UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
-OR-
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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:
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of |
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(I.R.S. Employer |
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(Address of Principal Executive Offices) |
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(Registrant’s Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which registered |
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The |
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.
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).
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.
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Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of November 29, 2021, the registrant had
LANDS’ END, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 29, 2021
TABLE OF CONTENTS
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Page |
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Item 1. |
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1 |
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1 |
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Condensed Consolidated Statements of Comprehensive Operations |
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2 |
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3 |
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4 |
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Condensed Consolidated Statements of Changes in Stockholders' Equity |
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5 |
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6 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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17 |
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Item 3. |
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30 |
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Item 4. |
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31 |
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32 |
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Item 1. |
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32 |
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Item 1A. |
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32 |
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Item 6. |
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33 |
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34 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDS’ END, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
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(in thousands, except per share data) |
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October 29, 2021 |
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October 30, 2020 |
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October 29, 2021 |
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October 30, 2020 |
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Net revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of sales (excluding depreciation and amortization) |
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Gross profit |
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Selling and administrative |
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Depreciation and amortization |
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Other operating expense, net |
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Operating income |
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Interest expense |
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Other (income) expense, net |
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Income (loss) before income taxes |
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Income tax expense (benefit) |
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NET INCOME (LOSS) |
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$ |
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$ |
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$ |
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$ |
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NET INCOME (LOSS) PER COMMON SHARE |
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Basic: |
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$ |
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$ |
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$ |
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$ |
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Diluted: |
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$ |
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$ |
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$ |
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$ |
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Basic weighted average common shares outstanding |
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Diluted weighted average common shares outstanding |
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See accompanying Notes to Condensed Consolidated Financial Statements.
1
LANDS’ END, INC.
Condensed Consolidated Statements of Comprehensive Operations
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
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(in thousands) |
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October 29, 2021 |
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October 30, 2020 |
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October 29, 2021 |
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October 30, 2020 |
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NET INCOME (LOSS) |
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$ |
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$ |
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$ |
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Other comprehensive (loss), net of tax |
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Foreign currency translation adjustments |
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COMPREHENSIVE INCOME (LOSS) |
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$ |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
LANDS’ END, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
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(in thousands, except per share data) |
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October 29, 2021 |
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October 30, 2020 |
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January 29, 2021 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use asset |
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Goodwill |
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Intangible asset, net |
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Other assets |
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TOTAL ASSETS |
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$ |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Current portion of long-term debt |
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$ |
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$ |
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Accounts payable |
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Lease liability - current |
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Other current liabilities |
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Total current liabilities |
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Long-term borrowings on ABL Facility |
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Long-term debt, net |
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Lease liability - long-term |
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Deferred tax liabilities |
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Other liabilities |
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TOTAL LIABILITIES |
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Commitments and contingencies |
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STOCKHOLDERS’ EQUITY |
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Common stock, par value $ issued and outstanding: |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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( |
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Accumulated other comprehensive (loss) |
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( |
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( |
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TOTAL STOCKHOLDERS' EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
3
LANDS’ END, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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39 Weeks Ended |
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(in thousands) |
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October 29, 2021 |
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October 30, 2020 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation and amortization |
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Amortization of debt issuance costs |
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Loss on disposal of property and equipment |
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Stock-based compensation |
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Deferred income taxes |
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Goodwill impairment |
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— |
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Other |
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( |
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Change in operating assets and liabilities: |
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Accounts receivable, net |
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( |
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Inventories, net |
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( |
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Accounts payable |
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Other operating assets |
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( |
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Other operating liabilities |
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( |
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Net cash used in operating activities |
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( |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property and equipment |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from borrowings under ABL Facility |
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Payments of borrowings under ABL Facility |
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( |
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( |
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Proceeds from issuance of long term debt, net |
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— |
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Principal payments on long-term debt, net |
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( |
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Payments for taxes related to net share settlement of equity awards |
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( |
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Payment of debt-issuance costs |
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( |
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Net cash provided by financing activities |
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Effects of exchange rate changes on cash, cash equivalents and restricted cash |
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NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD |
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$ |
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$ |
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SUPPLEMENTAL CASH FLOW DATA |
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Unpaid liability to acquire property and equipment |
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$ |
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$ |
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Income taxes paid, net of refunds |
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$ |
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$ |
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Interest paid |
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$ |
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$ |
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Lease liabilities arising from obtaining operating lease right-of-use assets |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
4
LANDS’ END, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
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Common Stock Issued |
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Additional Paid-in |
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Retained |
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Accumulated Other Comprehensive |
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Total Stockholders' |
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(in thousands) |
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Shares |
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Amount |
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Capital |
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Earnings |
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(Loss) |
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Equity |
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Balance at January 29, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Vesting of restricted shares |
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( |
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— |
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— |
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— |
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Common stock withheld related to net share settlement of equity awards |
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( |
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— |
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( |
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— |
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— |
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( |
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Balance at April 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Vesting of restricted shares |
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— |
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— |
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— |
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— |
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— |
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Common stock withheld related to net share settlement of equity awards |
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( |
) |
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— |
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( |
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— |
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— |
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( |
) |
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Balance at July 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
|
|
|
|
|
|
Vesting of restricted shares |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock withheld related to net share settlement of equity awards |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Balance at October 29, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
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 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Vesting of restricted shares |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock withheld related to net share settlement of equity awards |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Balance at May 1, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Vesting of restricted shares |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock withheld related to net share settlement of equity awards |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Balance at July 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Vesting of restricted shares |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock withheld related to net share settlement of equity awards |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Balance at October 30, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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 its own Company Operated stores, as well as third-party retail locations. Lands’ End is a classic American lifestyle brand with a passion for quality, legendary service and real value and seeks to deliver timeless style for women, men, kids and 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, providing for a revolving facility, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders, as amended to date |
|
|
• |
Adjusted EBITDA – Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit), Interest expense, Depreciation and amortization and certain significant items |
|
|
• |
ASC – Financial Accounting Standards Board 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 – Financial Accounting Standards Board Accounting Standards Update |
|
|
• |
CARES Act – The Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020 |
|
|
• |
Company Operated stores – Lands’ End retail stores in the Retail distribution channel |
|
|
• |
Debt Facilities – Collectively, the Term Loan Facility and ABL Facility |
|
|
• |
Deferred Awards – Time vesting stock awards |
|
|
• |
EPS – Earnings per share |
|
|
• |
FASB – Financial Accounting Standards Board |
|
|
• |
First Quarter 2021 – The 13 weeks ended April 30, 2021 |
|
|
• |
First Quarter 2020 – The 13 weeks ended May 1, 2020 |
|
|
• |
Fiscal 2022 – The 52 weeks ending January 27, 2023 |
|
|
• |
Fiscal 2021 – The 52 weeks ending January 28, 2022 |
|
|
• |
Fiscal 2020 – The 52 weeks ended January 29, 2021 |
|
|
• |
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 |
|
|
• |
SEC – United States Securities and Exchange Commission |
6
|
|
• |
Second Quarter 2020 – The 13 weeks ended July 31, 2020 |
|
|
• |
Term Loan Facility – Term loan credit agreement, dated as of September 9, 2020, among the Company, Fortress Credit Corp., as Administrative Agent and Collateral Agent, and the lenders party thereto |
|
|
• |
Third Quarter 2021 – The 13 weeks ended October 29, 2021 |
|
|
• |
Third Quarter 2020 – The 13 weeks ended October 30, 2020 |
|
|
• |
Year-to-Date 2021 – The 39 weeks ended October 29, 2021 |
|
|
• |
Year-to-Date 2020 – The 39 weeks ended October 30, 2020 |
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 25, 2021.
