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 .
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:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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 August 28, 2023, the registrant had
Table of Contents
LANDS’ END, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JULY 28, 2023
TABLE OF CONTENTS
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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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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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Item 4. |
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32 |
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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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34 |
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35 |
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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26 Weeks Ended |
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(in thousands, except per share data) |
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July 28, |
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July 29, |
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July 28, |
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July 29, 2022 |
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Net revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of sales (excluding depreciation and amortization) |
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Gross profit |
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Selling and administrative |
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Depreciation and amortization |
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Other operating expense, net |
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Operating income |
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Interest expense |
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Other income, net |
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Loss before income taxes |
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Income tax expense (benefit) |
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NET LOSS |
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$ |
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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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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
Table of Contents
LANDS’ END, INC.
Condensed Consolidated Statements of Comprehensive Operations
(Unaudited)
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13 Weeks Ended |
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26 Weeks Ended |
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(in thousands) |
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July 28, 2023 |
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July 29, 2022 |
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July 28, 2023 |
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July 29, 2022 |
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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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Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustments |
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COMPREHENSIVE LOSS |
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$ |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
Table of Contents
LANDS’ END, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) |
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July 28, 2023 |
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July 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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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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26 Weeks Ended |
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(in thousands) |
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July 28, 2023 |
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July 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 provided by (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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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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Inventories, net |
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( |
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Accounts payable |
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( |
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Other operating assets |
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( |
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Other operating liabilities |
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( |
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( |
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Net cash provided by (used in) operating activities |
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( |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Sales of property and equipment |
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— |
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Purchases of property and equipment |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from borrowings under ABL Facility |
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Payments of borrowings under ABL Facility |
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( |
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( |
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Payments on term loan |
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( |
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( |
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Payments of debt issuance costs |
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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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( |
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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 (refunded) |
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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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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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— |
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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 July 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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( |
) |
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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( |
) |
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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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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( |
) |
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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( |
) |
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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|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchases and retirement of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance at July 29, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
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”) which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference reform if certain criteria are met. These transactions include contract modifications, hedge relationships and sale or transfer of debt securities classified as held-to-maturity. 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 LIBOR 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.
As part of the response to the reference rate reform, during Second Quarter 2023, the Company amended the Debt Facilities to replace the interest rate based upon the LIBOR benchmark to the SOFR benchmark. See Note 5. Debt for additional details regarding these changes. Concurrent with the amendments, the Company adopted ASU 2020-04. The Company utilized optional practical expedients for contract modifications under ASC 848-20-358 Contracts within the Scope of Topic 470 and the adoption of ASU 2020-04 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
NOTE 3. LOSS PER SHARE
The numerator for both basic and diluted EPS is net loss. The denominator for basic EPS is based upon the number of weighted average shares of Lands’ End common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of Lands’ End common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with 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.
7
Table of Contents
The following table summarizes the components of basic and diluted EPS:
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands, except per share amounts) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
|
July 28, 2023 |
|
|
July 29, 2022 |
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of stock awards |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted loss per share |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Stock awards are considered anti-dilutive based on the application of the treasury stock method or in the event of a net loss. Anti-dilutive shares excluded from the diluted weighted average shares outstanding were
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.
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
|
July 28, 2023 |
|
|
July 29, 2022 |
|
||||
Beginning balance: Accumulated other comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments (net of tax of ($ |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Ending balance: Accumulated other comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
NOTE 5. DEBT
ABL Facility
The Company’s $
8
Table of Contents
Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility.
The following table summarizes the Company’s ABL Facility borrowing availability:
|
|
July 28, 2023 |
|
July 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
The Company’s September 9, 2020 Term Loan Facility provided borrowings of $
The Company’s long-term debt consisted of the following:
|
|
July 28, 2023 |
|
July 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 (the “Fourth Amendment”) to the ABL Facility which replaced the interest rate benchmark based on LIBOR with an interest rate benchmark based on SOFR plus an adjustment of
Effective with the Fourth Amendment, the ABL Facility interest rate, selected at the borrower’s election, is either (1) ABL Adjusted SOFR, or (2) a base rate which is the greater of (a) the federal funds rate plus
Prior to the Fourth Amendment to the ABL Facility, the interest rate, selected at the borrower’s election, was either (1) LIBOR (plus the Applicable Borrowing Margin), or (2) a base rate (plus the Applicable Borrowing Margin) which was the greater of (a) the federal funds rate plus
Effective June 22, 2023, the Company entered into Amendment No. 1 (the “First Amendment”) to the Term Loan Facility which (subject to a
9
Table of Contents
Effective with the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility is based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Adjusted Loan SOFR rate plus
Prior to the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a LIBOR rate (with a minimum rate of
During Second Quarter 2023, the Company adopted ASU 2020-04, the optional practical expedient for Reference Rate Reform related to its Debt Facilities and as such, these amendments are treated as a continuation of the existing debt agreement and no gain or loss on these modifications were recorded in the Condensed Consolidated Statement of Operations.
Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees include (i) commitment fees of
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
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.
10
Table of Contents
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 July 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):
11
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 |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
|
July 28, 2023 |
|
|
July 29, 2022 |
|
||||
Deferred awards |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Performance awards |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Option awards |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Deferred Awards
The following table provides a summary of the Deferred Awards activity for the 26 weeks ended July 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 July 28, 2023 |
|
|
|
|
$ |
|
||
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $
Performance Awards
The following table provides a summary of the Performance Awards activity for the 26 weeks ended July 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 July 28, 2023 |
|
|
|
|
$ |
|
||
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $
Monte Carlo Simulation Assumptions |
|
|
|
|
Risk-free interest rate (1) |
|
|
% |
|
Expected dividend yield |
|
|
% |
|
Expected volatility (2) |
|
|
% |
|
Expected term (in years) (3) |
|
|
|
|
Grant date fair value per share |
$ |
|
|
|
12
Table of Contents
Option Awards
During the 26 weeks ended July 28, 2023 there was
(in thousands, except contractual life and exercise price 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 through July 28, 2023:
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(Shares and $ in thousands except average per share cost) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
|
July 28, 2023 |
|
|
July 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 26 weeks ended July 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 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.
