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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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 May 27, 2022, the registrant had
LANDS’ END, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED APRIL 29, 2022
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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6 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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24 |
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Item 4. |
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26 |
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Item 1. |
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26 |
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Item 1A. |
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26 |
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Item 6. |
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27 |
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28 |
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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(in thousands, except per share data) |
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April 29, 2022 |
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April 30, 2021 |
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Net revenue |
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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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— |
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Operating income |
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Interest expense |
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Other (income), net |
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(Loss) income before income taxes |
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Income tax (benefit) expense |
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NET (LOSS) INCOME |
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$ |
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$ |
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NET (LOSS) INCOME PER COMMON SHARE |
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Basic: |
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$ |
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$ |
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Diluted: |
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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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(in thousands) |
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April 29, 2022 |
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April 30, 2021 |
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NET (LOSS) INCOME |
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$ |
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$ |
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Other comprehensive (loss) income, net of tax |
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Foreign currency translation adjustments |
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COMPREHENSIVE (LOSS) INCOME |
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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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April 29, 2022 |
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April 30, 2021 |
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January 28, 2022 |
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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 |
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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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$ |
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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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— |
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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 |
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Accumulated other comprehensive (loss) |
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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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13 Weeks Ended |
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(in thousands) |
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April 29, 2022 |
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April 30, 2021 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net (loss) income |
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$ |
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$ |
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Adjustments to reconcile net (loss) income 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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— |
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Stock-based compensation |
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Deferred income taxes |
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Other |
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Change in operating assets and liabilities: |
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Accounts receivable, net |
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Inventories, net |
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Accounts payable |
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Other operating assets |
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Other operating liabilities |
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Net cash used in operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property and equipment |
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Net cash used in investing activities |
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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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Payments on term loan |
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Payments for taxes related to net share settlement of equity awards |
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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 (DECREASE) INCREASE 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 28, 2022 |
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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 loss |
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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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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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Balance at April 29, 2022 |
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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 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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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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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, through Company Operated stores and through third-party distribution channels. 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 the home. References to www.landsend.com do not constitute incorporation by reference of the information at www.landsend.com, and such information is not part of this Quarterly Report on Form 10-Q or any other filings with the SEC, unless otherwise explicitly stated.
Terms that are commonly used in the Company’s Notes to Condensed Consolidated Financial Statements are defined as follows:
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ABL Facility – Asset-based senior secured credit agreement, 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 |
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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 |
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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 |
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Company Operated stores – Lands’ End retail stores in the Retail distribution channel |
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Debt Facilities – Collectively, the Term Loan Facility and ABL Facility |
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Deferred Awards – Time vesting stock awards |
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EPS – Earnings per share |
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First Quarter 2022 – The 13 weeks ended April 29, 2022 |
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First Quarter 2021 – The 13 weeks ended April 30, 2021 |
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First Quarter 2019 – The 13 weeks ended May 3, 2019 |
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GAAP – Accounting principles generally accepted in the United States |
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LIBOR – London inter-bank offered rate |
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Option Awards – Stock option awards |
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Performance Awards – Performance-based stock awards |
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SEC – United States Securities and Exchange Commission |
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|
• |
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 |
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.
6
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 24, 2022.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
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 |
|
|||||
|
(in thousands, except per share amounts) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
||
|
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
Dilutive effect of stock awards |
|
|
— |
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
|
$ |
( |
) |
|
$ |
|
|
|
Diluted (loss) earnings 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
NOTE 4. OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive (loss) income encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments.
|
|
|
13 Weeks Ended |
|
||||||
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
|||
|
Beginning balance: Accumulated other comprehensive (loss) (net of tax of $ |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (net of tax of $ |
|
|
( |
) |
|
|
|
|
|
|
Ending balance: Accumulated other comprehensive (loss) (net of tax of $ |
|
$ |
( |
) |
|
$ |
( |
) |
|
7
NOTE 5. DEBT
ABL Facility
The Company’s $
The following table summarizes the Company’s borrowing availability, before consideration of the Loan Cap, under the ABL Facility:
|
|
|
April 29, 2022 |
|
|
April 30, 2021 |
|
|
January 28, 2022 |
||||||||||||||
|
(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 |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
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:
|
|
|
April 29, 2022 |
|
|
April 30, 2021 |
|
|
January 28, 2022 |
|
|||||||||||||||
|
(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, effective
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 rate (with a minimum rate of
The ABL Facility fees include (i) commitment fees of
8
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.