Impact of the COVID-19 Pandemic
COVID-19 surfaced in late 2019 and in March 2020, the World Health Organization declared COVID-19 a pandemic. The onset of 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 during the first half of Fiscal 2020. During the Second Quarter 2020, the Company began a significant recovery that continued to build on the momentum experienced before the COVID-19 pandemic. The Company’s strong foundation and ongoing enhancements across the four strategic pillars of product, digital, uni-channel distribution and infrastructure and business processes supported the Company during this COVID-19 pandemic and continues to support the Company’s financial performance and encouraging customer metrics. The ultimate timing and impact of customer demand levels across all distribution channels will depend on the duration and scope of the COVID-19 pandemic, overall economic conditions and consumer preferences. The ongoing COVID-19 pandemic continued to adversely impact the Company in the Third Quarter 2021 by disrupting its supply chain, leading to shipping and inventory receipt delays, and remains a threat to the health and welfare of the Company’s workforce.
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 Company Operated stores. These stores reopened during Second Quarter 2020. Since the onset of the COVID-19 pandemic, the Company has taken extra precautions in its offices, distribution centers and Company Operated stores which have varied from time to time based on the then current guidance from global, federal and state health authorities. These measures have included COVID-19 retail guidelines, work-from-home policies, social distancing, masking, thermal scanning and partitions in facilities. With the emergence of COVID-19 variants and periodic increases in number of reported cases affecting different regions, the Company has been required to keep these measures in place longer than anticipated.
Supply Chain
The COVID-19 pandemic continues to cause supply chain disruptions across all industries, and the Company continually monitors its supply chain for manufacturing and transportation delays caused or exacerbated by the COVID-19 pandemic. During Fiscal 2021, the COVID-19 pandemic impacted the Company’s distribution centers, third-party manufacturing partners and logistics partners, including shipping delays and port congestion, and closure of certain third-party manufacturing facilities and production lines. These disruptions have resulted in later timing of Fiscal 2021 inventory receipts that have led, at times, to lower inventory positions and higher than normal back orders, as manufacturing, transport and receipt of inbound product is delayed. In addition, the Company has experienced higher freight and distribution costs.
7
The Company expects some of these supply chain disruptions and increases in costs to continue through the balance of Fiscal 2021 and into the first half of Fiscal 2022. As a result of these impacts, the Company has experienced later than expected inventory receipts and inventory availability for the Company’s distribution channels. These shipping delays and additional costs may impact the Company’s future net sales, gross margin and net earnings depending upon the ultimate timing of delivery and availability of product to sell.
Labor Shortages
Due to the seasonal nature of the business, the Company relies heavily on flexible part-time employees to staff the distribution centers in support of its peak seasons, including the back-to-school shopping season and fourth fiscal quarter holiday shopping season. The Company has experienced a labor shortage and has been unable to fill the flexible part-time peak staffing requirements at the distribution centers for both peak seasons. During the back-to-school season the labor shortage in monogramming and embroidery services caused delays in fulfilling customer orders. The Company has also been unable to attract as many seasonal part-time workers as was targeted to hire for the holiday shopping season. The Company provided financial incentives to attract and retain the part-time staffing and has utilized the Company’s corporate employee workforce to provide additional assistance in the distribution centers. The labor shortage may adversely impact the Company’s future net sales and earnings if orders are not fulfilled on a timely basis, which could discourage orders or lead to cancelled orders.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
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. 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 adopted this standard in First Quarter 2021 and the adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related 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 GAAP. Potentially dilutive securities for the diluted EPS calculations consist of non-vested 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 |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands, except per share amounts) |
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||
|
Net income (loss) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
Diluted earnings (loss) per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
Stock awards are considered anti-dilutive based on the application of the treasury stock method or in the event of a net loss. Anti-dilutive shares excluded from the diluted weighted average shares outstanding were
8
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.
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||
|
Beginning balance: Accumulated other comprehensive (loss) (net of tax of $ $ |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (net of tax of $ |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Ending balance: Accumulated other comprehensive (loss) (net of tax of $ $ |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
NOTE 5. DEBT
ABL Facility
The Company’s $
During Fiscal 2020, the Company exercised the “accordion” feature under the ABL Facility increasing the maximum borrowings available under the facility from $
On July 29, 2021, the Company executed the Third Amendment to the ABL Facility resulting in favorable financial terms compared to the Second Amendment to the ABL Facility and extension of the maturity date of the ABL Facility, as discussed below.
The following table summarizes the Company’s borrowing availability under the ABL Facility:
|
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
January 29, 2021 |
|
||||||||||||
|
(in thousands) |
|
Amount |
|
Interest Rate |
|
|
Amount |
|
Interest Rate |
|
|
Amount |
|
Interest Rate |
|
||||||
|
ABL Facility maximum borrowing |
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Less: Outstanding borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Less: Outstanding letters of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing availability under ABL Facility |
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
9
Long-Term Debt
On September 9, 2020, the Company entered into the Term Loan Facility which provided borrowings of $
The Company’s long-term debt consisted of the following:
|
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
January 29, 2021 |
|
|||||||||||||||
|
(in thousands) |
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
||||||
|
Term Loan Facility |
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|||
|
Less: Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Unamortized debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
Interest; Fees
The Third Amendment to the ABL Facility lowered the interest rates applicable to borrowings under the ABL Facility. For LIBOR loans, commencing
The interest rates per annum applicable to the loans under the Term Loan Facility are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (1) an adjusted LIBOR rate (with a minimum rate of
The ABL Facility fees include (i) commitment fees of
Customary agency fees are payable in respect of the Debt Facilities.
Maturity; Amortization and Prepayments
The Third Amendment to the ABL Facility extended the maturity from
The Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to
Guarantees; Security
All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral with certain exceptions.
10
The Term Loan Facility is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is secured by a second priority interest in the same collateral, with certain exceptions.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties, and restrictive covenants that, among other things and subject to specified exceptions, restrict Lands’ End, Inc.’s and its subsidiaries’ ability 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.
The Term Loan Facility is subject to certain financial covenants, including a quarterly maximum total leverage ratio test, a weekly minimum liquidity test and an annual maximum capital expenditure amount.
Under the ABL Facility, if excess availability falls below the greater of
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.
As of October 29, 2021, the Company was in compliance with all of its covenants in the Debt Facilities.
Events of Default
The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, and material judgments and change of control.