13
Table of Contents
NOTE 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
(in thousands) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
|
January 27, 2023 |
|
|||
Deferred gift card revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accrued employee compensation and benefits |
|
|
|
|
|
|
|
|
|
|||
Reserve for sales returns and allowances |
|
|
|
|
|
|
|
|
|
|||
Accrued property, sales and other taxes |
|
|
|
|
|
|
|
|
|
|||
Deferred revenue |
|
|
|
|
|
|
|
|
|
|||
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 approximately $
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 $
Carrying amounts and fair values of long-term debt, including current portion, in the Condensed Consolidated Balance Sheets are as follows:
|
|
July 28, 2023 |
|
|
July 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 July 28, 2023, July 29, 2022 and January 27, 2023. There were
14
Table of Contents
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 expense 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 26 weeks ended July 28, 2023, the Company’s operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Retail. During the 26 weeks ended July 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
15
Table of Contents
Net revenue is presented by distribution channel in the following tables:
|
|
13 Weeks Ended |
|
% of Net |
|
|
13 Weeks Ended |
|
% of Net |
|
||||
(in thousands) |
|
July 28, 2023 |
|
Revenue |
|
|
July 29, 2022 |
|
Revenue |
|
||||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
||||
U.S. eCommerce |
|
$ |
|
|
% |
|
$ |
|
|
% |
||||
International (1) |
|
|
|
|
% |
|
|
|
|
% |
||||
Outfitters |
|
|
|
|
% |
|
|
|
|
% |
||||
Third Party |
|
|
|
|
% |
|
|
|
|
% |
||||
Retail |
|
|
|
|
% |
|
|
|
|
% |
||||
Total Net revenue |
|
$ |
|
|
|
|
$ |
|
|
|
||||
|
|
26 Weeks Ended |
|
% of Net |
|
|
26 Weeks Ended |
|
% of Net |
|
||||
(in thousands) |
|
July 28, 2023 |
|
Revenue |
|
|
July 29, 2022 |
|
Revenue |
|
||||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
||||
U.S. eCommerce |
|
$ |
|
|
% |
|
$ |
|
|
% |
||||
International (1) |
|
|
|
|
% |
|
|
|
|
% |
||||
Outfitters |
|
|
|
|
% |
|
|
|
|
% |
||||
Third Party |
|
|
|
|
% |
|
|
|
|
% |
||||
Retail |
|
|
|
|
% |
|
|
|
|
% |
||||
Total Net revenue |
|
$ |
632,921 |
|
|
|
|
$ |
|
|
|
|||
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 |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
|
July 28, 2023 |
|
|
July 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.
16
Table of Contents
well as amounts recognized through Net revenue for each period presented. The majority of deferred revenue as of July 28, 2023 is expected to be recognized in Net revenue in the fiscal quarter ending October 27, 2023, as products are delivered to customers.
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
|
July 28, 2023 |
|
|
July 29, 2022 |
|
||||
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 (i) when 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 |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
|
July 28, 2023 |
|
|
July 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 July 28, 2023, July 29, 2022 and January 27, 2023, $
17
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
18
Table of Contents
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.
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 Second 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 Second Quarter 2022 and Year-to-Date 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.
19
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) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
||||||||||
Net revenue |
|
$ |
323,363 |
|
|
|
100.0 |
% |
|
$ |
351,178 |
|
|
|
100.0 |
% |
Cost of sales (excluding depreciation and amortization) |
|
|
183,766 |
|
|
|
56.8 |
% |
|
|
207,141 |
|
|
|
59.0 |
% |
Gross profit |
|
|
139,597 |
|
|
|
43.2 |
% |
|
|
144,037 |
|
|
|
41.0 |
% |
Selling and administrative |
|
|
123,866 |
|
|
|
38.3 |
% |
|
|
128,573 |
|
|
|
36.6 |
% |
Depreciation and amortization |
|
|
9,543 |
|
|
|
3.0 |
% |
|
|
9,883 |
|
|
|
2.8 |
% |
Other operating expense, net |
|
|
390 |
|
|
|
0.1 |
% |
|
|
39 |
|
|
|
0.0 |
% |
Operating income |
|
|
5,798 |
|
|
|
1.8 |
% |
|
|
5,542 |
|
|
|
1.6 |
% |
Interest expense |
|
|
12,024 |
|
|
|
3.7 |
% |
|
|
8,813 |
|
|
|
2.5 |
% |