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
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 April 29, 2022, the Company was in compliance with its financial 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 stock-based compensation expense 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 stock-based compensation expense for an estimated forfeiture rate for those shares not expected to vest and to recognize stock-based compensation expense on a straight-line basis for awards that only have a service requirement with multiple vest dates.
9
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 inducement grants outside of the Company’s stockholder approved stock plans in accordance with NASDAQ Listing Rule 5635(c)(4):
|
|
• |
Deferred Awards are in the form of restricted stock units and only require each recipient to complete a service period for the awards to be earned. Deferred Awards generally vest over |
|
|
• |
Performance Awards are in the form of restricted stock units and have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. For Performance Awards granted, the Target Shares earned can range from |
|
|
• |
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 |
|
|||||
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
||
|
Deferred awards |
|
$ |
|
|
|
$ |
|
|
|
Performance awards (1) |
|
|
( |
) |
|
|
|
|
|
Option awards |
|
— |
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
|
|
|
$ |
|
|
|
(1) |
Net credit expense for the 13 weeks ended April 29, 2022 includes the reduction of the accrual for Performance Awards granted during First Quarter 2021 from |
The following table provides a summary of the Deferred Awards activity for the 13 weeks ended April 29, 2022:
|
|
|
Deferred Awards |
|
|||||
|
(in thousands, except per share amounts) |
|
Number of Shares |
|
|
Weighted Average Grant Date Fair Value per Share |
|
||
|
Unvested deferred awards as of January 28, 2022 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
Unvested deferred awards as of April 29, 2022 |
|
|
|
|
|
|
|
|
10
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 the 13 weeks ended April 29, 2022:
|
|
|
Performance Awards |
|
|||||
|
(in thousands, except per share amounts) |
|
Number of Shares |
|
|
Weighted Average Grant Date Fair Value per Share |
|
||
|
Unvested performance awards as of January 28, 2022 |
|
|
|
|
|
$ |
|
|
|
Granted (2) |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
Unvested performance awards as of April 29, 2022 |
|
|
|
|
|
|
|
|
|
(2) |
Performance shares granted assume achievement performance at |
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $
There were
NOTE 7. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
|
January 28, 2022 |
|
|||
|
Deferred gift card revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Accrued employee compensation and benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for sales returns and allowances |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 8. 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:
|
|
|
April 29, 2022 |
|
|
April 30, 2021 |
|
|
January 28, 2022 |
|
|||||||||||||||
|
(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 valuation model to complete the analysis on April 29, 2022, April 30, 2021 and January 28, 2022. There were
11
NOTE 9. 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 benefit at an overall effective tax rate of
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
As disclosed in the Company’s Annual Report on Form 10-K for the year ended January 28, 2022, 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 has several motions pending before the Court and continues to be in discovery. Lands’ End is vigorously defending these lawsuits and believes they are without merit.