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, each of which are granted under the Company’s stockholder approved stock plans, other than March 6, 2017 grants to the Company’s Chief Executive Officer which were made as inducement grants outside of the Company’s stockholder approved stock plans in accordance with NASDAQ Listing Rule 5635(c)(4):
|
|
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 |
|
|
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 the Target Shares earned can range from |
11
|
|
|
|
|
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 |
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) |
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||
|
Deferred awards |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Performance awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option awards |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table provides a summary of the Deferred Awards activity for Year-to-Date 2021:
|
|
|
Deferred Awards |
|
|||||
|
(in thousands, except per share amounts) |
|
Number of Shares |
|
|
Weighted Average Grant Date Fair Value per Share |
|
||
|
Unvested as of January 29, 2021 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited or expired |
|
|
( |
) |
|
|
|
|
|
Unvested as of October 29, 2021 |
|
|
|
|
|
|
|
|
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $
The following table provides a summary of the Performance Awards activity for Year-to-Date 2021:
|
|
|
Performance Awards |
|
|||||
|
(in thousands, except per share amounts) |
|
Number of Shares |
|
|
Weighted Average Grant Date Fair Value per Share |
|
||
|
Unvested as of January 29, 2021 |
|
|
|
|
|
$ |
|
|
|
Granted (1) |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
Unvested as of October 29, 2021 |
|
|
|
|
|
|
|
|
|
(1) |
Performance shares granted assume achievement performance at |
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $
12
The following table provides a summary of the Options Award activity for Year-to-Date 2021:
|
|
|
Option Awards |
|
|||||
|
(in thousands, except per share amounts) |
|
Number of Shares |
|
|
Weighted Average Grant Date Fair Value per Share |
|
||
|
Unvested as of January 29, 2021 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
Unvested as of October 29, 2021 |
|
|
— |
|
|
— |
|
|
As of October 29, 2021, there were
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 $
Carrying values and fair values of long-term debt, including current portion, in the Condensed Consolidated Balance Sheets are as follows:
|
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
January 29, 2021 |
|
|||||||||||||||
|
(in thousands) |
|
Carrying Amount |
|
|
Fair Value |
|
|
Carrying Amount |
|
|
Fair Value |
|
|
Carrying Amount |
|
|
Fair Value |
|
||||||
|
Long-term debt, including current portion |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt, including current portion, was valued utilizing Level 3 valuation techniques based on a third-party analysis on October 29, 2021, October 30, 2020 and January 29, 2021. There were
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.
The Company recorded a tax expense at an overall effective tax rate of
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,
13
management is of the opinion that their ultimate resolution should not have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
As disclosed in the Company’s Annual Report on Form 10-K for the year ended January 29, 2021, the Company is the defendant in
By order dated April 20, 2020, the Court consolidated the Gilbert and Andrews cases (the “Consolidated Wisconsin Action”) and stayed the Davis case.
Plaintiffs in the Consolidated Wisconsin Action and Davis each assert that the damages sustained by the members of the proposed class exceed $
On August 18, 2021, the Court ruled on several pending motions in the Consolidated Wisconsin Action. The Court denied Plaintiffs’ motion for class certification with respect to performance of the uniforms and warranty claims. The Court denied Plaintiffs’ motion for partial summary judgment regarding crocking claims and granted Lands’ End’s motion for partial summary judgment related to certain warranty claims. In addition, giving effect to both the addition and voluntary dismissal of individual plaintiffs over the course of the litigation, the number of individual plaintiffs had been reduced from
The Consolidated Wisconsin Action continues to be in discovery. Lands’ End is vigorously defending these lawsuits and believes they are without merit.
NOTE 10. SEGMENT REPORTING
The Company’s operating segments consist of: U.S. eCommerce, Europe eCommerce, Japan eCommerce, Outfitters, Third Party and Retail. The Company determined that each of the operating segments have similar economic and other qualitative characteristics thus the results of the operating segments are aggregated into
Lands’ End identifies
|
|
• |
U.S. eCommerce offers products through the Company’s eCommerce website. |
|
|
• |
International offers products primarily to consumers located in Europe and Japan through eCommerce international websites and third-party affiliates. |
|
|
• |
Outfitters sells uniform and logo apparel to businesses and their employees, as well as to student households through school relationships, located primarily in the U.S., through negotiated arrangements to make specific styles or customized products which are made available for purchase on the Company’s eCommerce websites. |
|
|
• |
Third Party sells the same products as U.S. eCommerce but direct to consumers through third-party marketplace websites and through domestic wholesale customers. |
|
|
• |
Retail sells products through Company Operated stores. |
14
Net revenue is presented by distribution channel in the following table:
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. eCommerce |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outfitters |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Party |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 11. 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 U.S. eCommerce, International, Outfitters and Third Party distribution channels is when the merchandise is expected to be received by the customer and for the Retail distribution 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.
The Company’s revenue is disaggregated by distribution channel and geographic location. Revenue by distribution channel is presented in Note 10, Segment Reporting. Revenue by geographic location was:
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Contract Liabilities
Contract liabilities consist of payments received in advance of the transfer of control to the customer. As products are delivered and control transfers, the Company recognizes the deferred revenue in Net revenue in the Condensed Consolidated Statements of Operations.
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||
|
Deferred revenue beginning of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Deferred revenue recognized in period |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Revenue deferred in period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue end of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
15
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 liability is estimated based on expected breakage that considers historical patterns of redemption.
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 29, 2021 |
|
|
October 30, 2020 |
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||
|
Balance as of beginning of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Gift cards sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gift cards redeemed |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Gift card breakage |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance as of end of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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 October 29, 2021, October 30, 2020 and January 29, 2021, $
16
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 Statement Concerning Forward-Looking Statements” below, “Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended January 29, 2021 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, providing for a revolving facility, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders, as amended to date |
|
|
• |
CARES Act – The Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020 |
|
|
• |
Company Operated stores – Lands’ End retail stores in the Retail distribution channel |
|
|
• |
Debt Facilities – Collectively, the Term Loan Facility and ABL Facility |
|
|
• |
First Quarter 2020 – The 13 weeks ended May 1, 2020 |
|
|
• |
Fiscal 2022 – The 52 weeks ending January 27, 2023 |
|
|
• |
Fiscal 2021 – The 52 weeks ending January 28, 2022 |
|
|
• |
Fiscal 2020 – The 52 weeks ended January 29, 2021 |
|
|
• |
Fiscal 2019 – The 52 weeks ended January 31, 2020 |
|
|
• |
GAAP – Accounting principles generally accepted in the United States |
|
|
• |
LIBOR – London inter-bank offered rate |
|
|
• |
Second Quarter 2020 – The 13 weeks ended July 31, 2020 |
|
|
• |
Term Loan Facility – Term loan credit agreement, dated as of September 9, 2020, among the Company, Fortress Credit Corp., as Administrative Agent and Collateral Agent, and the lenders party thereto |
|
|
• |
Third Quarter 2021 – The 13 weeks ended October 29, 2021 |
|
|
• |
Third Quarter 2020 – The 13 weeks ended October 30, 2020 |
|
|
• |
Year-to-Date 2021 – The 39 weeks ended October 29, 2021 |
|
|
• |
Year-to-Date 2020 – The 39 weeks ended October 30, 2020 |
|
|
• |
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. Operating out of America’s heartland, we believe our vision and values make a strong connection with our core customers. We offer products online at www.landsend.com, on third-party online marketplaces and through our own Company Operated stores, as well as third-party retail
17
locations. We are a classic American lifestyle brand with a passion for quality, legendary service and real value and seek to deliver timeless style for women, men, kids and the home.
