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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarter Ended August 1, 1997
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 1-9769
LANDS' END, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2512786
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lands' End Lane, Dodgeville, WI 53595
(Address of principal executive (Zip code)
offices)
Registrant's telephone number, 608-935-9341
including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of September 12, 1997:
Common stock, $.01 par value 32,035,450 shares outstanding
LANDS' END, INC. & SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three Months Ended August 1, 1997, and
August 2, 1996.................................... 3
Consolidated Statements of Operations for the
Six Months Ended August 1, 1997, and
August 2, 1996.................................... 4
Consolidated Balance Sheets at August 1, 1997,
January 31, 1997, and August 2, 1996.............. 5
Consolidated Statements of Cash Flows for the
Six Months Ended August 1, 1997, and
August 2, 1996.................................... 6
Notes to Consolidated Financial Statements........... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 11
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 11
Item 6. Exhibits and Reports on Form 8-K..................... 11
Signature..................................................... 12
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended
Aug. 1, Aug. 2,
1997 1996
(Unaudited)
Net sales $219,883 $196,160
Cost of sales 117,350 106,691
Gross profit 102,533 89,469
Selling, general and
administrative expenses 96,780 84,516
Income from operations 5,753 4,953
Other income (expense):
Interest expense (204) (73)
Interest income 552 74
Other (346) (28)
Total other income
(expense), net 2 (27)
Income before income taxes 5,755 4,926
Income tax provision 2,327 1,976
Net income $ 3,428 $ 2,950
Net income per share $ 0.11 $ 0.09
Weighted average shares outstanding 32,220 33,247
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
3
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six months ended
Aug. 1, Aug. 2,
1997 1996
(unaudited)
Net sales $464,603 $407,995
Cost of sales 249,338 223,789
Gross profit 215,265 184,206
Selling, general and
administrative expenses 198,945 171,600
Income from operations 16,320 12,606
Other income (expense):
Interest expense (346) (169)
Interest income 1,508 100
Gain on sale of subsidiary 7,805 -
Other (688) (263)
Total other income, (expense) net 8,279 (332)
Income before income taxes 24,599 12,274
Income tax provision 9,865 4,915
Net income $ 14,734 $ 7,359
Net income per share $ 0.46 $ 0.22
Weighted average shares outstanding 32,304 33,437
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
4
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Aug. 1, January 31, Aug. 2,
1997 1997 1996
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,781 $ 92,827 $ 4,179
Receivables 7,033 8,739 5,500
Inventory 217,104 142,445 168,468
Prepaid advertising 12,728 11,066 9,772
Other prepaid expenses 5,103 5,440 5,250
Income taxes receivable - - 597
Deferred income tax benefit 11,522 11,522 10,914
Total current assets 259,271 272,039 204,680
Property, plant and equipment, at cost:
Land and buildings 71,767 72,360 72,261
Fixtures and equipment 105,518 98,642 89,308
Leasehold improvements 5,149 4,291 3,253
Construction in progress 8,028 1,337 -
Total property, plant and equipment 190,462 176,630 164,822
Less-accumulated depreciation
and amortization 79,854 72,946 66,514
Property, plant and equipment, net 110,608 103,684 98,308
Intangibles, net 888 2,322 2,369
Total assets $370,767 $378,045 $305,357
Liabilities and shareholders' investment
Current liabilities:
Lines of credit $ 17,622 $ 11,195 $ 16,463
Accounts payable 85,013 76,585 63,111
Reserve for returns 3,280 5,184 2,462
Accrued liabilities 22,295 28,141 22,496
Accrued profit sharing 812 2,937 288
Income taxes payable 4,262 21,524 -
Total current liabilities 133,284 145,566 104,820
Deferred income taxes 8,814 8,814 7,212
Long-term liabilities - 660 387
Shareholders' investment:
Common stock, 40,221 shares issued 402 402 402
Donated capital 8,400 8,400 8,400
Additional paid-in capital 26,359 26,230 26,196
Deferred compensation (1,216) (1,370) (1,526)
Currency translation adjustments 1,088 378 419
Retained earnings 325,795 311,061 267,468
Treasury stock, 8,123, 7,778 and
7,258 shares at cost, respectively (132,159) (122,096) (108,421)
Total shareholders' investment 228,669 223,005 192,938
Total liabilities and shareholders'
investment $370,767 $378,045 $305,357
