Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
-OR-
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to to .
Commission File Number:
(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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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 26, 2023, the registrant had
Table of Contents
LANDS’ END, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED APRIL 28, 2023
TABLE OF CONTENTS
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Item 1. |
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Condensed Consolidated Statements of Comprehensive Operations |
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Condensed Consolidated Statements of Changes in Stockholders' Equity |
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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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Item 4. |
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28 |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 5. |
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Item 6. |
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30 |
Table of Contents
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 28, |
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April 29, |
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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 before income taxes |
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Income tax benefit |
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NET LOSS |
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$ |
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$ |
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NET LOSS 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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$ |
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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
Table of Contents
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 28, 2023 |
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April 29, 2022 |
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NET LOSS |
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$ |
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$ |
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Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustments |
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( |
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COMPREHENSIVE LOSS |
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$ |
( |
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$ |
( |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
Table of Contents
LANDS’ END, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) |
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April 28, 2023 |
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April 29, 2022 |
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January 27, 2023 |
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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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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term borrowings under ABL Facility |
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Long-term debt, net |
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Lease liability – long-term |
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Deferred tax liabilities |
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Other liabilities |
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TOTAL LIABILITIES |
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STOCKHOLDERS’ EQUITY |
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Common stock, par value $ |
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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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( |
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( |
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( |
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TOTAL STOCKHOLDERS’ EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
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 28, 2023 |
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April 29, 2022 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
( |
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$ |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Amortization of debt issuance costs |
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Loss on disposal of property and equipment |
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Stock-based compensation |
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Deferred income taxes |
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( |
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Other |
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( |
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( |
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Change in operating assets and liabilities: |
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Accounts receivable, net |
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( |
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Inventories, net |
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( |
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Accounts payable |
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( |
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( |
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Other operating assets |
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( |
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( |
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Other operating liabilities |
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( |
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( |
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Net cash used in operating activities |
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( |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property and equipment |
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( |
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Net cash used in investing activities |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from borrowings under ABL Facility |
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Payments of borrowings under ABL Facility |
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( |
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( |
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Payments on term loan |
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( |
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( |
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Payments for taxes related to net share settlement of equity awards |
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( |
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( |
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Purchases and retirement of common stock |
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( |
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Net cash (used in) provided by financing activities |
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( |
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Effects of exchange rate changes on cash, cash equivalents and restricted cash |
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( |
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NET DECREASE IN CASH, CASH EQUIVALENTS AND |
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( |
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( |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, |
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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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Operating lease right-of-use-assets obtained in exchange for lease liabilities |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
LANDS’ END, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
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Common Stock Issued |
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Additional |
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Retained |
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Accumulated |
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Total |
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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 27, 2023 |
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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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— |
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( |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Vesting of restricted shares |
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( |
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— |
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— |
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— |
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Common stock withheld related to net share |
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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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Purchases and retirement of common stock |
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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 28, 2023 |
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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 |
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Retained |
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Accumulated |
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Total |
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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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— |
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( |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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( |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Vesting of restricted shares |
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( |
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— |
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— |
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— |
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Common stock withheld related to net share |
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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 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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See accompanying Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
LANDS’ END, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business
Lands’ End, Inc. (“Lands’ End” or the “Company”) is a leading digital retailer of casual clothing, swimwear, outerwear, accessories, footwear, home products and uniform solutions. 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. Lands’ End also offers products to businesses and schools, for their employees and students, through the Outfitters distribution channel. 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:
6
Table of Contents
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands’ End Annual Report on Form 10-K filed with the SEC on April 10, 2023.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued ASU 2020-04, Reference Reform Rate (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) to provide temporary optional expedients and exceptions to the contract modifications, hedge relationships and other transactions affected by reference rate reform if certain criteria are met. This ASU, which was effective upon issuance and modified by ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of Sunset Date of Topic 848, may be applied through December 31, 2024, is applicable to all contracts and hedging relationships that reference the London Interbank Offered Rate or any other reference rate expected to be discontinued. The guidance in ASU 2020-04 may be implemented over time as reference rate reform activities occur. The Company is currently evaluating the potential effects of this ASU, however, does not expect reference rate reform to have a material effect on its consolidated financial statements as the Company’s current Debt Facilities provide for the replacement of LIBOR with an alternative benchmark rate should LIBOR become unavailable.