Lands’ End was founded in 1963 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.”
We seek to provide a common customer experience regardless of whether our customers are interacting with us on our company websites, third-party marketplaces, at our Company Operated stores or other distribution channels.
We have one external reportable segment and identify our operating segments according to how our business activities are managed and evaluated. Our operating segments consist of: U.S. eCommerce, Europe eCommerce, Japan eCommerce, Outfitters, Third Party and Retail. 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.
Distribution Channels
We identify five separate distribution channels for revenue reporting purposes:
|
|
• |
U.S. eCommerce offers products through our eCommerce website. |
|
|
• |
International offers products primarily to consumers located in Europe and Japan through our eCommerce international websites and third-party affiliates. |
|
|
• |
Outfitters sells uniform and logo apparel to businesses and their employees, as well as to school households through school relationships, located primarily in the U.S., through negotiated arrangements to make specific styles or customized products which are made available for purchase on the Company’s eCommerce websites. |
|
|
• |
Third Party sells the same products as U.S. eCommerce but direct to consumers through third-party marketplace websites and through domestic wholesale customers. |
|
|
• |
Retail sells products through our Company Operated stores. |
Impact of the COVID-19 Pandemic
COVID-19 surfaced in late 2019 and in March 2020, the World Health Organization declared COVID-19 a pandemic. The onset of the COVID-19 pandemic had a disruptive impact on our business operations and an unfavorable impact on our results of operations during the first half of Fiscal 2020. During the Second Quarter 2020, we began a significant recovery that continued to build on the momentum experienced before the COVID-19 pandemic. Our strong foundation and ongoing enhancements across the four strategic pillars of product, digital, uni-channel distribution and infrastructure and business processes supported us during this COVID-19 pandemic and continues to support our financial performance and encouraging customer metrics. The ultimate timing and impact of customer demand levels across all distribution channels will depend on the duration and scope of the COVID-19 pandemic, overall economic conditions and consumer preferences. The ongoing COVID-19 pandemic continued to adversely impact us in the Third Quarter 2021 by disrupting our supply chain, leading to shipping and inventory receipt delays, and remains a threat to the health and welfare of our workforce.
Health and Safety of our People and Consumers
From the beginning of the COVID-19 pandemic, our priority has been the safety of our employees and customers. On March 16, 2020, we temporarily closed our Company Operated stores. These stores reopened during Second Quarter 2020. Since the onset of the COVID-19 pandemic, we have taken extra precautions in our offices, distribution centers and Company Operated stores, which have varied from time to time based on the then current guidance from global, federal and state health authorities. These measures have included COVID-19 retail guidelines, work-from-home policies, social distancing, masking, thermal scanning and partitions in facilities. With the emergence of COVID-19 variants and periodic increases in the number of reported cases affecting different regions, we have been required to keep these measures in place longer than anticipated.
Supply Chain
The COVID-19 pandemic continues to cause supply chain disruptions across all industries, and we continually monitor our supply chain for manufacturing and transportation delays caused or exacerbated by the COVID-19 pandemic. During Fiscal 2021, the
18
COVID-19 pandemic impacted our distribution centers, third-party manufacturing partners and logistics partners, including shipping delays and port congestion, and closure of certain third-party manufacturing facilities and production lines. These disruptions have resulted in later timing of Fiscal 2021 inventory receipts that have led, at times, to lower inventory positions and higher than normal back orders, as manufacturing, transport and receipt of inbound product is delayed. In addition, we have experienced higher freight and distribution costs.
We expect some of these supply chain disruptions and increases in costs to continue through the balance of Fiscal 2021 and into the first half of Fiscal 2022. As a result of these impacts, we have experienced later than expected inventory receipts and inventory availability for our distribution channels. These shipping delays and additional costs may impact our future net sales, gross margin and net earnings depending upon the ultimate timing of delivery and availability of product to sell.
Labor Shortage
Due to the seasonal nature of our business, we rely heavily on flexible part-time employees to staff our distribution centers in support of our peak seasons, including the back-to-school shopping season and fourth fiscal quarter holiday shopping season. We have experienced a labor shortage and have been unable to fill the flexible part-time peak staffing requirements at the distribution centers for both peak seasons. During the back-to-school season the labor shortage in monogramming and embroidery services caused delays in fulfilling customer orders. We have also been unable to attract as many seasonal part-time workers as was targeted to hire for the holiday shopping season. We have provided financial incentives to attract and retain the part-time staffing and have utilized our corporate employee workforce to provide additional assistance in our distribution centers. The labor shortage may adversely impact our future net sales and earnings if orders are not fulfilled on a timely basis, which could discourage orders or lead to cancelled orders.
Expense Reduction
Beginning in First Quarter 2020, we took aggressive actions to reduce overall expenses as a response to decreased customer demand due to the COVID-19 pandemic. We reduced our operating expenses and structural costs by enacting employee furloughs, and temporary tiered salary reductions for the executive team and corporate staff. In addition, other discretionary operating expenses and planned capital expenditures for Fiscal 2020 were significantly reduced. As the COVID-19 pandemic continues and new variants emerge, we will continue to monitor the impact of the COVID-19 pandemic to manage overall expenses.
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. The COVID-19 pandemic had a material impact on our results for the 39 weeks ended October 30, 2020. As such, this interim period, as well as upcoming periods, may not be comparable to past performance or indicative of future performance.
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 37.7% and 37.9% of our net revenue in the fourth fiscal quarter of Fiscal 2020 and Fiscal 2019 respectively. 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 quarters of the fiscal year as inventory builds to support peak shipping/selling periods 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.