Other income, net |
|
|
(169 |
) |
|
|
(0.1 |
)% |
|
|
(166 |
) |
|
|
0.0 |
% |
Loss before income taxes |
|
|
(6,057 |
) |
|
|
(1.9 |
)% |
|
|
(3,105 |
) |
|
|
(0.9 |
)% |
Income tax expense (benefit) |
|
|
1,961 |
|
|
|
0.6 |
% |
|
|
(926 |
) |
|
|
(0.3 |
)% |
NET LOSS |
|
$ |
(8,018 |
) |
|
|
(2.5 |
)% |
|
$ |
(2,179 |
) |
|
|
(0.6 |
)% |
|
|
26 Weeks Ended |
|
|||||||||||||
(in thousands) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
||||||||||
Net revenue |
|
$ |
632,921 |
|
|
|
100.0 |
% |
|
$ |
654,843 |
|
|
|
100.0 |
% |
Cost of sales (excluding depreciation and amortization) |
|
|
355,387 |
|
|
|
56.2 |
% |
|
|
381,631 |
|
|
|
58.3 |
% |
Gross profit |
|
|
277,534 |
|
|
|
43.8 |
% |
|
|
273,212 |
|
|
|
41.7 |
% |
Selling and administrative |
|
|
242,380 |
|
|
|
38.3 |
% |
|
|
244,267 |
|
|
|
37.3 |
% |
Depreciation and amortization |
|
|
18,844 |
|
|
|
3.0 |
% |
|
|
19,467 |
|
|
|
3.0 |
% |
Other operating expense, net |
|
|
592 |
|
|
|
0.1 |
% |
|
|
39 |
|
|
|
0.0 |
% |
Operating income |
|
|
15,718 |
|
|
|
2.5 |
% |
|
|
9,439 |
|
|
|
1.4 |
% |
Interest expense |
|
|
24,307 |
|
|
|
3.8 |
% |
|
|
16,982 |
|
|
|
2.6 |
% |
Other income, net |
|
|
(356 |
) |
|
|
(0.1 |
)% |
|
|
(328 |
) |
|
|
(0.1 |
)% |
Loss before income taxes |
|
|
(8,233 |
) |
|
|
(1.3 |
)% |
|
|
(7,215 |
) |
|
|
(1.1 |
)% |
Income tax expense (benefit) |
|
|
1,437 |
|
|
|
0.2 |
% |
|
|
(2,665 |
) |
|
|
(0.4 |
)% |
NET LOSS |
|
$ |
(9,670 |
) |
|
|
(1.5 |
)% |
|
$ |
(4,550 |
) |
|
|
(0.7 |
)% |
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 $8.0 million in Second Quarter 2023 compared to Net loss of $2.2 million in Second 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.
20
Table of Contents
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:
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) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
||||||||||
Net loss |
|
$ |
(8,018 |
) |
|
|
(2.5 |
)% |
|
$ |
(2,179 |
) |
|
|
(0.6 |
)% |
Income tax expense (benefit) |
|
|
1,961 |
|
|
|
0.6 |
% |
|
|
(926 |
) |
|
|
(0.3 |
)% |
Other income, net |
|
|
(169 |
) |
|
|
(0.1 |
)% |
|
|
(166 |
) |
|
|
(0.0 |
)% |
Interest expense |
|
|
12,024 |
|
|
|
3.7 |
% |
|
|
8,813 |
|
|
|
2.5 |
% |
Operating income |
|
|
5,798 |
|
|
|
1.8 |
% |
|
|
5,542 |
|
|
|
1.6 |
% |
Depreciation and amortization |
|
|
9,543 |
|
|
|
3.0 |
% |
|
|
9,883 |
|
|
|
2.8 |
% |
Lands' End Japan closure |
|
|
23 |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
— |
% |
(Gain) loss on disposal of property and equipment |
|
|
(23 |
) |
|
|
(0.0 |
)% |
|
|
39 |
|
|
|
0.0 |
% |
Other |
|
|
484 |
|
|
|
0.1 |
% |
|
|
344 |
|
|
|
0.1 |
% |
Adjusted EBITDA |
|
$ |
15,825 |
|
|
|
4.9 |
% |
|
$ |
15,808 |
|
|
|
4.5 |
% |
|
|
26 Weeks Ended |
|
|||||||||||||
(in thousands) |
|
July 28, 2023 |
|
|
July 29, 2022 |
|
||||||||||
Net loss |
|
$ |
(9,670 |
) |
|
|
(1.5 |
)% |
|
$ |
(4,550 |
) |
|
|
(0.7 |
)% |
Income tax expense (benefit) |
|
|
1,437 |
|
|
|
0.2 |
% |
|
|
(2,665 |
) |
|
|
(0.4 |
)% |
Other income, net |
|
|
(356 |
) |
|
|
(0.1 |
)% |
|
|
(328 |
) |
|
|
(0.1 |
)% |
Interest expense |
|
|
24,307 |
|
|
|
3.8 |
% |
|
|
16,982 |
|
|
|
2.6 |
% |
Operating income |
|
|
15,718 |
|
|
|
2.5 |
% |
|
|
9,439 |
|
|
|
1.4 |
% |
Depreciation and amortization |
|
|
18,844 |
|
|
|
3.0 |
% |
|
|
19,467 |
|
|
|
3.0 |
% |
Landsʼ End Japan closure |
|
|
99 |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
— |
% |
Loss on disposal of property and equipment |
|
|
100 |
|
|
|
0.0 |
% |
|
|
39 |
|
|
|
0.0 |
% |
Other |
|
|
579 |
|
|
|
0.1 |
% |
|
|
688 |
|
|
|
0.1 |
% |
Adjusted EBITDA |
|
$ |
35,340 |
|
|
|
5.6 |
% |
|
$ |
29,633 |
|
|
|
4.5 |
% |
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.
21
Table of Contents
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
Second Quarter 2023 compared with Second Quarter 2022
Net Revenue
Net revenue was $323.3 million for Second Quarter 2023, a decrease of $27.9 million or 7.9%, from $351.2 million during the Second Quarter 2022.
U.S. eCommerce Net revenue was $195.9 million for Second Quarter 2023, a decrease of $7.4 million or 3.6%, from $203.3 million during the Second Quarter 2022. The decrease in U.S. eCommerce was primarily driven by continued promotional productivity within swim and adjacent product categories more than offset by lower markdown inventory sales.