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
5
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
Aug. 1, Aug. 2,
1997 1996
(unaudited)
Cash flows from (used for) operating activities:
Net income $ 14,734 $ 7,359
Adjustments to reconcile net income to net
cash flows from operating activities-
Depreciation and amortization 8,022 6,644
Deferred compensation expense 154 (333)
Pre-tax gain on sale of subsidiary (7,805) -
Loss on disposal of fixed assets 64 283
Changes in current assets and liabilities
excluding the effects of acquisitions
and divestitures:
Receivables 1,391 2,564
Inventory (80,495) (3,652)
Prepaid advertising (1,662) 6,052
Other prepaid expenses (1,384) 45
Income taxes receivable - (597)
Accounts payable 12,886 731
Reserve for returns (1,904) (2,093)
Accrued liabilities (3,977) (1,255)
Accrued profit sharing (2,125) (1,195)
Income taxes payable (17,262) (13,256)
Other 179 128
Net cash flows (used for) from operating activities (79,184) 1,425
Cash flows from investing activities:
Cash paid for capital additions (16,576) (6,196)
Proceeds from sale of subsidiary 12,350 -
Net cash flows used for investing activities (4,226) (6,196)
Cash flows from financing activities:
Proceeds from short-term debt 6,427 7,144
Purchases of treasury stock (10,063) (15,370)
Net cash flows used for financing activities (3,636) (8,226)
Net decrease in cash and cash equivalents (87,046) (12,997)
Beginning cash and cash equivalents 92,827 17,176
Ending cash and cash equivalents $ 5,781 $ 4,179
Supplemental cash flow disclosures:
Interest paid $ 345 $ 166
Income taxes paid 27,552 15,984
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
6
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim financial statements
The condensed consolidated financial statements included herein have been
prepared by Lands' End, Inc. (the company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission, and in the
opinion of management contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the company believes that the disclosures are adequate
to make the information presented not misleading. The results of operations
for the interim periods disclosed within this report are not necessarily
indicative of future financial results. These consolidated financial
statements are condensed and should be read in conjunction with the financial
statements and the notes thereto included in the company's latest Annual
Report on Form 10-K, which includes financial statements for the year ended
January 31, 1997.
2. Reclassification
Certain financial statement amounts have been reclassified to be consistent
with the current presentation.
7
Item 2. Management's Discussion
and Analysis
Results of Operations
Three Months Ended August 1, 1997, compared with
Three Months Ended August 2, 1996
The company's net sales in the second quarter of fiscal 1998 increased 12.1
percent to $219.9 million from $196.2 million in the same quarter last year.
The growth in sales during the quarter just ended came from the company's
specialty businesses and foreign-based operations, as well as from the core
U.S. business, represented by the monthly and prospecting catalogs. The sales
increase during the quarter just ended was primarily due to an overall
increase in the number of catalogs and pages mailed. Overall productivity, or
sales per page, was down from the prior year, partially due to the increase in
pages mailed. Net sales for last year's second quarter included $4.8 million
from The Territory Ahead, in which the company had a majority interest at that
time. Excluding this amount from fiscal 1997's revenues, net sales for the
second quarter of fiscal 1998 increased 14.9 percent.
Update on the effect of the UPS strike
The company's normal service standard is to ship all in-stock from its
distribution center within one business day of receiving the customer's order.
Approximately 95 percent of all packages are then delivered to customers in
the United States within two business days after they leave the Lands' End
distribution center. During the 15-day UPS strike, all packages were shipped
out of Dodgeville within one business day and were mailed to customers via
Priority Mail through the United States Postal Service. From our tracking, we
know that most customers received their shipments within 2 to 4 business days.
As soon as the strike began, directly after the close of the second quarter,
there was a decline in the number of customer calls. As a result, the year-
over-year trend in sales for the first five weeks of the third quarter has
been below that of the second quarter. However, since the strike ended,
customer calls have rebounded.