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:
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13 Weeks Ended |
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(in thousands, except per share amounts) |
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April 28, 2023 |
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April 29, 2022 |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
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Basic weighted average common shares outstanding |
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Dilutive effect of stock awards |
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— |
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— |
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Diluted weighted average common shares outstanding |
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Basic loss per share |
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$ |
( |
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$ |
( |
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Diluted loss per share |
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$ |
( |
) |
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$ |
( |
) |
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
7
Table of Contents
NOTE 4. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments.
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13 Weeks Ended |
|
|||||
(in thousands) |
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April 28, 2023 |
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April 29, 2022 |
|
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Beginning balance: Accumulated other comprehensive loss |
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$ |
( |
) |
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$ |
( |
) |
Other comprehensive income (loss): |
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|
|
|
||
Foreign currency translation adjustments (net of tax of ($ |
|
|
|
|
|
( |
) |
|
Ending balance: Accumulated other comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
NOTE 5. DEBT
ABL Facility
The Company’s $
The following table summarizes the Company’s ABL Facility borrowing availability:
|
|
April 28, 2023 |
|
April 29, 2022 |
|
January 27, 2023 |
||||||||||||
(in thousands) |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|||
ABL Facility Limit |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|||
Borrowing Base |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Outstanding borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Outstanding letters of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
ABL Facility utilization at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
ABL Facility borrowing availability |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|||
Long-Term Debt
On September 9, 2020, the Company entered into the Term Loan Facility which provided borrowings of $
8
Table of Contents
The Company’s long-term debt consisted of the following:
|
|
April 28, 2023 |
|
April 29, 2022 |
|
January 27, 2023 |
||||||||||||
(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
Effective May 12, 2023, the Company executed the Fourth Amendment to the ABL Facility to transition a benchmark reference rate from LIBOR to SOFR plus an adjustment of
The new applicable margin interest rates applicable to the referenced rate, selected at the borrower’s election, are either (1) ABL Adjusted SOFR, subject to
Prior to the Fourth Amendment, the applicable margin interest rates applicable to the referenced rate, selected at the borrower’s election, were either (1) adjusted LIBOR, subject to a
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
Customary agency fees are payable in respect of the Debt Facilities.
Maturity; Amortization and Prepayments
The ABL Facility maturity date is the earlier of (a)
The Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to
9
Table of Contents
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 28, 2023, 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, material judgments and change of control.
NOTE 6. STOCK-BASED COMPENSATION
The Company expenses the fair value of all stock awards over their requisite service period, 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.
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):
10
Table of Contents
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 28, 2023 |
|
|
April 29, 2022 |
|
||
Deferred awards |
|
$ |
|
|
$ |
|
||
Performance awards (1) |
|
|
— |
|
|
|
( |
) |
Option awards |
|
|
|
|
|
— |
|
|
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
||
Deferred Awards
The following table provides a summary of the Deferred Awards activity for the 13 weeks ended April 28, 2023:
|
|
Deferred Awards |
|
|||||
(in thousands, except per share amounts) |
|
Number of |
|
|
Weighted Average |
|
||
Unvested deferred awards as of January 27, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
( |
) |
|
|
|
|
Forfeited or expired |
|
|
( |
) |
|
|
|
|
Unvested deferred awards as of April 28, 2023 |
|
|
|
|
$ |
|
||
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $
11
Table of Contents
Performance Awards
The following table provides a summary of the Performance Awards activity for the 13 weeks ended April 28, 2023:
|
|
Performance Awards |
|
|||||
(in thousands, except per share amounts) |