International eCommerce Net revenue was $22.8 million for Second Quarter 2023, a decrease of $13.6 million or 37.3%, from $36.4 million during the Second Quarter 2022. The decrease in International eCommerce was due to continued assortment editing with a focus on key categories and reduced markdown inventories in Europe and the closing of Lands’ End Japan at the end of Fiscal 2022. Excluding the $7.6 million of Lands’ End Japan, Net revenue for International eCommerce decreased 20.8%.
Outfitters Net revenue was $68.0 million for Second Quarter 2023, a decrease of $2.7 million or 3.8%, from $70.7 million during the Second Quarter 2022. The decrease was primarily driven by the conclusion of the Delta Air Lines contract in the First Quarter 2023 partially offset by school uniform revenue increasing high single digits year over year. Excluding the $4.9 million decrease in year over year revenue from the Delta Air Lines business, Net revenue for the Outfitters business increased 3.5%.
Third Party Net revenue was $24.4 million for Second Quarter 2023, a decrease of $2.9 million or 10.6%, from $27.3 million during the Second Quarter 2022. The decrease was primarily attributed to weaker than expected online demand performance at Kohl’s partially offset by continued growth of existing marketplaces.
Retail Net revenue was $12.2 million for Second Quarter 2023, a decrease of $1.3 million or 9.7%, from $13.5 million during the Second Quarter 2022. Our U.S. Company Operated stores experienced a decrease of 7.5% in Same Store Sales as compared to the Second Quarter 2022. On July 28, 2023 there were 27 U.S. Company Operated stores, compared to 30 U.S. Company Operated stores on July 29, 2022.
Gross Profit
Gross profit was $139.6 million for Second Quarter 2023, a decrease of $4.4 million or 3.1% from $144.0 million during the Second Quarter of 2022. Gross margin increased approximately 220 basis points to 43.2% in Second Quarter 2023, compared with 41.0% in Second Quarter 2022. The Gross margin improvement was primarily driven by leveraging the strength in the swim and adjacent product categories across the channels, reduction in markdown inventory and improvements in supply chain costs in the second quarter of fiscal 2023 compared to the prior year.
Selling and Administrative Expenses
Selling and administrative expenses decreased $4.7 million to $123.9 million or 38.3% of total Net revenue in Second Quarter 2023 compared with $128.6 million or 36.6% of Net revenue in Second Quarter 2022. The approximately 170 basis points increase was driven by deleveraging from lower revenues, partially offset by lower digital marketing spend and continued cost controls.
Depreciation and Amortization
Depreciation and amortization expense decreased $0.4 million to $9.5 million in Second Quarter 2023 compared with $9.9 million in the Second Quarter 2022.
22
Table of Contents
Other Operating Expense
Other operating expense, net was $0.4 million in Second Quarter 2023 compared to an insignificant amount in Second Quarter 2022.
Operating Income
Operating income was $5.8 million in Second Quarter 2023 compared to $5.5 million in Second Quarter 2022. The $0.3 million increase was driven by the increase in Gross profit slightly offset by higher selling and administrative expenses.
Interest Expense
Interest expense was $12.0 million in Second Quarter 2023 compared to $8.8 million in Second Quarter 2022. The $3.2 million increase was driven by higher applicable interest rates under the Debt Facilities.
Other Expense (Income)
Other income remained unchanged at $0.2 million in Second Quarter 2023 and Second Quarter 2022, respectively.
Income Tax (Benefit) Expense
We recorded an income tax expense at an overall effective tax rate of (32.4)% for Second Quarter 2023 and income tax benefit at an overall effective tax rate of 29.8% for Second Quarter 2022. The overall effective tax rate for the Second Quarter 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation.
Net Income (Loss)
As a result of the above factors, Net loss was $8.0 million and diluted loss per share was $0.25 in Second Quarter 2023 compared with Net loss of $2.2 million and diluted loss per share of $0.07 in Second Quarter 2022.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $15.8 million in both Second Quarter 2023 and Second Quarter 2022, respectively.
Year-to-Date 2023 compared with Year-to-Date 2022
Net Revenue
Net revenue was $632.9 million for Year-to-Date 2023, a decrease of $21.9 million or 3.3%, from $654.8 million during the Year-to-Date 2022.
U.S. eCommerce Net revenue was $373.6 million for Year-to-Date 2023, a decrease of $4.6 million or 1.2%, from $378.2 million during the Year-to-Date 2022. The decrease in U.S. eCommerce was primarily driven by continued promotional productivity within swim and our adjacent product categories more than offset by lower markdown inventory sales.
International eCommerce Net revenue was $48.2 million for Year-to-Date 2023, a decrease of $32.4 million or 40.1%, from $80.6 million during the Year-to-Date 2022. The decrease in International eCommerce was due to continued assortment editing with a focus on key categories and reduced markdown inventories in Europe and the closing of Lands’ End Japan at the end of Fiscal 2022. Excluding the $16.1 million of Lands’ End Japan, Net revenue for International eCommerce decreased 25.2%.
Outfitters Net revenue was $142.0 million for Year-to-Date 2023, an increase of $17.4 million or 13.9%, from $124.6 million during the Year-to-Date 2022. Compared to the Year-to-Date 2022, the increase was primarily driven by inventory sales to Delta Air Lines at the conclusion of their five-year contract in the First Quarter 2023 as well as an increase in the school uniform business. Excluding the $13.4 million increase in year over year revenue from the Delta Air Lines business, Net revenue for the Outfitters business increased by 3.6%.
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Third Party Net revenue was $47.4 million for Year-to-Date 2023, a decrease of $1.5 million or 3.2% from $48.9 million during the Year-to-Date 2022. The decrease was primarily driven by a decline in the Kohl’s online marketplace and stores partially offset by growth in existing online marketplaces.