19
Results of Operations
The following table sets forth, for the periods indicated, selected income statement data:
|
|
|
13 Weeks Ended |
|
|||||||||||||
|
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||||||||
|
(in thousands) |
|
$’s |
|
|
% of Net revenue |
|
|
$’s |
|
|
% of Net revenue |
|
||||
|
Net revenue |
|
$ |
375,843 |
|
|
|
100.0 |
% |
|
$ |
359,982 |
|
|
|
100.0 |
% |
|
Cost of sales (excluding depreciation and amortization) |
|
|
209,028 |
|
|
|
55.6 |
% |
|
|
196,527 |
|
|
|
54.6 |
% |
|
Gross profit |
|
|
166,815 |
|
|
|
44.4 |
% |
|
|
163,455 |
|
|
|
45.4 |
% |
|
Selling and administrative |
|
|
137,408 |
|
|
|
36.6 |
% |
|
|
134,890 |
|
|
|
37.5 |
% |
|
Depreciation and amortization |
|
|
9,788 |
|
|
|
2.6 |
% |
|
|
9,627 |
|
|
|
2.7 |
% |
|
Other operating expense, net |
|
|
140 |
|
|
|
0.0 |
% |
|
|
255 |
|
|
|
0.1 |
% |
|
Operating income |
|
|
19,479 |
|
|
|
5.2 |
% |
|
|
18,683 |
|
|
|
5.2 |
% |
|
Interest expense |
|
|
8,334 |
|
|
|
2.2 |
% |
|
|
9,005 |
|
|
|
2.5 |
% |
|
Other (income), net |
|
|
(171 |
) |
|
|
(0.0 |
)% |
|
|
(250 |
) |
|
|
(0.1 |
)% |
|
Income before income taxes |
|
|
11,316 |
|
|
|
3.0 |
% |
|
|
9,928 |
|
|
|
2.8 |
% |
|
Income tax expense |
|
|
3,917 |
|
|
|
1.0 |
% |
|
|
2,752 |
|
|
|
0.8 |
% |
|
NET INCOME |
|
$ |
7,399 |
|
|
|
2.0 |
% |
|
$ |
7,176 |
|
|
|
2.0 |
% |
|
|
|
39 Weeks Ended |
|
|||||||||||||
|
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||||||||
|
(in thousands) |
|
$’s |
|
|
% of Net revenue |
|
|
$’s |
|
|
% of Net revenue |
|
||||
|
Net revenue |
|
$ |
1,081,249 |
|
|
|
100.0 |
% |
|
$ |
889,073 |
|
|
|
100.0 |
% |
|
Cost of sales (excluding depreciation and amortization) |
|
|
588,908 |
|
|
|
54.5 |
% |
|
|
496,041 |
|
|
|
55.8 |
% |
|
Gross profit |
|
|
492,341 |
|
|
|
45.5 |
% |
|
|
393,032 |
|
|
|
44.2 |
% |
|
Selling and administrative |
|
|
399,579 |
|
|
|
36.9 |
% |
|
|
352,164 |
|
|
|
39.6 |
% |
|
Depreciation and amortization |
|
|
29,483 |
|
|
|
2.7 |
% |
|
|
27,791 |
|
|
|
3.1 |
% |
|
Other operating expense, net |
|
|
583 |
|
|
|
0.1 |
% |
|
|
7,913 |
|
|
|
0.9 |
% |
|
Operating income |
|
|
62,696 |
|
|
|
5.8 |
% |
|
|
5,164 |
|
|
|
0.6 |
% |
|
Interest expense |
|
|
26,231 |
|
|
|
2.4 |
% |
|
|
19,232 |
|
|
|
2.2 |
% |
|
Other (income) expense, net |
|
|
(461 |
) |
|
|
(0.0 |
)% |
|
|
910 |
|
|
|
0.1 |
% |
|
Income (loss) before income taxes |
|
|
36,926 |
|
|
|
3.4 |
% |
|
|
(14,978 |
) |
|
|
(1.7 |
)% |
|
Income tax expense (benefit) |
|
|
10,667 |
|
|
|
1.0 |
% |
|
|
(5,887 |
) |
|
|
(0.7 |
)% |
|
NET INCOME (LOSS) |
|
$ |
26,259 |
|
|
|
2.4 |
% |
|
$ |
(9,091 |
) |
|
|
(1.0 |
)% |
Depreciation and amortization are 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 and Adjusted EBITDA
We recorded Net income of $7.4 million in Third Quarter 2021 compared to Net income of $7.2 million in the Third Quarter 2020. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA metric. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit), Interest expense, Depreciation and amortization and certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our business for comparable periods, and as a basis for an executive compensation metric. The methods used by us to calculate our 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.
20
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. |
|
|
• |
Corporate restructuring – corporate restructuring actions and activities including severance for the reduction in corporate positions for the 13 weeks and 39 weeks ended October 30, 2020. |
|
|
• |
Goodwill and long-lived asset impairment – charges associated with the non-cash write down of goodwill and certain long-lived assets for the 39 weeks ended October 30, 2020. |
|
|
• |
Other – amortization of transaction related costs associated with Third Party distribution channel for the 13 weeks and 39 weeks ended October 29, 2021 and October 30, 2020. |
|
|
• |
Loss on disposal of property and equipment - management considers the gains or losses on asset valuation to result from investing decisions rather than ongoing operations for the 13 weeks and 39 weeks ended October 29, 2021 and October 30, 2020. |
|
|
|
13 Weeks Ended |
|
|||||||||||||
|
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||||||||
|
(in thousands) |
|
$’s |
|
|
% of Net revenue |
|
|
$’s |
|
|
% of Net revenue |
|
||||
|
Net income |
|
$ |
7,399 |
|
|
|
2.0 |
% |
|
$ |
7,176 |
|
|
|
2.0 |
% |
|
Income tax expense |
|
|
3,917 |
|
|
|
1.0 |
% |
|
|
2,752 |
|
|
|
0.8 |
% |
|
Other (income), net |
|
|
(171 |
) |
|
|
(0.0 |
)% |
|
|
(250 |
) |
|
|
(0.1 |
)% |
|
Interest expense |
|
|
8,334 |
|
|
|
2.2 |
% |
|
|
9,005 |
|
|
|
2.5 |
% |
|
Operating income |
|
|
19,479 |
|
|
|
5.2 |
% |
|
|
18,683 |
|
|
|
5.2 |
% |
|
Depreciation and amortization |
|
|
9,788 |
|
|
|
2.6 |
% |
|
|
9,627 |
|
|
|
2.7 |
% |
|
Corporate restructuring |
|
|
— |
|
|
|
— |
% |
|
|
16 |
|
|
|
0.0 |
% |
|
Other |
|
|
344 |
|
|
|
0.1 |
% |
|
|
132 |
|
|
|
0.0 |
% |
|
Loss on disposal of property and equipment |
|
|
140 |
|
|
|
0.0 |
% |
|
|
107 |
|
|
|
0.0 |
% |
|
Adjusted EBITDA |
|
$ |
29,751 |
|
|
|
7.9 |
% |
|
$ |
28,565 |
|
|
|
7.9 |
% |
|
|
|
39 Weeks Ended |
|
|||||||||||||
|
|
|
October 29, 2021 |
|
|
October 30, 2020 |
|
||||||||||
|
(in thousands) |
|
$’s |
|
|
% of Net revenue |
|
|
$’s |
|
|
% of Net revenue |
|
||||
|
Net income (loss) |
|
$ |
26,259 |
|
|
|
2.5 |
% |
|
$ |
(9,091 |
) |
|
|
(1.0 |
)% |
|
Income tax expense (benefit) |
|
|
10,667 |
|
|
|
0.9 |
% |
|
|
(5,887 |
) |
|
|
(0.7 |
)% |
|
Other (income) expense, net |
|
|
(461 |
) |
|
|
(0.0 |
)% |
|
|
910 |
|
|
|
0.1 |
% |
|
Interest expense |
|
|
26,231 |
|
|
|
2.4 |
% |
|
|
19,232 |
|
|
|
2.2 |
% |
|
Operating income |
|
|
62,696 |
|
|
|
5.8 |
% |
|
|
5,164 |
|
|
|
0.6 |
% |
|
Depreciation and amortization |
|
|
29,483 |
|
|
|
2.7 |
% |
|
|
27,791 |
|
|
|
3.1 |
% |
|
Corporate restructuring |
|
|
— |
|
|
|
— |
% |
|
|
2,941 |
|
|
|
0.3 |
% |
|
Goodwill and long-lived asset impairment |
|
— |
|
|
|
— |
% |
|
|
3,844 |
|
|
|
0.4 |
% |
|
|
Other |
|
|
844 |
|
|
|
0.1 |
% |
|
|
132 |
|
|
|
0.0 |
% |
|
Loss on disposal of property and equipment |
|
|
583 |
|
|
|
0.1 |
% |
|
|
994 |
|
|
|
0.1 |
% |
|
Adjusted EBITDA |
|
$ |
93,606 |
|
|
|
8.7 |
% |
|
$ |
40,866 |
|
|
|
4.6 |
% |
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in five separate distribution channels for revenue reporting purposes: U.S. eCommerce, International, Outfitters, Third Party and Retail. A
21
key measure in the evaluation of our business is revenue performance by distribution channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.