NOTE 11. 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
12
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. |
|
|
• |
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. |
Net revenue is presented by distribution channel in the following table:
|
|
|
13 Weeks Ended |
|
|||||
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
U.S. eCommerce |
|
$ |
|
|
|
$ |
|
|
|
International |
|
|
|
|
|
|
|
|
|
Outfitters |
|
|
|
|
|
|
|
|
|
Third Party |
|
|
|
|
|
|
|
|
|
Retail |
|
|
|
|
|
|
|
|
|
Total Net revenue |
|
$ |
|
|
|
$ |
|
|
NOTE 12. REVENUE
Revenue includes sales of merchandise and delivery revenue related to merchandise sold. Substantially all of the Company’s revenue is recognized when control of product passes to customers, which for the U.S. eCommerce, International, Outfitters and Third Party distribution channels is when the merchandise is 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 11, Segment Reporting. Revenue by geographic location was:
|
|
|
13 Weeks Ended |
|
|||||
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total Net revenue |
|
$ |
|
|
|
$ |
|
|
13
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 |
|
|||||
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
||
|
Deferred revenue beginning of period |
|
$ |
|
|
|
$ |
|
|
|
Deferred revenue recognized in period |
|
|
( |
) |
|
|
( |
) |
|
Revenue deferred in period |
|
|
|
|
|
|
|
|
|
Deferred revenue end of period |
|
$ |
|
|
|
$ |
|
|
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 and 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 |
|
|||||
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
||
|
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 April 29, 2022, April 30, 2021 and January 28, 2022, $
14
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 28, 2022 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 agreement, 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 Consolidated Statements of Operations net of Income tax expense, Interest expense, Depreciation and amortization and certain significant items |
|
|
• |
Company Operated stores – Lands’ End retail stores in the Retail distribution channel |
|
|
• |
COVID – Coronavirus disease 2019 (COVID-19) caused by severe respiratory syndrome coronavirus 2 (SARS-CoV-2) |
|
|
• |
Debt Facilities – Collectively, the Term Loan Facility and ABL Facility |
|
|
• |
First Quarter 2022 – The 13 weeks ended April 29, 2022 |
|
|
• |
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 ended 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 |
|
|
• |
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 |
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, through our own Company Operated stores and through third-party distribution channels. We are a classic American lifestyle brand with a passion for quality, legendary service and real value. We 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.”
15
We seek to provide a common customer experience regardless of whether our customers are interacting with us on our company websites, at Company Operated stores or through third-party 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. |
|
|
• |
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. |
Global Supply Chain and Macroeconomic Challenges
Like many companies, we continue to experience global supply chain challenges and disruptions. These global supply chain challenges and disruptions have caused manufacturing and transportation delays that have resulted in lower inventory positions, at times, on key products, higher than normal back orders and increased transportation and distribution costs. We continually monitor our supply chain for manufacturing and transportation delays caused or exacerbated by the COVID pandemic, among other factors. We have leveraged our relationships with suppliers to shift production schedules and increase lead times in comparison to prior years. In addition, we have rerouted shipments as we attempt to mitigate our exposure of unpredictable transportation delays with potential labor disruptions at the two major West Coast ports.
Macroeconomic issues, such as recent inflationary pressures and the ongoing Russian invasion of Ukraine have had an impact on our business. Since apparel purchases are discretionary expenditures that historically have been influenced by domestic and global economic conditions, higher prices of consumer goods due to inflation may result in less discretionary spending for consumers which may negatively impact customer demand. Additionally, macroeconomic challenges have led to increased cost of raw materials, packaging materials, labor, energy, fuel and other inputs necessary for the production and distribution of our products and may impact our gross margin.
We expect the global supply chain challenges, increased transportation and distribution costs and inflationary pressures to continue through the remainder of Fiscal 2022.
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.
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 33.9% and 37.7% of our net revenue in the fourth quarter of Fiscal 2021 and Fiscal 2020 respectively. The Fiscal 2021 percentage decrease of net revenue in the fourth quarter was primarily attributed to the global supply chain challenges. Thus, lower than expected fourth quarter net revenue has had and may continue to have an adverse impact on our annual operating results.
16
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.