Retail Net revenue was $21.8 million for Year-to-Date 2023, a decrease of $0.7 million or 3.5%, from $22.5 million during the Year-to-Date 2022. Our U.S. Company Operated stores experienced a decrease of 0.6% in Same Store Sales as compared to the Year-to-Date 2022. On July 28, 2023 there were 27 U.S. Company Operated stores compared to 30 U.S. Company Operated stores on July 29, 2022.
Gross Profit
Gross profit was $277.5 million for Year-to-Date 2023, an increase of $4.3 million or 1.6% from $273.2 million during Year-to-Date 2022. Gross margin increased to 43.8% in Year-to-Date 2023, compared with 41.7% in Year-to-Date 2022. The 210 basis point improvement in gross margin was primarily driven by leveraging the strength in the swim and adjacent product categories across the channels, reduction in markdown inventory and improvements in supply chain costs for Year-to-Date 2023 compared to the prior year.
Selling and Administrative Expenses
Selling and administrative expenses decreased $1.9 million to $242.4 million or 38.3% of total Net revenue in Year-to-Date 2023 compared with $244.3 million or 37.3% of Net revenue in Year-to-Date 2022. The approximately 100 basis point increase was driven by deleveraging from lower revenues, partially offset by lower digital marketing spend and continued cost controls.
Depreciation and Amortization
Depreciation and amortization expense was $18.8 million in Year-to-Date 2023, a decrease of $0.7 million or 3.6%, compared with $19.5 million in Year-to-Date 2022.
Other Operating Expense
Other operating expense, net was $0.6 million in Year-to-Date 2023 compared to an insignificant amount in Year-to-Date 2022.
Operating Income (Loss)
Operating income was $15.7 million in Year-to-Date 2023 compared to Operating income of $9.4 million in Year-to-Date 2022. The $6.3 million increase was driven by the increase in Gross Profit and decrease in Selling and administrative expenses.
Interest Expense
Interest expense was $24.3 million in Year-to-Date 2023 compared to $17.0 million in Year-to-Date 2022. The $7.3 million increase was primarily attributed to higher applicable interest rates on the Debt Facilities.
Other Expense (Income)
Other income was $0.4 million in Year-to-Date 2023 compared to other income $0.3 million in Year-to-Date 2022.
Income Tax (Benefit) Expense
We recorded an income tax expense at an overall effective tax rate of (17.5)% for Year-to-Date 2023 and an income tax benefit at an overall effective tax rate of 36.9% for Year-to-Date 2022. The overall effective tax rate for Year-to-Date 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation. The overall effective tax rate for Year-to-Date 2022 reflects a tax benefit as a result of stock-based compensation recorded in First Quarter 2022.
Net Income (Loss)
As a result of the above factors, Net loss was $9.6 million and diluted loss per share was $0.30 in Year-to-Date 2023 compared with Net loss of $4.5 million and diluted earnings per share of $0.14 in Year-to-Date 2022.
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Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $35.3 million in Year-to-Date 2023 compared to $29.6 million in Year-to-Date 2022.
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. The ABL Facility had a balance outstanding of $70.0 million on July 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 which is calculated from Eligible Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility. The balance outstanding on July 28, 2023 and July 29, 2022 was $70.0 million and $135.0 million, respectively. The balance of outstanding letters of credit was $8.6 million and $13.8 million on July 28, 2023 and July 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, we executed the Fourth Amendment (the “Fourth Amendment”) to the ABL Facility which replaced the interest rate benchmark based on LIBOR with an interest rate benchmark based on SOFR plus an adjustment of 0.10% for all loans (“ABL Adjusted SOFR”). This transition resulted in no material interest rate impact. The ABL Adjusted SOFR rate is now available for all new loans after the effective date of the Fourth Amendment.
Effective with the Fourth Amendment, the ABL Facility interest rate, selected at the borrower’s election, is either (1) ABL Adjusted SOFR, 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”. The 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 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% (“Applicable Borrowing Margin”). The Applicable Borrowing Margin for all loans is based upon the average daily total loans outstanding for the previous quarter.
Prior to the Fourth Amendment to the ABL Facility, the interest rate, selected at the borrower’s election, was either (1) LIBOR (plus the Applicable Borrowing Margin), or (2) a base rate (plus the Applicable Borrowing Margin) which was 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”.
Effective June 22, 2023, we entered into Amendment No. 1 (the “First Amendment”) to the Term Loan Facility which (subject to a 1% floor) replaced the interest rate benchmark based upon LIBOR with an interest rate benchmark based upon SOFR plus adjustments of either (a) 0.11448% for a one-month interest period, (b) 0.26161% for a three-month interest period, or (c) 0.42826% for a six-month interest period (“Term Loan Adjusted SOFR”). This transition resulted in no material interest rate impact.
Effective with the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility is based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Adjusted Loan SOFR rate plus 9.75% or (2) an alternative base rate (which is the greater of (i) the prime rate published in the Wall
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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 Term Loan Adjusted SOFR rate plus 1.00% per annum) plus 8.75%.
Prior to the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a LIBOR rate (with a minimum rate of 1.00%) plus 9.75% or (2) an alternative base rate (which was the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which was to 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%.
During Second Quarter 2023, we adopted ASU 2020-04, the optional practical expedient for Reference Rate Reform related to its Debt Facilities and as such, these amendments are treated as a continuation of the existing debt agreement and no gain or loss on these modifications were recorded in the Condensed Consolidated Statement of Operations.
Customary agency fees are payable in respect of the Debt Facilities. 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 July 28, 2023, we had borrowings of $70.0 million under the ABL Facility.
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.