To evaluate revenue performance for the U.S. eCommerce, International, Outfitters and Third Party distribution channels, we use Net revenue. For our Retail distribution channel, we use Company Operated stores Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations when it has been open for at least 14 months and selling square footage has not changed by 15% or more within the past year. Online sales and sales generated through our in-store web portal are considered revenue in our U.S. eCommerce and International distribution channels and are excluded from Same Store Sales. Since First Quarter 2020, due to the COVID-19 pandemic, we temporarily ceased using Same Store Sales as a key measure in evaluating performance and instead evaluated our Company Operated stores on sales productivity which was a metric measuring sales traffic and customer conversion. Beginning with Third Quarter 2021, we reverted back to Same Store Sales as we believe there is now greater comparability of year-on-year store and economic dynamics.
Discussion and Analysis
Third Quarter 2021 compared with Third Quarter 2020
Due to the impact of the COVID-19 pandemic on our financial operating results during the Third Quarter 2020, we also have included select comparisons to Third Quarter 2019 as management believes such comparisons are relevant to our rate of recovery during the COVID-19 pandemic and performance of our business.
Net Revenue
Net revenue for Third Quarter 2021 was $375.8 million, an increase of $15.8 million or 4.4% compared to $360.0 million in the Third Quarter 2020, and an increase of $35.8 million or 10.5% compared to $340.0 million in the Third Quarter 2019.
U.S. eCommerce Net revenue was $214.0 million for Third Quarter 2021, a decrease of $7.8 million or 3.5%, from $221.8 million during the Third Quarter 2020, and an increase of $12.1 million or 6.0% from $201.9 million during the Third Quarter 2019. Compared to Third Quarter 2020, the decrease in revenue in Third Quarter 2021 was attributed to delayed receipt of products due to the global supply chain challenges.
International eCommerce Net revenue was $47.2 million for Third Quarter 2021, a decrease of $8.8 million or 15.7%, from $56.0 million during the Third Quarter 2020, and an increase of $10.2 million or 27.6% from $37.0 million during the Third Quarter 2019. The decrease in revenue in Third Quarter 2021 was attributed to delayed receipt of products due to the global supply chain challenges.
Outfitters Net revenue was $86.1 million for Third Quarter 2021, an increase of $24.1 million or 38.9%, from $62.0 million during the Third Quarter 2020, and an increase of $2.8 million or 3.4% from $83.3 million during the Third Quarter 2019. Compared to the Third Quarter 2020, the increase was primarily attributed to stronger demand within our travel-related national accounts and school uniforms as households recovered to prior back-to-school shopping patterns, with a slower recovery in our small and medium-sized customers.
Third Party Net revenue was $19.3 million for Third Quarter 2021, an increase of $7.3 million or 60.8% from $12.0 million during the Third Quarter 2020. The increase was primarily attributed to a full quarter of revenue with Kohl’s, compared to the launch in Third Quarter 2020, as well as the impact of expanding our broader store assortment into an additional 150 Kohl’s retail locations, for a total of 300 retail locations, during Third Quarter 2021.
Retail Net revenue was $9.2 million for Third Quarter 2021, an increase of $1.0 million or 12.2% from $8.2 million during Third Quarter 2020, and a decrease of $5.2 million or 36.1% from $14.4 million during Third Quarter 2019. Our U.S. Company Operated stores experienced an increase of 5.7% in Same Store Sales as compared to Third Quarter 2020. On October 29, 2021 there were 30 U.S. Company Operated stores compared to 31 U.S. Company Operated stores on October 30, 2020 and 22 U.S. Company Operated stores on November 1, 2019.
Gross Profit
Gross profit was $166.8 million for Third Quarter 2021, an increase of $3.3 million or 2.1% from $163.5 million during the Third Quarter of 2020. Gross margin decreased to 44.4% in Third Quarter 2021, compared with 45.4% in Third Quarter 2020. Compared to Third Quarter 2020, gross margin decreased primarily due to increased shipping costs attributed to the global supply chain challenges.
22
Selling and Administrative Expenses
Selling and administrative expenses increased $2.5 million to $137.4 million or 36.6% of total Net revenue in Third Quarter 2021 compared with $134.9 million or 37.5% of Net revenue in Third Quarter 2020. The approximately 90 basis point decrease was driven by leverage on higher sales and continued expense controls slightly offset by continued investment in digital marketing. This was an approximately 300 basis point decrease compared to Third Quarter 2019.
Depreciation and Amortization
Depreciation and amortization expense was $9.8 million in Third Quarter 2021, an increase of $0.2 million compared with $9.6 million in Third Quarter 2020.
Other Operating Expense
Other operating expense, net was $0.1 million in Third Quarter 2021 compared to $0.3 million in Third Quarter 2020.
Operating Income
Operating income was $19.5 million in Third Quarter 2021 compared to $18.7 million in Third Quarter 2020. The $0.8 million increase was driven by the increase in Gross profit from the increased revenue partially offset by higher shipping costs attributed to the global supply chain challenges and higher selling and administrative expenses.
Interest Expense
Interest expense was $8.3 million in Third Quarter 2021 compared to $9.0 million in Third Quarter 2020. The $0.7 million decrease was primarily attributed to lower usage on the revolving ABL Facility at lower interest rates as a result of the Third Amendment to the ABL Facility.
Other Income
Other income was $0.2 million in Third Quarter 2021 compared to Other income of $0.3 million in Third Quarter 2020.
Income Tax Expense
We recorded income tax expense at an overall effective tax rate of 34.6% and 27.7% for Third Quarter 2021 and Third Quarter 2020, respectively.
Net Income
As a result of the above factors, Net income was $7.4 million and diluted earnings per share was $0.22 in Third Quarter 2021 compared with a Net income of $7.2 million and diluted earnings per share of $0.22 in Third Quarter 2020.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $29.8 million in Third Quarter 2021 compared to $28.6 million in Third Quarter 2020.
Year-to-Date 2021 compared with Year-to-Date 2020
Due to the impact of the COVID-19 pandemic on our financial operating results Year-to-Date 2020, we also have included select comparisons to Year-to-Date 2019 as management believes such comparisons are relevant to our rate of recovery during the COVID-19 pandemic and performance of our business.
Net Revenue
Net revenue for Year-to-Date 2021 was $1.1 billion, an increase of $192.0 million or 21.6% compared to $889.1 million during Year-to-Date 2020, and an increase of $180.5 million or 20.0% compared to $900.7 million during Year-to-Date 2019.