Results of Operations
The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue:
|
|
|
13 Weeks Ended |
|
|||||||||||||
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
||||||||||
|
Net revenue |
|
$ |
303,665 |
|
|
|
100.0 |
% |
|
$ |
321,297 |
|
|
|
100.0 |
% |
|
Cost of sales (excluding depreciation and amortization) |
|
|
174,490 |
|
|
|
57.5 |
% |
|
|
173,560 |
|
|
|
54.0 |
% |
|
Gross profit |
|
|
129,175 |
|
|
|
42.5 |
% |
|
|
147,737 |
|
|
|
46.0 |
% |
|
Selling and administrative |
|
|
115,693 |
|
|
|
38.1 |
% |
|
|
125,522 |
|
|
|
39.1 |
% |
|
Depreciation and amortization |
|
|
9,584 |
|
|
|
3.2 |
% |
|
|
9,904 |
|
|
|
3.1 |
% |
|
Other operating expense, net |
|
|
— |
|
|
|
— |
% |
|
|
443 |
|
|
|
0.1 |
% |
|
Operating income |
|
|
3,898 |
|
|
|
1.3 |
% |
|
|
11,868 |
|
|
|
3.7 |
% |
|
Interest expense |
|
|
8,169 |
|
|
|
2.7 |
% |
|
|
9,060 |
|
|
|
2.8 |
% |
|
Other (income), net |
|
|
(161 |
) |
|
|
(0.0 |
)% |
|
|
(167 |
) |
|
|
0.0 |
% |
|
(Loss) income before income taxes |
|
|
(4,110 |
) |
|
|
(1.4 |
)% |
|
|
2,975 |
|
|
|
0.9 |
% |
|
Income tax (benefit) expense |
|
|
(1,739 |
) |
|
|
(0.6 |
)% |
|
|
336 |
|
|
|
0.1 |
% |
|
NET (LOSS) INCOME |
|
$ |
(2,371 |
) |
|
|
(0.8 |
)% |
|
$ |
2,639 |
|
|
|
0.8 |
% |
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 (Loss) and Adjusted EBITDA
We recorded a Net loss of $2.4 million in First Quarter 2022 compared to Net income of $2.6 million in First Quarter 2021. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. 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 we use to calculate our non-GAAP financial measures may differ significantly from methods other companies use to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.
While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance, and is useful to investors, because:
|
|
• |
EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax. |
|
|
• |
Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations. |
|
|
• |
Other – amortization of transaction related costs associated with Third Party distribution channel for the 13 weeks ended April 29, 2022 and April 30, 2021. |
|
|
• |
Loss on disposal of property and equipment – management considers the net gain or loss on asset valuation to result from investing decisions rather than ongoing operations for the 13 weeks ended April 30, 2021. |
17
The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue:
|
|
|
13 Weeks Ended |
|
|||||||||||||
|
(in thousands) |
|
April 29, 2022 |
|
|
April 30, 2021 |
|
||||||||||
|
Net (loss) income |
|
$ |
(2,371 |
) |
|
|
(0.8 |
)% |
|
$ |
2,639 |
|
|
|
0.8 |
% |
|
Income tax (benefit) expense |
|
|
(1,739 |
) |
|
|
(0.6 |
)% |
|
|
336 |
|
|
|
0.1 |
% |
|
Other (income), net |
|
|
(161 |
) |
|
|
(0.0 |
)% |
|
|
(167 |
) |
|
|
0.0 |
% |
|
Interest expense |
|
|
8,169 |
|
|
|
2.7 |
% |
|
|
9,060 |
|
|
|
2.8 |
% |
|
Operating income |
|
|
3,898 |
|
|
|
1.3 |
% |
|
|
11,868 |
|
|
|
3.7 |
% |
|
Depreciation and amortization |
|
|
9,584 |
|
|
|
3.2 |
% |
|
|
9,904 |
|
|
|
3.1 |
% |
|
Other |
|
|
344 |
|
|
|
0.1 |
% |
|
|
250 |
|
|
|
0.1 |
% |
|
Loss on disposal of property and equipment |
|
|
— |
|
|
|
— |
% |
|
|
443 |
|
|
|
0.1 |
% |
|
Adjusted EBITDA |
|
$ |
13,826 |
|
|
|
4.6 |
% |
|
$ |
22,465 |
|
|
|
7.0 |
% |
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 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.
We use Net revenue to evaluate revenue performance for the U.S. eCommerce, International, Outfitters and Third Party distribution channels. For our Retail distribution channel, we use 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. Starting in First Quarter 2020, due to the COVID pandemic, we temporarily ceased using Same Store Sales as a key measure in evaluating performance. We reverted back to Same Store Sales beginning with Third Quarter 2021 as we believe there is greater comparability of year-on-year store and economic dynamics.