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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 July 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 provided by operating activities was $54.8 million during Year-to-Date 2023 compared to net cash used in operating activities of $117.5 million during Year-To-Date 2022. The $172.3 million improvement in cash provided by operating activities was primarily due to the efficient management of inventory. We capitalized on a more stable supply chain and purchased less inventory than the prior year while receiving it closer to the selling season. Additionally, we benefited from timing of payments for current liabilities compared to last year.
Cash Flows from Investing Activities
Net cash used in investing activities was $22.9 million and $14.8 million during Year-To-Date 2023 and Year-To-Date 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 $44.9 million during Year-To-Date 2023, compared with net cash provided by financing activities of $121.5 million during Year-To-Date 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 has a maturity date of 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 July 28, 2023 and July 29, 2022 was $70.0 million and $135.0 million, respectively. The balance of outstanding letters of credit was $8.6 million and $13.8 million on July 28, 2023 and July 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.
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Recent Accounting Pronouncements
See Part I, Item 1, Note 2, Recent Accounting Pronouncements, of the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross margin, operating expenses, operating income, net income, adjusted EBITDA, cash flow, financial condition, financings, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, market opportunities and general market and industry conditions. We generally identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely,” “targeting” or the negative version of these words or comparable words. Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 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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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 Year-to-Date 2023. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of net revenue, expenses, assets and liabilities. Assuming a 10% change in foreign currency exchange rates, net revenue for Year-to-Date 2023 would have increased or decreased by approximately $4.8 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 Year-to-Date 2023 totaled approximately $0.8 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 July 28, 2023, the Company had $4.7 million of cash and cash equivalents denominated in foreign currency in British pound sterling, Hong Kong dollar, euro and Japanese yen.
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% SOFR floor) associated with the Term Loan Facility would result in a $2.3 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn to a principal amount equal to $275.0 million, each one percentage point change in interest rates would result in a $2.8 million change in our annual cash interest expense.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
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 July 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 July 28, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
As disclosed in the Company’s Annual Report on Form 10-K for the year ended January 27, 2023, the Company is the defendant in three separate lawsuits, each of which allege adverse health events and personal property damage as a result of wearing uniforms manufactured by Lands’ End: (1) Gilbert et al. v. Lands’ End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-00823-JDP, complaint filed October 3, 2019; (2) Andrews et al. v. Lands’ End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-01066-JDP, complaint filed on December 31, 2019, on behalf of 521 named plaintiffs, later amended to include 1,089 named plaintiffs; and (3) Davis et al. v. Lands’ End, Inc. and Lands’ End Business Outfitters, Inc., United States District Court for the Western District of Wisconsin, Case No. 3:20-cv-00195, complaint filed on March 4, 2020. Plaintiffs in Gilbert, Andrews, and Davis seek nationwide class certification on behalf of similarly situated Delta employees.
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 $5,000,000. Plaintiffs in each case seek damages for personal injuries, pain and suffering, severe emotional distress, financial or economic loss, including medical services and expenses, lost income and other compensable injuries. Plaintiffs in the Consolidated Wisconsin Action seek class certification with respect to performance of the uniforms and warranty claims and maintain individual claims for personal injury by numerous named plaintiffs.
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 1,089 to 603 as of August 18, 2021. On September 1, 2021, Plaintiffs filed a Rule 23(f) petition, seeking interlocutory review of the Court’s decision denying class certification. On September 22, 2021, the U.S. Court of Appeals for the Seventh Circuit denied plaintiffs’ petition.
On July 8, 2022, the Court issued an Opinion and Order in the Consolidated Wisconsin Action (the “July 8 Opinion”), ruling in the Company’s favor on several additional pending motions. The Court granted the Company’s motion to exclude Plaintiffs’ expert opinions because the opinions were not based on reliably applied and scientifically valid methods. Accordingly, because Plaintiffs failed to submit evidence sufficient to show that the uniforms were defective or that a defect in the uniforms caused Plaintiffs’ alleged health problems, the Court granted the Company’s motion for summary judgement on Plaintiffs’ personal injury claims.
After giving effect to the July 8 Opinion, the remaining claims under the Consolidated Wisconsin Action related to claims for property damage and breach of warranty. Following these rulings and an order of the court dated December 1, 2022, 277 named Plaintiffs remained in the case who claim they have suffered personal property damage as a result of dye transferring to personal items, with aggregate claims of approximately $110,000 in damages. The Court set a deadline for the parties to voluntarily resolve these remaining outstanding claims, and on July 19, 2023 the parties reported to the Court that they had reached a settlement in principle of the matter.
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.
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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 Second 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 |
|
||||
April 29 - May 26 |
|
|
402,641 |
|
|
$ |
7.45 |
|
|
|
402,641 |
|
|
$ |
34,780 |
|
May 27 - June 30 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
34,780 |
|
July 1 - July 28 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
34,780 |
|
Total |
|
|
402,641 |
|
|
$ |
7.45 |
|
|
|
402,641 |
|
|
|
|
|
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the fiscal quarter ended July 28, 2023, none of the Company’s
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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)). |
|
|
|
|
|
Amendment No. 1 to Term Loan Credit Agreement, dated June 22, 2023, by and among Lands’ End, Inc. (as the borrower), the grantors party thereto, and Fortress Credit Corp. (as administrative agent and collateral agent) (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on June 27, 2023 (File No. 001-09769)). |
|
|
|
|
|
Amendment No. 1 to the Lands’ End, Inc. Amended and Restated 2017 Stock Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on June 13, 2023 (File No. 001-09769)). |
|
|
|
|
|
Letter from Lands’ End, Inc. to Angela Rieger relating to employment, dated January 16, 2023.* |
|
|
|
|
|
Executive Severance Agreement by and between Lands’ End, Inc. and Angela Rieger, dated March 10, 2016.* |
|
|
|
|
|
Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.* |
|
|
|
|
|
Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.* |
|
|
|
|
|
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.** |
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Document* |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document* |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document*
|
104 |
|
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)* |
* Filed herewith.