Additional costs of approximately $1.3 million were incurred during the strike
for shipping packages via Priority Mail and for advertising to encourage
customers to call.
Inventory at the end of the quarter was $217 million, up 29 percent from $168
million in the prior year. Last year many customers were disappointed when
their orders could not be filled during the late fall and holiday seasons.
This year the company has increased inventory in its efforts to provide an
annualized first-time fulfillment rate of at least 90 percent for all items
ordered by customers. Higher inventory levels may result in greater product
liquidations at lower margins in the future periods.
Gross profit in this year's second quarter was $102.5 million, or 46.6 percent
of net sales, compared with $89.5 million, or 45.6 percent of net sales, in
the second quarter of the prior year. The improvement in gross profit margin
was primarily due to higher initial markups. Liquidations of excess inventory
were about six percent of net sales in the current year's second quarter,
compared with about eight percent in the prior year.
8
In the quarter just ended, selling, general and administrative expenses
increased 14.5 percent to $96.8 million, compared with $84.5 million for last
year's second quarter. As a percentage of sales, SG&A was 44.0 percent,
compared with 43.1 percent in the same period last year. The increase in the
SG&A ratio during the quarter was principally the result of relatively higher
order-fulfillment expenses due to higher wages and a higher level of
backorders; additional investment in information systems; and relatively
higher costs due to increased catalog circulation. The company increased the
number of catalogs and pages mailed to customers, however, paper prices were
lower than in the prior year.
Net income for the quarter just ended was $3.4 million, up 16.2 percent from
the $3.0 million earned in the same quarter last year. Earnings per share
totaled $0.11 for the quarter just ended, compared with $0.09 in the prior
year.
Six Months Ended August 1, 1997, compared with
Six Months Ended August 2, 1996
The company's net sales in the first six months of fiscal 1998 increased 13.9
percent to $464.6 million from $408.0 million in the same period last year.
The increase in net sales was due primarily to the same factors disclosed
above for the three months ended August 1, 1997. Net sales from The Territory
Ahead for the first six months in fiscal 1998 and 1997 were $5.1 million and
$11.6 million, respectively. Excluding these amounts, net sales for the first
six months of fiscal 1998 increased 15.9 percent.
Gross profit of $215.3 million for the first six months of fiscal 1998
increased 16.9 percent from $184.2 million in the same six-month period last
year. As a percentage of net sales, gross profit increased from 45.1 percent
in fiscal 1997 to 46.3 percent in fiscal 1998. The increase in gross profit
was due principally to the same factors disclosed above for the second quarter
ended August 1, 1997. Year-to-date liquidation sales were about seven
percent, compared with eight percent during the same period last year.
Selling, general and administrative expenses increased 15.9 percent to $198.9
million in the first six months of fiscal 1998 from $171.6 million in the same
period last year. As a percentage of net sales, selling, general and
administrative expenses increased to 42.8 percent in fiscal 1998 from 42.1
percent in fiscal 1997. The increase in the SG&A ratio was the result of
relatively higher net shipping costs along with the same factors listed above
for the second quarter ended August 1, 1997.
Net income in the first half of fiscal 1998 was $14.7 million, or $0.46 per
share. This includes an after-tax gain of $4.7 million, or $0.15 per share,
from the sale of the company's majority interest in The Territory Ahead.
Excluding this non-recurring gain, net income in the first half of fiscal 1998
was $10.1 million, or $0.31 per share, compared with $7.4 million, or $0.22
per share, earned in the first half of the prior year.
9
Seasonality of business
The company's business is highly seasonal. Historically, a disproportionate
amount of the company's net sales and a majority of its profits have been
realized during the fourth quarter. If the company's sales were materially
different from seasonal norms during the fourth quarter, the company's annual
operating results could be materially affected. In addition, as the company
continues to refine its marketing efforts by experimenting with the timing of
its catalog mailings, quarter results may fluctuate. Accordingly, results for
the individual quarters are not necessarily indicative of the results to be
expected for the entire year.