Discussion and Analysis
First Quarter 2022 compared with First Quarter 2021
Net Revenue
Net revenue for First Quarter 2022 was $303.7 million, a decrease of $17.6 million or 5.5% compared to $321.3 million from First Quarter 2021.
U.S. eCommerce Net revenue was $174.9 million for First Quarter 2022, a decrease of $28.7 million or 14.1%, from $203.6 million during the First Quarter 2021. Compared to First Quarter 2021, the decrease in revenue in First Quarter 2022 was driven by delayed receipts of key products due to the global supply chain challenges and macroeconomic challenges.
International eCommerce Net revenue was $44.2 million for First Quarter 2022, a decrease of $12.2 million or 21.7%, from $56.4 million during the First Quarter 2021. The decrease in revenue in First Quarter 2022 was driven by delayed receipts of key products due to the global supply chain challenges and macroeconomic challenges.
Outfitters Net revenue was $54.0 million for First Quarter 2022, an increase of $13.3 million or 32.6%, from $40.7 million during the First Quarter 2021. Compared to First Quarter 2021, the increase was attributed to stronger demand within our small and medium-sized business customers, national accounts and school uniform households.
Third Party Net revenue was $21.6 million for First Quarter 2022, an increase of $9.8 million or 83.3% from $11.8 million during the First Quarter 2021. The increase was primarily attributed to expanding the number of Kohl’s stores in the Third Quarter 2021 to a total of 300 retail locations, growth in existing online marketplaces, and the on-air launch of select product at QVC in First Quarter 2022.
18
Retail Net revenue was $9.0 million for First Quarter 2022, an increase of $0.2 million or 2.2% from $8.8 million during the First Quarter 2021. Our U.S. Company Operated stores experienced an increase of 3.6% in Same Store Sales as compared to the First Quarter 2021. On April 29, 2022 there were 30 U.S. Company Operated stores compared to 31 U.S. Company Operated stores on April 30, 2021.
Gross Profit
Gross profit was $129.2 million for First Quarter 2022, a decrease of $18.5 million or 12.6% from $147.7 million during the First Quarter of 2021. Gross margin decreased approximately 350 basis points to 42.5% in First Quarter 2022, compared with 46.0% in First Quarter 2021. Compared to First Quarter 2021, gross margin decreased due to an incremental $13.6 million of transportation costs as a result of the global supply chain challenges.
Selling and Administrative Expenses
Selling and administrative expenses decreased $9.8 million to $115.7 million or 38.1% of total Net revenue in First Quarter 2022 compared with $125.5 million or 39.1% of Net revenue in First Quarter 2021. The approximately 100 basis point decrease was a result of continued expense controls and lower digital marketing spend partially offset by deleverage on lower sales.
Depreciation and Amortization
Depreciation and amortization expense was $9.6 million in First Quarter 2022, a decrease of $0.3 million compared with $9.9 million in First Quarter 2021.
Other Operating Expense
There was no Other operating expense in First Quarter 2022 compared to $0.4 million in First Quarter 2021. The Other operating expense of $0.4 million in First Quarter 2021 was loss on disposal of property and equipment.
Operating Income
Operating income was $3.9 million in First Quarter 2022 compared to $11.9 million in First Quarter 2021. The $8.0 million decrease was driven by the decrease in Gross profit due to increased transportation costs attributed to the global supply chain challenges slightly offset by lower selling and administrative expenses.
Interest Expense
Interest expense was $8.2 million in First Quarter 2022 compared to $9.1 million in First Quarter 2021. The $0.9 million decrease was primarily attributed to lower interest rates as a result of the Third Amendment to the ABL Facility and lower interest on Term Loan due to scheduled principal payments.
Other Income
Other income was $0.2 million in First Quarter 2022 compared to Other income of $0.2 million in First Quarter 2021.
Income Tax (Benefit) Expense
We recorded an income tax benefit at an overall effective tax rate of 42.3% for First Quarter 2022 and income tax expense at an overall effective tax rate of 11.3% for First Quarter 2021.