|
Number of |
|
|
Weighted Average |
|
||
Unvested performance awards as of January 27, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
— |
|
|
|
— |
|
Forfeited or expired |
|
|
( |
) |
|
|
|
|
Unvested performance awards as of April 28, 2023 |
|
|
|
|
$ |
|
||
Option Awards
During the 13 weeks ended April 28, 2023 there was
(in thousands, except per share and contractual life amounts) |
|
Option Awards |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate Intrinsic Value |
|
||||
Option Awards vested and expected to vest |
|
|
|
|
|
|
|
$ |
|
|
|
— |
|
|||
Option Awards exercisable |
|
|
|
|
|
|
|
$ |
|
|
|
— |
|
|||
Total unrecognized stock-based compensation expense related to Option Awards was approximately $
NOTE 7. STOCKHOLDERS’ EQUITY
Share Repurchase Program
On June 28, 2022, the Company announced that its Board of Directors authorized the Company to repurchase up to $
The following table summarizes the Company’s share repurchases for the 13 weeks ended April 28, 2023:
|
|
13 Weeks Ended |
|
|||||
(Shares and $ in thousands except average per share cost) |
|
April 28, 2023 |
|
|
April 29, 2022 |
|
||
Number of shares repurchased |
|
|
|
|
|
— |
|
|
Total cost |
|
$ |
|
|
$ |
— |
|
|
Average per share cost |
|
$ |
|
|
$ |
— |
|
|
The Company retired all shares that were repurchased through the 2022 Share Repurchase Program during the 13 weeks ended April 28, 2023. In accordance with the FASB ASC 505—Equity, the par value of the shares retired was charged against Common stock and the remaining purchase price was allocated between Additional paid-in capital and Retained earnings. The portion charged against
12
Table of Contents
Additional paid-in capital is determined based on the Additional paid-in capital per share amount recorded in the initial issuance of the shares with the remaining to Retained earnings. Shares purchased at a price less than that of initial issuance is charged only against Additional paid-in capital. In addition, the total cost of the broker commissions is charged directly to Retained earnings.
NOTE 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
(in thousands) |
|
April 28, 2023 |
|
|
April 29, 2022 |
|
|
January 27, 2023 |
|
|||
Deferred gift card revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Reserve for sales returns and allowances |
|
|
|
|
|
|
|
|
|
|||
Accrued employee compensation and benefits |
|
|
|
|
|
|
|
|
|
|||
Deferred revenue |
|
|
|
|
|
|
|
|
|
|||
Accrued property, sales and other taxes |
|
|
|
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
|
|
|
|
|||
Total Accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|||
NOTE 9. LANDS’ END JAPAN CLOSING
In July 2022, the Board of Directors approved a plan to cease operations of Lands’ End Japan KK, a subsidiary of Lands’ End, Inc. (“Lands’ End Japan”) by the end of Fiscal 2022. The dissolution of Lands’ End Japan was authorized and approved on January 31, 2023. Lands’ End Japan operations were reported in the Japan eCommerce operating segment in Fiscal 2022 and prior. For a discussion of this operating segment, see Note 13, Segment Reporting. The closing and subsequent disposal of the assets did not represent a strategic shift with a major effect on the consolidated financial condition. Accordingly, the closing of Lands’ End Japan was not presented in the Condensed Consolidated Financial Statements as discontinued operations.
In Third Quarter 2022, the Company commenced recording one-time closing costs for employee severance and benefit costs, early termination and restoration costs of leased facilities and contract cancellation and other costs. During the 13 weeks ended April 28, 2023, the Company recognized one-time closing costs for contract cancellation and other costs of approximately $
The following table summarizes accrued closing cost activity related to Lands’ End Japan included in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets:
(in thousands) |
|
Employee Severance and Benefit Costs |
|
|
Leased Facilities Costs |
|
|
Other Closing Costs |
|
|
Total |
|
||||
Balance as of July 29, 2022 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Estimated costs payable in cash |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance as of January 27, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Estimated costs payable in cash |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Cash payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign currency translation |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance as of April 28, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
NOTE 10. 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 $
13
Table of Contents
Carrying amounts and fair values of long-term debt, including current portion, in the Condensed Consolidated Balance Sheets are as follows:
|
|
April 28, 2023 |
|
|
April 29, 2022 |
|
|
January 27, 2023 |
|
|||||||||||||||
(in thousands) |
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||||
Long-term debt, including current portion |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Long-term debt, including current portion, was valued by management utilizing Level 3 valuation techniques as of April 28, 2023, April 29, 2022 and January 27, 2023. There were
NOTE 11. 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 12. 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.