U.S. eCommerce Net revenue was $655.1 million for Year-to-Date 2021, an increase of $73.5 million or 12.6%, from $581.6 million during Year-to-Date 2020, and an increase of $111.8 million or 20.6% from $543.3 million during Year-to-Date 2019. These
23
increases in revenue were primarily driven by stronger website traffic and a higher average order value as customers continue to react positively to the product assortments and digital capabilities, which drove a year over year increase in our new customers acquired and our overall customer file.
International eCommerce Net revenue was $151.5 million for Year-to-Date 2021, an increase of $10.1 million or 7.1%, from $141.4 million during Year-to-Date 2020, and an increase of $33.2 million or 28.1% from $118.3 million during Year-to-Date 2019. These increases in revenue were primarily driven by implementing U.S. eCommerce initiatives in Europe eCommerce which resulted in stronger demand as customers reacted positively to the product assortments and digital capabilities, which drove a year over year increase in our new customers acquired and overall customer file.
Outfitters Net revenue was $192.4 million for Year-to-Date 2021, an increase of $61.2 million or 46.6%, from $131.2 million during Year-to-Date 2020, and an increase of $0.5 million or 0.3% from $191.9 million during Year-to-Date 2019. Compared to the Year-to-Date 2020, the increase was primarily attributed to stronger demand within our travel-related national accounts and school uniforms as households recovered to prior back-to-school shopping patterns, with a slower recovery in our small and medium-sized customers.
Third Party Net revenue was $50.2 million for Year-to-Date 2021, an increase of $31.6 million from $18.6 million during Year-to-Date 2020. The increase was primarily attributed to year-to-date revenue growth with Kohl’s compared to the launch in the Third Quarter 2020, as well as the impact of expanding our broader store assortment into an additional 150 Kohl’s retail locations, for a total of 300 retail locations, during Third Quarter 2021.
Retail Net revenue was $32.0 million for Year-to-Date 2021, an increase of $15.7 million or 96.3% from $16.3 million during Year-to-Date 2020, and a decrease of $6.9 million or 17.7% from $38.9 million during Year-to-Date 2019. On October 29, 2021 there were 30 U.S. Company Operated stores compared to 31 U.S. Company Operated stores on October 30, 2020 and 22 U.S. Company Operated stores on November 1, 2019.
Gross Profit
Gross profit was $492.3 million for Year-to-Date 2021, an increase of $99.3 million or 25.3% from $393.0 million during Year-to-Date of 2020. Gross margin increased to 45.5% in Year-to-Date 2021, compared with 44.2% in Year-to-Date 2020. Compared to Year-to-Date 2020, gross margin increased due to merchandise margin expansion in the U.S. eCommerce distribution channel driven by enhanced promotional strategies and continued use of analytics for both our pricing and inventory management, offset by increased shipping costs attributed to the global supply chain challenges as well as higher sales mix from the lower-margin Third Party distribution channel.
Selling and Administrative Expenses
Selling and administrative expenses increased $47.4 million to $399.6 million or 37.0% of total Net revenue in Year-to-Date 2021 compared with $352.2 million or 39.6% of Net revenue in Year-to-Date 2020. The approximately 260 basis point decrease was driven by improved leverage from higher sales and continued expense controls slightly offset by increased digital marketing expenses and expense reductions taken at the onset of the COVID-19 pandemic. This was also an approximately 460 basis point decrease compared to Year-to-Date 2019.
Depreciation and Amortization
Depreciation and amortization expense was $29.5 million in Year-to-Date 2021, an increase of $1.7 million compared with $27.8 million in Year-to-Date 2020. The increase was primarily attributable to depreciation associated with our continued investment in our digital information technology infrastructure.
Other Operating Expense
Other operating expense, net was $0.6 million in Year-to-Date 2021 and $7.9 million in Year-to-Date 2020. The decrease of $7.3 million was primarily attributed to the $3.3 million impairment charge of goodwill allocated to our Japan eCommerce reporting unit and $3.0 million of restructuring costs in Year-to-Date 2020.
Operating Income
Operating income was $62.7 million in Year-to-Date 2021 compared to Operating income of $5.2 million in Year-to-Date 2020. The increase was driven by the increase in Gross profit from the increased revenue and improved margins over Year-to-Date 2020 partially offset by higher selling and administrative expenses.
24
Interest Expense
Interest expense was $26.2 million in Year-to-Date 2021 compared to $19.2 million in Year-to-Date 2020. The $7.0 million increase was primarily attributed to higher interest rates associated with the Term Loan Facility.
Other (Income) Expense
Other income was $0.5 million in Year-to-Date 2021 compared to Other expense of $0.9 million in Year-to-Date 2020. The increase in income and decrease in expense is primarily attributed to a final payment in Second Quarter 2020 associated with the transitioning of a sourcing office.
Income Tax Expense (Benefit)
We recorded income tax expense at an overall effective tax rate of 28.9% for Year-to-Date 2021 and an income tax benefit of 39.3% for Year-to-Date 2020. The Year-to-Date 2021 rate is lower than Year-to-Date 2020 primarily due to the generation of pretax income in 2021 compared to a pretax loss in 2020 in addition to the estimated tax benefits recorded as a result of the CARES Act in 2020.
Net Income (Loss)
As a result of the above factors, Net income was $26.3 million and diluted earnings per share was $0.78 in Year-to-Date 2021 compared with a Net loss of $9.1 million and diluted loss per share of $0.28 in Year-to-Date 2020.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $93.6 million in Year-to-Date 2021 compared to $40.9 million in Year-to-Date 2020.
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. The ABL Facility had a balance outstanding of $70.0 million on October 29, 2021 other than letters of credit. Cash generated from our net revenue and profitability, and to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a significant amount of net revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year. We expect that our cash on hand and cash flows from operations, along with revolving on the ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months.
Description of Material Indebtedness
Debt Arrangements
Our $275.0 million revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs. The balance outstanding was $70.0 million and $155.0 million on October 29, 2021 and October 30, 2020, respectively. The balance of outstanding letters of credit was $21.4 million and $15.3 million on October 29, 2021 and October 30, 2020, respectively.
During Fiscal 2020, we exercised the “accordion” feature under the ABL Facility increasing the maximum borrowings available under the facility from $175.0 million to $275.0 million, subject to a borrowing base (the “Loan Cap”). This was completed in two separate transactions. The first was a $25.0 million increase effective March 19, 2020 and the second was a $75.0 million increase effective September 9, 2020. The latter was completed through the Second Amendment to the ABL Facility executed on August 12, 2020.
On July 29, 2021, we executed the Third Amendment to the ABL Facility resulting in favorable financial terms compared to the Second Amendment to the ABL Facility and extension of the maturity date of the ABL Facility, as discussed below.
On September 9, 2020, we entered into the Term Loan Facility which provided borrowings of $275.0 million. Origination costs, including an Original Issue Discount (OID) of 3% and $5.1 million in debt origination fees were paid upon entering into the Term Loan Facility.