** 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)
By: |
/s/ Bernard McCracken |
|
Name: |
Bernard McCracken |
|
Title: |
Interim Chief Financial Officer Vice President, Controller and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) |
|
Date: August 31, 2023
35
|
|
EXHIBIT 10.2 |
January 16, 2023
Angie Rieger
[Address Omitted]
Dear Angie,
We are pleased to confirm the compensation details for your new role as Chief Transformation Officer, which title change shall be effective January 28, 2023. In this role, you will report to me. Your Home Office remains Dodgeville, WI. We all believe the future of Lands' End will provide us with many opportunities for growth and the company is well positioned for continued success.
The following outlines the changes to your compensation package:
We all think highly of you and believe there will be opportunity to leverage your knowledge, experience, and leadership as we continue to grow as a trusted American lifestyle brand.
Sincerely, |
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/s/ Andrew McLean |
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/s/ Angie Rieger |
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Andrew McLean |
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Agreed and Accepted |
CEO - Designate |
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Angie Rieger |
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EXHIBIT 10.3 |
EXECUTIVE SEVERANCE AGREEMENT
This Executive Severance Agreement (“Agreement”) is made as of the 10th day of March, 2016 between Lands’ End, Inc., a Delaware corporation (together with its successors, assigns and Affiliates, the “Company”), and Angela Rieger (“Executive”).
WHEREAS, in light of the Company’s size and its visibility as a publicly-traded company that reports its results to the public, the Company has attracted attention of other companies and businesses seeking to obtain for themselves or their customers some of the Company’s business acumen and know-how; and
WHEREAS, the Company has shared with Executive certain aspects of its business acumen and know-how as well as specific confidential and proprietary information about the products, markets, processes, costs, developments, ideas, and personnel of the Company; and
WHEREAS, the Company has imbued Executive with certain aspects of the goodwill that the Company has developed with its customers, vendors, representatives and employees; and
WHEREAS, as consideration for entering into this Agreement, the Company is extending to Executive the opportunity to receive severance benefits under certain circumstances as provided in this Agreement; and
WHEREAS, as additional consideration for entering into this Agreement, the Company has granted to Executive restricted stock units pursuant to a Restricted Stock Agreement entered into between the Company and the Executive.
NOW, THEREFORE, in consideration of the foregoing, and of the respective covenants and agreements of the parties set forth in this Agreement, the parties hereto agree as follows:
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Executive acknowledges that the Company shall have the right to propose modifications to Appendix A periodically to include (i) emergent Competitive Businesses in the existing lines of business of the Company, and (ii) Competitive Businesses in lines of business that are new for the Company, in each case, with the prior written consent of Executive, which consent shall not be unreasonably withheld.
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this amount shall be limited to the amount specified under Treasury Regulation Section 1.409A-1(b)(9)(iii)(A) or any successor thereto.
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continue to make these payments without incurring discrimination penalties under the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, and all applicable regulations and guidance thereunder. Any such coverage provided during the Salary Continuation Period shall not run concurrently with the applicable continuation period in accordance with the provisions of the Consolidated Omnibus Budget Reconciliation Act (“COBRA”). If Executive becomes eligible to participate in another medical or dental benefit plan or arrangement through another employer or spousal plan during such period, the Company shall no longer pay for continuation coverage benefits and Executive shall be required to pay the full COBRA premium. Executive is required to notify the Company within thirty (30) days of obtaining other medical or dental benefits coverage. Any coverage provided under this Section 3(a)(ii) shall be subject to such amendments (including termination) of the coverage as the Company shall make from time to time at its sole discretion, including but not limited to changes in covered expenses, employee contributions for premiums, and co-payment obligations, and shall be, to the fullest extent permitted by law, secondary to any other coverage Executive may obtain from subsequent employment or any other source.
Executive shall not be entitled to continuation of compensation or benefits if Executive’s employment terminates for any other reason, including due to death or Disability, except as may be provided under any other agreement or benefit plan applicable to Executive at the time of the termination of Executive’s employment. Executive shall also not be entitled to Salary Continuation or any of the other benefits above if Executive does not meet all of the other requirements under, or otherwise violates the terms of, this Agreement, including the
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requirements under Section 8. Except as provided in this Section 3, all other compensation and benefits shall terminate as of the Date of Termination.
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otherwise be paid during such twelve (12) months, and any portion of the Salary Continuation that is otherwise subject to Section 409A, shall instead be paid to Executive in a lump sum payment on the date that is twelve (12) months and one (1) day after the date of Executive’s Separation from Service.
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Section 3 above, Executive will execute a binding general release and waiver of claims in a form to be provided by the Company (“General Release and Waiver”). The General Release and Waiver will be in a form substantially similar to the attached Appendix B. If the General Release and Waiver is not signed within the time it requires or is signed but subsequently revoked, Executive will not continue to receive any Salary Continuation otherwise payable, and shall reimburse any Salary Continuation previously paid.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written.
EXECUTIVE
/s/ Angela Rieger
Name: Angela Rieger
Address: [Address Omitted]
LANDS’ END, INC.
5 Lands’ End Lane
Dodgeville, WI 53595
By: /s/ Kelly Ritchie
Its: Kelly Ritchie, SVP, ES & CSS
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Appendix A
COMPETITIVE BUSINESSES
The following companies (including affiliates and subsidiaries within the same controlled group of corporations) are included within the definition of “Competitive Businesses”, as referred to under subsection 1(c) of the Executive Severance Agreement (“Agreement”):
J.C. Penney Company Inc.