NOTE 13. SEGMENT REPORTING
For the 13 weeks ended April 28, 2023, the Company’s operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Retail. During the 13 weeks ended April 29, 2022, the Company’s operating segments included Japan eCommerce. See Note 9, Lands’ End Japan Closing.
The Company determined that each of the operating segments have similar economic and other qualitative characteristics, thus the results of the operating segments are aggregated into
Lands’ End identifies
14
Table of Contents
Net revenue is presented by distribution channel in the following table:
|
|
13 Weeks Ended |
|
% of Net |
|
13 Weeks Ended |
|
% of Net |
||
(in thousands) |
|
April 28, 2023 |
|
Revenue |
|
April 29, 2022 |
|
Revenue |
||
Net revenue: |
|
|
|
|
|
|
|
|
||
U.S. eCommerce |
|
$ |
|
|
$ |
|
||||
International (1) |
|
|
|
|
|
|
||||
Outfitters |
|
|
|
|
|
|
||||
Third Party |
|
|
|
|
|
|
||||
Retail |
|
|
|
|
|
|
||||
Total Net revenue |
|
$ |
|
|
|
$ |
|
|
||
NOTE 14. 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 13, Segment Reporting. Revenue by geographic location was:
|
|
13 Weeks Ended |
|
|||||
(in thousands) |
|
April 28, 2023 |
|
|
April 29, 2022 |
|
||
Net revenue: |
|
|
|
|
|
|
||
United States |
|
$ |
|
|
$ |
|
||
Europe |
|
|
|
|
|
|
||
Asia (1) |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total Net revenue |
|
$ |
|
|
$ |
|
||
Contract Liabilities
Contract liabilities consist of payments received in advance of the transfer of control to the customer. As products are delivered and control transfers, the Company recognizes the deferred revenue in Net revenue in the Condensed Consolidated Statements of Operations.
|
|
13 Weeks Ended |
|
|||||
(in thousands) |
|
April 28, 2023 |
|
|
April 29, 2022 |
|
||
Deferred revenue beginning of period |
|
$ |
|
|
$ |
|
||
Deferred revenue recognized in period |
|
|
( |
) |
|
|
( |
) |
Revenue deferred in period |
|
|
|
|
|
|
||
Deferred revenue end of period |
|
$ |
|
|
$ |
|
||
15
Table of Contents
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 Accrued expenses and 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 28, 2023 |
|
|
April 29, 2022 |
|
||
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 28, 2023, April 29, 2022 and January 27, 2023, $
16
Table of Contents
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 27, 2023 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:
Executive Overview
Description of the Company
Lands’ End is a leading digital retailer of casual clothing, swimwear, outerwear, accessories, footwear, home products and uniform solutions. 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. We also offer products to businesses and schools, for their employees and students, through the Outfitters distribution channel.
17
Table of Contents
Lands’ End was founded in 1963 by Gary Comer and his partners to sell sailboat hardware and equipment by catalog. While our product focus has shifted significantly over the years, we have continued to adhere to our founder’s motto as one of our guiding principles: “Take care of the customer, take care of the employee and the rest will take care of itself.”
We have one external reportable segment and identify our operating segments according to how our business activities are managed and evaluated. During First Quarter 2023, our operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Retail. Our operating segments included Japan eCommerce during the First Quarter 2022. See Note 9, Lands’ End Japan Closing.
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:
Macroeconomic Challenges
Macroeconomic issues, such as recent inflationary pressures, have continued to have 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 and require higher levels of promotion in order to attract and retain customers. These 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.
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 34.0% and 33.9% of our net revenue in the fourth quarter of Fiscal 2022 and Fiscal 2021, respectively.
Working capital requirements typically increase during the second and third quarters of the fiscal year as inventory builds to support peak selling periods and, accordingly, typically decrease during the fourth quarter of the fiscal year as inventory is 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.