25
Interest; Fees
The Third Amendment to the ABL Facility lowered the interest rates applicable to borrowings under the ABL Facility. For LIBOR loans, commencing July 31, 2021 the borrowing margin is, where the average daily total loans outstanding for the previous quarter are (i) less than $ 95.0 million, 1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For Base Rate loans, the borrowing margin is, where the average daily total loans outstanding for the previous quarter are (i) less than $95.0 million for the previous quarter, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00%. The Third Amendment to the ABL Facility replaced the 0.75% LIBOR floor with a 0.0% LIBOR floor.
The interest rates per annum applicable to the loans under the Term Loan Facility are based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) an adjusted LIBOR (with a minimum rate of 1.00%) plus 9.75% or (2) an alternative base rate (which is the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which shall be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month LIBOR rate plus 1.00% per annum) plus 8.75%.
Effective with the Third Amendment to the ABL Facility, the ABL Facility fees include (i) commitment fees of 0.25% based upon the average daily unused commitment (aggregate commitment less loans and letter of credit outstanding) under the ABL Facility for the preceding fiscal quarter and (ii) customary letter of credit fees. As of the end of Third Quarter 2021, we had borrowings of $70.0 million on the ABL Facility.
Customary agency fees are payable in respect of the Debt Facilities.
Maturity; Amortization and Prepayments
The Third Amendment to the ABL Facility extended the maturity from November 16, 2022 to the earlier of (a) July 29, 2026 and (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness.
The Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to 1.25% per quarter. It is subject to mandatory prepayments in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 75% depending on our total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan may not be voluntarily prepaid during the first two years of its term, without significant penalties. A prepayment premium is applicable to voluntary prepayments and certain mandatory prepayments made prior to the fourth anniversary of the closing date of the Term Loan Facility.
Guarantees; Security
All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is secured by a second priority interest in the same collateral, with certain exceptions.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability 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.
The Term Loan Facility contains certain financial covenants, including a quarterly maximum total leverage ratio test, a weekly minimum liquidity test and an annual maximum capital expenditure amount.
Under the ABL Facility, if excess availability falls below the greater of 10% of the Loan Cap amount or $15.0 million, we will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0.
26
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.
As of October 29, 2021, we were in compliance with all of our covenants in the Debt Facilities.
Events of Default
The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests and material judgments and change of control.
Cash Flows from Operating Activities
Net cash used in operating activities decreased to $6.4 million Year-to-Date 2021 from $26.1 million Year-to-Date 2020. The $19.7 million decrease in cash used in operating activities was driven by an increase in year over year net income and decrease in net working capital partially offset by a decrease in deferred revenue and other accruals.
Cash Flows from Investing Activities
Net cash used in investing activities was $18.7 million and $25.6 million Year-to-Date 2021 and Year-to-Date 2020, respectively. Cash used in investing activities for both periods was primarily used for investments to update our digital information technology infrastructure.
For Fiscal 2021, we plan to invest approximately $26 million in capital expenditures for strategic investments and infrastructure, primarily in technology and general corporate needs.
Cash Flows from Financing Activities
Net cash provided by financing activities was $28.4 million and $30.8 million Year-to-Date 2021 and Year-to-Date 2020, respectively. Year-to-Date 2021 activity consisted of required principal payments of $10.3 million on the Term Loan Facility and net borrowings of $45.0 million on the ABL Facility. Year-to-Date 2020 activity consisted of new debt of $275.0 million with the Term Loan Facility and net borrowings of $155.0 million on the ABL Facility.
Contractual Obligations and Off-Balance-Sheet Arrangements
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2021, except for the Third Amendment to the ABL Facility for which the maturity date was extended from November 16, 2022 to the earlier of (a) July 29, 2026 and (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness.
Financial Instruments with Off-Balance-Sheet Risk
The $275.0 million ABL Facility includes a $70.0 million sublimit for letters of credit and the Third Amendment to the ABL Facility extended the maturity from November 16, 2022 to the earlier of (a) July 29, 2026 and (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness. The ABL Facility is available for working capital and other general corporate liquidity needs. The balance outstanding on October 29, 2021 and October 30, 2020 was $70.0 million and $155.0 million, respectively. The balance of outstanding letters of credit was $21.4 million and $15.3 million on October 29, 2021 and October 30, 2020, respectively.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended January 29, 2021. There have been no significant changes in our critical accounting policies or their application since January 29, 2021.
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Recent Accounting Pronouncements
See Part I, Item 1, Note 2, Recent Accounting Pronouncements, of the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross margin, operating expenses, operating income, net income, adjusted EBITDA, cash flow, financial condition, financings, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, market opportunities and general market and industry conditions. We generally identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely,” “targeting” or the negative version of these words or comparable words. Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 29, 2021 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. A significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of October 29, 2021, we had $7.9 million of cash denominated in foreign currencies, principally in Pound sterling, Euro and Japanese yen. We do not enter into financial instruments for trading purposes or hedging and have not used any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with the Term Loan Facility and the ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates (above the 1.00% LIBOR floor) associated with the Term Loan Facility would result in a $2.6 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn to a principal amount equal to $275.0 million, each one percentage point change in interest rates would result in a $2.8 million change in our annual cash interest expense.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, Lands’ End’s Chief Executive Officer and President and Chief Financial Officer have concluded that, as of October 29, 2021, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal controls over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the Third Fiscal Quarter Ended October 29, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. 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 pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
For a description of our legal proceedings, see Note 9, Commitments and Contingencies in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which description of legal proceedings is incorporated by reference herein.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 29, 2021, filed with the SEC on March 25, 2021.
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Index of Exhibits
ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
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Amended and Restated Certificate of Incorporation of Lands’ End, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on March 20, 2014 (File No. 001-09769)). |
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Amended and Restated Bylaws of Lands’ End, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Lands’ End, Inc. on April 8, 2014 (File No. 001-09769)). |
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Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.* |
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Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.* |
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Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
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101.INS |
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XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document* |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document* |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Document* |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document* |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document*
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104 |
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Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)* |
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Filed herewith. |
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** |
Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Lands’ End, Inc.
(Registrant)
Dated: December 2, 2021
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By: |
/s/ James Gooch |
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James Gooch |
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President and Chief Financial Officer (Principal Financial Officer)
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EXHIBIT 31.1
I, Jerome Griffith, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Lands’ End, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: December 2, 2021 |
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/s/ Jerome Griffith |
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Jerome Griffith |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Lands' End, Inc. |
EXHIBIT 31.2
I, James Gooch, certify that:
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I have reviewed this quarterly report on Form 10-Q of Lands’ End, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: December 2, 2021 |
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/s/ James Gooch |
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James Gooch |
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President and Chief Financial Officer |
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(Principal Financial Officer) |
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Lands' End, Inc. |
EXHIBIT 32.1
Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned, Jerome Griffith, Chief Executive Officer of Lands’ End, Inc. (the “Company”) and James Gooch, President and Chief Financial Officer of the Company, has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2021 (the “Report”).
Each of the undersigned hereby certifies that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: December 2, 2021 |
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/s/ Jerome Griffith |
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Jerome Griffith |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Date: December 2, 2021 |
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/s/ James Gooch |
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James Gooch |
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President and Chief Financial Officer |
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(Principal Financial Officer) |