Kohl’s
J. Crew
Eddie Bauer
Gap
L Brands
Jos A. Banks
Macy’s
Target
Amazon.com
L.L. Bean
Ann Taylor
Polo Ralph Lauren
Brooks Brothers
Talbots
Chico’s
V.F. Corporation
Next Retail
Vineyard Vines
Bonobos
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Appendix B
NOTICE: yOU MAY CONsIDER THIs gENERAL RELEAsE AND WAIVER FOR Up TO TWENTY-ONE (21) DAYs. You may not sign it until on or after your last day of work. IF YOU DECIDE TO sIgN IT, YOU MAY REVOkE THE gENERAL RELEAsE AND WAIVER WITHIN sEVEN (7) DAYs AFTER sIgNINg. ANY REVOCATION WITHIN THIs pERIOD MUsT BE IMMEDIATELY sUBMITTED IN WRITINg TO gENERAL COUNsEL, LANDS’ END, INC., 5 LANDS’ END LANE, DODGEVILLE, WISCONSIN 53595. YOU MAY WIsH TO CONsULT WITH AN ATTORNEY BEFORE sIgNINg THIs DOCUMENT.
GENERAL RELEASE AND WAIVER
In consideration of the severance benefits that are described in the attached Executive Severance Agreement, I, for myself, my heirs, administrators, representatives, executors, successors and assigns, do hereby release Lands’ End, Inc., its current and former agents, subsidiaries, affiliates, related organizations, employees, officers, directors, shareholders, attorneys, successors, and assigns (collectively, “Lands’ End”) from any and all claims of any kind whatsoever, whether known or unknown, arising out of, or connected with, my employment with Lands’ End and the termination of my employment. Without limiting the general application of the foregoing, this General Release & Waiver releases, to the fullest extent permitted under law, all contract, tort, defamation, and personal injury claims; all claims based on any legal restriction upon Lands’ End’s right to terminate my employment at will; Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e et seq.; the Age Discrimination in Employment Act, 29 U.S.C. §§ 621 et seq.; the Americans with Disabilities Act, 42 U.S.C. §§ 12101 et seq.; the Rehabilitation Act of 1973, 29 U.S.C. §§ 701 et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq. (“ERISA”); 29 U.S.C. § 1985; the Civil Rights Reconstruction Era Acts, 42 U.S.C. §§ 1981-1988; the National Labor Relations Act, 29 U.S.C. §§ 151 et seq.; the Family & Medical Leave Act, 29 U.S.C. §§ 2601 et seq.; the Immigration & Nationality Act, 8 U.S.C. §§ 1101 et seq.; Executive Order 11246 and all regulations thereunder; the Wisconsin Fair Employment Act, Wis. Stat. §§ 111.31-111.395; the Wisconsin Family & Medical Leave Act, Wis. Stat. § 103.10; the Wisconsin Worker’s Compensation Act, Wis. Stat. Ch. 102; and any and all other state, federal or local laws of any kind, whether administrative, regulatory, statutory or decisional.
This General Release & Waiver does not apply to any claims that may arise after the date I sign this General Release & Waiver. Also excluded from this General Release & Waiver are any claims that cannot be waived by law, including but not limited to (1) my right to file a charge with or participate in an investigation conducted by the Equal Employment Opportunity Commission and (2) my rights or claims to benefits accrued under benefit plans maintained by Lands’ End and governed by ERISA. I do, however, waive any right to any monetary or other relief flowing from any agency or third-party claims or charges, including any charge I might file with any federal, state or local agency. I warrant and represent that I have not filed any
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complaint, charge, or lawsuit against Lands’ End with any governmental agency or with any court.
I also waive any right to become, and promise not to consent to become a participant, member, or named representative of any class in any case in which claims are asserted against Lands’ End that are related in any way to my employment or termination of employment at Lands’ End, and that involve events that have occurred as of the date I sign this General Release and Waiver. If I, without my knowledge, am made a member of a class in any proceeding, I will opt out of the class at the first opportunity afforded to me after learning of my inclusion. In this regard, I agree that I will execute, without objection or delay, an “opt-out” form presented to me either by the court in which such proceeding is pending, by class counsel or by counsel for Lands’ End.
I have read this General Release and Waiver and understand all of its terms.
I have signed it voluntarily with full knowledge of its legal significance.
I have had the opportunity to seek, and I have been advised in writing of my right to seek, legal counsel prior to signing this General Release & Waiver.
I was given at least twenty-one (21) days to consider signing this General Release & Waiver. I agree that any modification of this General Release & Waiver Agreement will not restart the twenty-one (21) day consideration period.
I understand that if I sign the General Release & Waiver, I can change my mind and revoke it within seven (7) days after signing it by notifying the General Counsel of Lands’ End in writing at Lands’ End, Inc., 5 Lands’ End Lane, Dodgeville, Wisconsin 53595. I understand the General Release & Waiver will not be effective until after the seven (7) day revocation period has expired.
I understand that the delivery of the consideration herein stated does not constitute an admission of liability by Lands’ End and that Lands’ End expressly denies any wrongdoing or liability.
Date: SAMPLE ONLY - DO NOT DATE |
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Signed by: SAMPLE ONLY - DO NOT SIGN |
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Witness by: SAMPLE ONLY - DO NOT SIGN |
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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. |
August 31, 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. |
August 31, 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 second quarter ended July 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) |
August 31, 2023 |
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/s/ Bernard McCracken |
Bernard McCracken |
Interim Chief Financial Officer |
Vice President, Controller and Chief Accounting Officer |
(Principal Financial Officer) |
August 31, 2023 |