18
Table of Contents
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 28, 2023 |
|
|
April 29, 2022 |
|
||||||||||
Net revenue |
|
$ |
309,558 |
|
|
|
100.0 |
% |
|
$ |
303,665 |
|
|
|
100.0 |
% |
Cost of sales (excluding depreciation and amortization) |
|
|
171,621 |
|
|
|
55.4 |
% |
|
|
174,490 |
|
|
|
57.5 |
% |
Gross profit |
|
|
137,937 |
|
|
|
44.6 |
% |
|
|
129,175 |
|
|
|
42.5 |
% |
Selling and administrative |
|
|
118,514 |
|
|
|
38.3 |
% |
|
|
115,693 |
|
|
|
38.1 |
% |
Depreciation and amortization |
|
|
9,301 |
|
|
|
3.0 |
% |
|
|
9,584 |
|
|
|
3.2 |
% |
Other operating expense, net |
|
|
202 |
|
|
|
0.1 |
% |
|
|
— |
|
|
|
— |
|
Operating income |
|
|
9,920 |
|
|
|
3.2 |
% |
|
|
3,898 |
|
|
|
1.3 |
% |
Interest expense |
|
|
12,283 |
|
|
|
4.0 |
% |
|
|
8,169 |
|
|
|
2.7 |
% |
Other income, net |
|
|
(187 |
) |
|
|
(0.1 |
)% |
|
|
(161 |
) |
|
|
(0.0 |
)% |
Loss before income taxes |
|
|
(2,176 |
) |
|
|
(0.7 |
)% |
|
|
(4,110 |
) |
|
|
(1.4 |
)% |
Income tax benefit |
|
|
(524 |
) |
|
|
(0.2 |
)% |
|
|
(1,739 |
) |
|
|
(0.6 |
)% |
NET LOSS |
|
$ |
(1,652 |
) |
|
|
(0.5 |
)% |
|
$ |
(2,371 |
) |
|
|
(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 $1.7 million in First Quarter 2023 compared to Net loss of $2.4 million in First Quarter 2022. 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:
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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 28, 2023 |
|
|
April 29, 2022 |
|
||||||||||
Net loss |
|
$ |
(1,652 |
) |
|
|
(0.5 |
)% |
|
$ |
(2,371 |
) |
|
|
(0.8 |
)% |
Income tax benefit |
|
|
(524 |
) |
|
|
(0.2 |
)% |
|
|
(1,739 |
) |
|
|
(0.6 |
)% |
Other income, net |
|
|
(187 |
) |
|
|
(0.1 |
)% |
|
|
(161 |
) |
|
|
(0.0 |
)% |
Interest expense |
|
|
12,283 |
|
|
|
4.0 |
% |
|
|
8,169 |
|
|
|
2.7 |
% |
Operating income |
|
|
9,920 |
|
|
|
3.2 |
% |
|
|
3,898 |
|
|
|
1.3 |
% |
Depreciation and amortization |
|
|
9,301 |
|
|
|
3.0 |
% |
|
|
9,584 |
|
|
|
3.2 |
% |
Lands' End Japan closure |
|
|
76 |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
— |
% |
Loss on disposal of property and equipment |
|
|
123 |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
— |
% |
Other |
|
|
94 |
|
|
|
0.0 |
% |
|
|
344 |
|
|
|
0.1 |
% |
Adjusted EBITDA |
|
$ |
19,514 |
|
|
|
6.3 |
% |
|
$ |
13,826 |
|
|
|
4.6 |
% |
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in five separate distribution channels for revenue reporting purposes: U.S. eCommerce, International, Outfitters, Third Party and Retail. A 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 Company Operated store is included in U.S. Same Store Sales calculations when it has been open for at least 14 months. Online sales and sales generated through our in-store web portal are considered revenue in our U.S. eCommerce and are excluded from U.S. Same Store Sales.
Discussion and Analysis
First Quarter 2023 compared with First Quarter 2022
Net Revenue
Net revenue was $309.6 million for First Quarter 2023, an increase of $5.9 million or 1.9%, from $303.7 million during the First Quarter 2022.
U.S. eCommerce Net revenue was $177.7 million for First Quarter 2023, an increase of $2.8 million or 1.6%, from $174.9 million during the First Quarter 2022. The increase in U.S. eCommerce was primarily driven by targeted promotions within swim and adjacent product categories.