Net Income (Loss)
As a result of the above factors, Net loss was $2.4 million and diluted loss per share was $(0.07) in First Quarter 2022 compared with Net income of $2.6 million and diluted earnings per share of $0.08 in First Quarter 2021.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $13.8 million in First Quarter 2022 compared to $22.5 million in First Quarter 2021.
19
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 $125.0 million on April 29, 2022, 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. On July 29, 2021, we executed the Third Amendment to the ABL Facility resulting in favorable financial terms and extension of the maturity date of the ABL Facility, as discussed below. The amount available to borrow is subject to the Loan Cap, as defined in the agreement, which considers the Borrowing Base calculated from eligible inventory, trade receivables and credit card receivables as defined in the agreement. The balance outstanding was $125.0 million and $80.0 million on April 29, 2022 and April 30, 2021, respectively. The balance of outstanding letters of credit was $14.6 million and $16.9 million on April 29, 2022 and April 30, 2021, respectively.
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.
Interest; Fees
The Third Amendment to the ABL Facility, effective July 31, 2021, lowered the applicable margin interest rates applicable to the referenced rate, selected at the borrower’s election, either (1) adjusted LIBOR or (2) a base rate which the greater of (a) the federal funds rate plus 0.50%, (b) the one month LIBOR rate plus 1.00%, or (c) the Wells Fargo “prime rate”. For all loans, the borrowing margin is based upon the average daily total loans outstanding for the previous quarter. The applicable borrowing margin for LIBOR loans is (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 applicable borrowing margin is (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%.
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 April 29, 2022, we had borrowings of $125.0 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.
20
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. After the initial two-year period, a prepayment premium of 3% applies to voluntary prepayments and certain mandatory prepayments made after September 9, 2022 and on or prior to September 9, 2023, 1% for such prepayments made after September 9, 2023 and on or prior to September 9, 2024, and no premium on such prepayments thereafter.
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.
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 April 29, 2022, we were in compliance with our financial 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 increased to $122.4 million during First Quarter 2022 from $38.7 million during First Quarter 2021. The $83.7 million increase in cash used in operating activities was primarily driven by an increase year over year in inventories and year over year change in other current liabilities. The $42.6 million increase in inventory compared to First Quarter 2021 was due to our in-transit inventory as a result of extended lead times due to global supply chain challenges and increased transportation costs.
Cash Flows from Investing Activities
Net cash used in investing activities was $7.0 million and $4.9 million during First Quarter 2022 and First Quarter 2021, respectively. Cash used in investing activities for both periods was primarily used for investments to update our digital information technology infrastructure.
21
For Fiscal 2022, we plan to invest approximately $37.0 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 $117.3 million and $46.5 million during First Quarter 2022 and First Quarter 2021, respectively, primarily from borrowings through the ABL Facility to support increased supply chain costs and timing of our inventory purchases.
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 28, 2022.
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 April 29, 2022 and April 30, 2021 was $125.0 million and $80.0 million, respectively. The balance of outstanding letters of credit was $14.6 million and $16.9 million on April 29, 2022 and April 30, 2021, 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 28, 2022. There have been no significant changes in our critical accounting policies or their application since January 28, 2022.
Recent Accounting Pronouncements
We have considered all recent accounting pronouncements and have concluded that there are no recent accounting pronouncements that may have a material impact on our Condensed Consolidated Financial Statements and disclosures.
22
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 28, 2022 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.
23
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 April 29, 2022, we had $9.3 million of cash denominated in foreign currencies, principally in British pound sterling, Euro and Japanese yen. We do not utilize 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 $2.5 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.
24
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and our President and Chief Financial Officer have concluded that, as of April 29, 2022, 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 first fiscal quarter ended April 29, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
25
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 10, 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 28, 2022, filed with the SEC on March 24, 2022.
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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 Annual Report on Form 10-K filed by Lands’ End, Inc. on March 24, 2022 (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: June 2, 2022
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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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28
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: June 2, 2022 |
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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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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: June 2, 2022 |
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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 April 29, 2022 (the “Report”).
Each of the undersigned hereby certifies that:
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1. |
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: June 2, 2022 |
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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: June 2, 2022 |
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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) |