Liquidity and capital resources
To date, the bulk of the company's working capital needs have been met through
funds generated from operations and from short-term bank loans. The company's
principal need for working capital has been to meet peak inventory
requirements associated with its seasonal sales pattern. In addition, the
company's resources have been used to purchase treasury stock and make asset
additions.
The company will continue to explore investment opportunities arising from the
expansion of its international businesses and the development of new
businesses. While this investment spending has had some negative short term
impact on earnings, it is not expected to have a material effect on liquidity.
At August 1, 1997, the company had unsecured domestic credit facilities
totaling $110 million, all of which was unused. The company also maintains
foreign credit lines for use in foreign operations totaling the equivalent of
approximately $51 million as of August 1, 1997, of which $17.6 million was
used. The company has a separate $20 million bank facility available to fund
treasury stock purchases and capital expenditures, all of which was unused.
This facility runs through May 31, 1998.
Since fiscal 1990, the company's board of directors has authorized the company
from time to time to purchase a total of 10.7 million shares of treasury
stock. As of September 12, 1997, 9.2 million shares have been purchased, and
there is a balance of 1.5 million shares available to the company. The
company anticipates accelerating the rate of treasury stock purchases under
its previously announced authorization during the remainder of fiscal 1998,
and may use short-term borrowings under its existing bank facilities to
finance these purchases.
Capital expenditures for fiscal 1998 are currently planned to be about $48
million, of which about $17 million had been expended through August 1, 1997.
Major projects to date as of August 1, 1997, included expansion of
distribution facilities in Dodgeville, WI, new computer hardware and software
and replacement of corporate aircraft. The company believes that its cash
flow from operations and borrowings under its current credit facilities will
provide adequate resources to meet its capital requirements, treasury stock
purchases and operational needs for the foreseeable future.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings presently pending, except for
routine litigation incidental to the business, to which Lands' End,
Inc., is a party or of which any of its property is the subject.
Items 2 and 3 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders for
the quarter ended August 1, 1997, other than those disclosed in the
Form 10-Q dated May 2, 1997, reporting the results of the company's
annual meeting.
Item 5 is not applicable and has been omitted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed as part of this report:
Table Exhibit
Number Description Number
(11) Statement of recomputation of
earnings per share 1
(b) Reports on Form 8-K
A report on Form 8-K was filed June 17, 1997,
reporting a meeting with members of the
financial community in New York, New York,
on Thursday, May 22, 1997.
11
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its duly authorized officer and chief financial officer.
LANDS' END, INC.
Date: September 12, 1997 By /s/ BRADLEY K. JOHNSON
Bradley K. Johnson
Senior Vice President,
Chief Administrative Officer
and Chief Financial Officer
12
Exhibit 11.1
COMPUTATION OF EARNINGS PER SHARE
LANDS' END, INC. & SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
Three months ended Six Months Ended
08/01/97 08/02/96 08/01/97 08/02/96
Net income............................. $ 3,428 $ 2,950 $ 14,734 $ 7,359
Average shares of common stock
outstanding during the period.......... 32,220 33,247 32,304 33,437
Incremental shares from assumed
exercise of stock options (primary).... 361 197 347 109
32,581 33,444 32,651 33,546
Primary earnings per share............. $ 0.11 $ 0.09 $ 0.45 $ 0.22
Average shares of common stock
outstanding during the period.......... 32,220 33,247 32,304 33,437
Incremental shares from assumed exercise
of stock options (fully diluted)....... 377 197 377 154
32,597 33,444 32,681 33,591
Fully diluted earnings per share....... $ 0.11 $ 0.09 $ 0.45 $ 0.22
Average shares of common stock
outstanding during the period.......... 32,220 33,247 32,304 33,437
Basic earnings per share............... $ 0.11 $ 0.09 $ 0.46 $ 0.22
5
1,000
6-MOS
JAN-30-1998
AUG-01-1997
$5,781
0
7,033
0
217,104
259,271
190,462
79,854
370,767
133,284
0
0
0
402
228,267
370,767
464,603
464,603
249,338
249,338
0
0
346
24,599
9,865
14,734
0
0
0
$14,734
$0.45
$0.45