International eCommerce Net revenue was $25.4 million for First Quarter 2023, a decrease of $18.8 million or 42.5%, from $44.2 million during the First Quarter 2022. The decrease in International eCommerce was due to lower consumer demand in Europe and the closing of Lands’ End Japan at the end of Fiscal 2022. First Quarter of Fiscal 2022 includes Lands’ End Japan net revenue of $8.5 million.
Outfitters Net revenue was $74.0 million for First Quarter 2023, an increase of $20.0 million or 37.1%, from $54.0 million during the First Quarter 2022. The increase was primarily driven by inventory sales to Delta Air Lines at the conclusion of their five-year contract. Excluding the $18.3 million difference in year over year revenue from the Delta Air Lines business, revenue for the Outfitters business increased by 3.7%.
Third Party Net revenue was $23.0 million for First Quarter 2023, an increase of $1.4 million or 6.2%, from $21.6 million during the First Quarter 2022. The increase was primarily attributed to growth in existing and new marketplaces.
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Retail Net revenue was $9.5 million for First Quarter 2023, an increase of $0.5 million or 5.7%, from $9.0 million during the First Quarter 2022. Our U.S. Company Operated stores experienced an increase of 9.5% in Same Store Sales driven by an increase in traffic as consumers returned to in-store shopping as compared to the First Quarter 2022. On April 28, 2023 there were 28 U.S. Company Operated stores compared to 30 U.S. Company Operated stores on April 29, 2022.
Gross Profit
Gross profit was $137.9 million for First Quarter 2023, an increase of $8.7 million or 6.7% from $129.2 million during the First Quarter of 2022. Gross margin increased approximately 210 basis points to 44.6% in First Quarter 2023, compared with 42.5% in First Quarter 2022. The Gross margin improvement was primarily driven by leveraging the strength in the swim and vacation product categories across the channels as well as improvements in supply chain costs in First Quarter Fiscal 2023 compared to the prior year.
Selling and Administrative Expenses
Selling and administrative expenses increased $2.8 million to $118.5 million or 38.3% of total Net revenue in First Quarter 2023 compared with $115.7 million or 38.1% of Net revenue in First Quarter 2022. The approximately 20 basis points increase was driven by lower digital marketing spend offset by higher employee related expenses.
Depreciation and Amortization
Depreciation and amortization expense decreased $0.3 million to $9.3 million in First Quarter 2023 compared with $9.6 million in the First Quarter 2022.
Other Operating Expense
Other operating expense, net was $0.2 million in First Quarter 2023 compared to no Other operating expense, net in First Quarter 2022.
Operating Income
Operating income was $9.9 million in First Quarter 2023 compared to $3.9 million in First Quarter 2022. The $6.0 million increase was driven by the increase in Gross profit slightly offset by higher selling and administrative expenses.
Interest Expense
Interest expense was $12.3 million in First Quarter 2023 compared to $8.2 million in First Quarter 2022. The $4.1 million increase was driven by higher applicable interest rates under the Debt Facilities.
Other Expense (Income)
Other income was $0.2 million in both First Quarter 2023 and First Quarter 2022.
Income Tax (Benefit) Expense
We recorded an income tax benefit at an overall effective tax rate of 24.1% for First Quarter 2023 and income tax benefit at an overall effective tax rate of 42.3% for First Quarter 2022. The tax rate for the First Quarter 2023 is lower primarily due to the accounting for stock-based compensation.
Net Income (Loss)
As a result of the above factors, Net loss was $1.7 million and diluted loss per share was $0.05 in First Quarter 2023 compared with Net loss of $2.4 million and diluted loss per share of $0.07 in First Quarter 2022.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased 41.3%, or $5.7 million, to $19.5 million compared to $13.8 million in First Quarter 2022.
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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 $100.0 million on April 28, 2023, 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 committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs. The amount available to borrow is the lesser of (1) the Aggregate Commitments of $275.0 million (“ABL Facility Limit”) or (2) the Borrowing Base (“Borrowing Base”) which is calculated from Eligible Inventory, Trade Receivables and Credit Card Receivables, all capitalized terms not defined herein are as defined in the ABL Facility. The balance outstanding on April 28, 2023 and April 29, 2022 was $100.0 million and $125.0 million, respectively. The balance of outstanding letters of credit was $9.1 million and $14.6 million on April 28, 2023 and April 29, 2022, 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 in connection with entering into the Term Loan Facility.
Interest; Fees
Effective May 12, 2023, the Company executed the Fourth Amendment to the ABL Facility to transition a benchmark reference rate from LIBOR to SOFR plus an adjustment of 0.10% for all loans (“ABL Adjusted SOFR”). This transition resulted in no material interest rate impact and maintains a 0% benchmark rate floor. The ABL Adjusted SOFR rate is now available for all new loans after the effective date of the Fourth Amendment.
The new applicable margin interest rates applicable to the referenced rate, selected at the borrower’s election, are either (1) ABL Adjusted SOFR, subject to 0% floor, or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month ABL Adjusted SOFR 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 ABL Adjusted SOFR 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, 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%.
Prior to the Fourth Amendment, the applicable margin interest rates applicable to the referenced rate, selected at the borrower’s election, were either (1) adjusted LIBOR, subject to a 0% floor, or (2) a base rate which is 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 was based upon the average daily total loans outstanding for the previous quarter. The applicable borrowing margin for LIBOR loans was (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 was (i) less than $95.0 million, 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 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 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 Company expects to amend the Term Loan Facility to transition from LIBOR to SOFR on or before June 30, 2023.
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 28, 2023, we had borrowings of $100.0 million under the ABL Facility.
22
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Customary agency fees are payable in respect of the Debt Facilities.
Maturity; Amortization and Prepayments
The ABL Facility maturity date is the earlier of (a) July 29, 2026 and (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness.
The Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to 1.25% per quarter. It is subject to mandatory prepayments in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 75% depending on our total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan could not be voluntarily prepaid during the first two years of its term without significant penalties. 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 28, 2023, 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, material judgments and change of control.
Cash Flows from Operating Activities
Net cash used in operating activities was $10.8 million during First Quarter 2023 compared to $122.4 million during First Quarter 2022. The decrease in cash used in operating activities was primarily due to the year over year changes in inventories. Inventory decreased $49.5 million during First Quarter 2023 driven by actions taken to leverage normalized supply chain lead times in order to
23
Table of Contents
receive spring and summer inventory closer to the selling season, while inventory increased $52.7 million during First Quarter 2022 due to the supply chain challenges.
Cash Flows from Investing Activities
Net cash used in investing activities was $12.4 million and $7.0 million during First Quarter 2023 and First Quarter 2022, respectively. Cash used in investing activities for both periods was primarily used for investments to update our digital information technology infrastructure.
For Fiscal 2023, we plan to invest approximately $35.0 million in capital expenditures for strategic investments and infrastructure, primarily in technology and general corporate needs.
Cash Flows from Financing Activities
Net cash used in financing activities was $8.4 million during First Quarter 2023, compared with net cash provided by financing activities of $117.3 million during First Quarter 2022. The decrease in net cash provided by financing activities is primarily due to lower inventory levels.
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 27, 2023.
Financial Instruments with Off-Balance-Sheet Risk
The $275.0 million committed revolving 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 28, 2023 and April 29, 2022 was $100.0 million and $125.0 million, respectively. The balance of outstanding letters of credit was $9.1 million and $14.6 million on April 28, 2023 and April 29, 2022, 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 27, 2023. There have been no significant changes in our critical accounting policies or their application since January 27, 2023.
Recent Accounting Pronouncements
See Part I, Item 1, Note 2, Recent Accounting Pronouncements, of the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.
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Table of Contents
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 27, 2023 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.
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Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
The Company’s international subsidiaries operate with functional currencies other than the U.S. dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. dollars, the Company must translate all components of these financial statements from the functional currencies into U.S. dollars at exchange rates in effect during or at the end of the reporting period. Net revenue generated from the International distribution channel represented approximately 8% of our total net revenue during the First Quarter 2023. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of net revenues, expenses, assets and liabilities. Assuming a 10% change in foreign currency exchange rates, net revenue for the First Quarter 2023 would have increased or decreased by approximately $2.5 million. Translation gains or losses, which are recorded in other comprehensive income or loss, result from translation of the assets and liabilities of our international subsidiaries into U.S. dollars. Foreign currency translation gains, net, for the First Quarter 2023 totaled approximately $0.1 million related to our international subsidiaries in United Kingdom and Germany. Additionally, the Company has foreign currency denominated intercompany receivables and payables that when settled result in a transaction gain or loss. A 10% change in foreign currency exchanges rates would not result in a significant transaction gain or loss in earnings. The Company does not utilize financial instruments for trading purposes or hedging and have not used any derivative financial instruments to limit foreign currency exchange rate exposures. The Company does not consider our foreign earnings to be permanently reinvested.
As of April 28, 2023, the Company had $5.5 million of cash and cash equivalents denominated in foreign currency, principally in British pound sterling, Japanese yen and Euro.
Interest Rate Risk
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 $2.4 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.
26
Table of Contents
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Interim 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 Interim Chief Financial Officer have concluded that, as of April 28, 2023, 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 most recently completed fiscal quarter ended April 28, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Table of Contents
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. There have been no material developments to the legal proceedings disclosed in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the year ended January 27, 2023, filed with the SEC on April 10, 2023.
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 27, 2023, filed with the SEC on April 10, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents a month-to-month summary of information with respect to purchases of common stock made during the First Quarter 2023 pursuant to the 2022 Share Repurchase Program announced on June 28, 2022:
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share (2) |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3) |
|
|
Approximate Dollar Value (in thousands) of Shares that May Yet Be Purchased Under the Plans or Programs |
|
||||
January 28 - February 24 |
|
|
346,035 |
|
|
$ |
8.67 |
|
|
|
346,035 |
|
|
$ |
38,553 |
|
February 25 - March 31 |
|
|
48,450 |
|
|
|
9.00 |
|
|
|
48,450 |
|
|
|
38,117 |
|
April 1 - April 28 |
|
|
35,880 |
|
|
|
9.37 |
|
|
|
35,880 |
|
|
|
37,780 |
|
Total |
|
|
430,365 |
|
|
$ |
8.77 |
|
|
|
430,365 |
|
|
|
|
|
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the fiscal quarter ended April 28, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
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Table of Contents
ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
Exhibit Number |
|
Exhibit Description |
|
|
|
|
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)). |
|
|
|
|
|
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)). |
|
|
|
|
|
Fourth Amendment to Credit Agreement, dated May 12, 2023, by and among Lands’ End, Inc. (as the Lead Borrower), the guarantors party thereto, the lenders party thereto and Wells Fargo Bank, National Association (as administrative agent and collateral agent) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 17, 2023 (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.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)* |
* Filed herewith.
** Furnished herewith.
29
Table of Contents
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)
By: |
/s/ Bernard McCracken |
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Name: |
Bernard McCracken |
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Title: |
Interim Chief Financial Officer Vice President, Controller and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) |
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Date: June 1, 2023
30
EXHIBIT 31.1
CERTIFICATIONS
I, Andrew J. McLean, certify that:
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/s/ Andrew J. McLean |
Andrew J. McLean |
Chief Executive Officer |
(Principal Executive Officer) |
Lands’ End, Inc. |
June 1, 2023 |
EXHIBIT 31.2
CERTIFICATIONS
I, Bernard McCracken, certify that:
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/s/ Bernard McCracken |
Bernard McCracken |
Interim Chief Financial Officer |
Vice President, Controller and Chief Accounting Officer |
(Principal Financial Officer) |
Lands’ End, Inc. |
June 1, 2023 |
EXHIBIT 32.1
CERTIFICATION
Pursuant to 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned, Andrew J. McLean, Chief Executive Officer of Lands’ End, Inc. (the “Company”) and Bernard McCracken, Interim Chief Financial Officer, Vice President, Controller and Chief Accounting 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 28, 2023 (the “Report”).
Each of the undersigned hereby certifies that:
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/s/ Andrew J. McLean |
Andrew J. McLean |
Chief Executive Officer |
(Principal Executive Officer) |
June 1, 2023 |
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/s/ Bernard McCracken |
Bernard McCracken |
Interim Chief Financial Officer |
Vice President, Controller and Chief Accounting Officer |
(Principal Financial Officer) |
June 1, 2023 |