UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 29, 2022
-OR-
☐
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to to .
Commission File Number: 001-09769
Lands’ End, Inc.
(Exact name of registrant as specified in its charter)
Delaware
36-2512786
(State or Other Jurisdiction of Incorporation of Organization)
(I.R.S. Employer Identification No.)
1 Lands’ End Lane
Dodgeville, Wisconsin
53595
(Address of Principal Executive Offices)
(Zip Code)
(608) 935-9341
(Registrant’s Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
LE
The NASDAQ Stock Market LLC
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 ☒ No ☐
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). Yes ☒ No ☐
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.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
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 ☐ No ☒
As of August 29, 2022, the registrant had 33,114,563 shares of common stock, $0.01 par value, outstanding.
LANDS’ END, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JULY 29, 2022
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
1
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Comprehensive Operations
2
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Cash Flows
4
Condensed Consolidated Statements of Changes in Stockholders' Equity
5
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
27
Item 4.
Controls and Procedures
28
PART II. OTHER INFORMATION
29
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
30
Signatures
31
Table of Contents
ITEM 1. FINANCIAL STATEMENTS
(Unaudited)
13 Weeks Ended
26 Weeks Ended
(in thousands, except per share data)
July 29,
2022
July 30,
2021
July 30, 2021
Net revenue
$
351,178
384,109
654,843
705,406
Cost of sales (excluding depreciation and amortization)
207,141
206,320
381,631
379,880
Gross profit
144,037
177,789
273,212
325,526
Selling and administrative
128,573
136,649
244,267
262,171
Depreciation and amortization
9,883
9,791
19,467
19,695
Other operating expense, net
39
—
443
Operating income
5,542
31,349
9,439
43,217
Interest expense
8,813
8,837
16,982
17,897
Other (income), net
(166
)
(123
(328
(290
(Loss) income before income taxes
(3,105
22,635
(7,215
25,610
Income tax (benefit) expense
(926
6,414
(2,665
6,750
NET (LOSS) INCOME
(2,179
16,221
(4,550
18,860
NET (LOSS) INCOME PER COMMON SHARE
Basic:
(0.07
0.49
(0.14
0.57
Diluted:
0.48
0.56
Basic weighted average common shares outstanding
33,361
32,979
33,262
32,875
Diluted weighted average common shares outstanding
33,713
33,710
See accompanying Notes to Condensed Consolidated Financial Statements.
(in thousands)
July 29, 2022
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustments
(843
(36
(3,937
275
COMPREHENSIVE (LOSS) INCOME
(3,022
16,185
(8,487
19,135
January 28, 2022
ASSETS
Current assets
Cash and cash equivalents
23,505
39,223
34,301
Restricted cash
2,091
2,102
1,834
Accounts receivable, net
40,917
30,203
49,668
Inventories, net
569,174
464,291
384,241
Prepaid expenses and other current assets
39,267
31,127
36,905
Total current assets
674,954
566,946
506,949
Property and equipment, net
124,626
136,714
129,791
Operating lease right-of-use asset
32,115
33,989
31,492
Goodwill
106,700
Intangible asset
257,000
Other assets
3,760
4,347
4,702
TOTAL ASSETS
1,199,155
1,105,696
1,036,634
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt
13,750
Accounts payable
236,015
211,916
145,802
Lease liability – current
6,720
5,437
5,617
Other current liabilities
101,015
130,285
146,263
Total current liabilities
357,500
361,388
311,432
Long-term borrowings under ABL Facility
135,000
25,000
Long-term debt, net
228,948
240,020
234,474
Lease liability – long-term
32,333
35,912
32,731
Deferred tax liabilities
45,516
47,469
46,191
Other liabilities
4,913
6,084
5,110
TOTAL LIABILITIES
804,210
715,873
629,938
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Common stock, par value $0.01 authorized: 480,000 shares;
issued and outstanding: 33,202, 32,981 and 32,985, respectively
332
330
Additional paid-in capital
371,245
370,353
374,413
Retained earnings
39,947
30,086
44,595
Accumulated other comprehensive (loss)
(16,579
(10,946
(12,642
TOTAL STOCKHOLDERS’ EQUITY
394,945
389,823
406,696
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Amortization of debt issuance costs
1,546
1,597
Loss on disposal of property and equipment
Stock-based compensation
3,403
6,069
Deferred income taxes
372
46
Other
(374
194
Change in operating assets and liabilities:
8,292
7,071
(190,885
(81,971
91,370
78,376
Other operating assets
(2,105
10,615
Other operating liabilities
(44,100
(30,470
Net cash (used in) provided by operating activities
(117,525
30,525
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of property and equipment
87
Purchases of property and equipment
(14,863
(11,961
Net cash used in investing activities
(14,776
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under ABL Facility
141,000
75,000
Payments of borrowings under ABL Facility
(6,000
(75,000
Payments on term loan
(6,875
Payments for taxes related to net share settlement of equity awards
(4,310
(5,084
Purchases and retirement of common stock
(2,357
Payment of debt-issuance costs
(932
Net cash provided by (used in) financing activities
121,458
(12,891
Effects of exchange rate changes on cash, cash equivalents and restricted cash
304
(142
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH
(10,539
5,531
CASH, CASH EQUIVALENTS AND RESTRICTED CASH,
BEGINNING OF PERIOD
36,135
35,794
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
25,596
41,325
SUPPLEMENTAL CASH FLOW DATA
Unpaid liability to acquire property and equipment
2,914
2,726
Income taxes paid, net of refunds
4,013
18,338
Interest paid
16,661
16,306
Lease liabilities arising from obtaining operating lease right-of-use assets
3,902
1,161
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Common Stock Issued
Additional
Paid-in
Retained
Accumulated
Comprehensive
Total
Stockholders’
Shares
Amount
Capital
Earnings
(Loss)
Equity
Balance at January 28, 2022
32,985
Net loss
(2,371
Cumulative translation adjustment, net of tax
(3,094
Stock-based compensation expense
1,484
Vesting of restricted shares
660
(4
Common stock withheld related to net share
settlement of equity awards
(232
Balance at April 29, 2022
33,413
334
371,583
42,224
(15,736
398,405
1,919
(212
(2
(2,257
(98
Balance at July 29, 2022
33,202
Balance at January 29, 2021
32,614
326
369,372
11,226
(11,221
369,703
Net income
2,639
311
2,513
553
(190
(5,013
Balance at April 30, 2021
32,977
366,868
13,865
(10,910
370,153
3,556
7
(3
(71
Balance at July 30, 2021
32,981
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business
Lands’ End, Inc. (“Lands’ End” or the “Company”) is a leading uni-channel retailer of casual clothing, accessories, footwear and home products. Lands’ End offers products online at www.landsend.com, through Company Operated stores and through third-party distribution channels. Lands’ End is a classic American lifestyle brand with a passion for quality, legendary service and real value and seeks to deliver timeless style for women, men, kids and the home. References to www.landsend.com do not constitute incorporation by reference of the information at www.landsend.com, and such information is not part of this Quarterly Report on Form 10-Q or any other filings with the SEC, unless otherwise explicitly stated.
Terms that are commonly used in the Company’s Notes to Condensed Consolidated Financial Statements are defined as follows:
•
ABL Facility – Asset-based senior secured credit agreement, providing for a revolving facility, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders, as amended to date
Adjusted EBITDA – Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit), Interest expense, Depreciation and amortization and certain significant items
ASC – Financial Accounting Standards Board Accounting Standards Codification, which serves as the source for authoritative GAAP, as supplemented by rules and interpretive releases by the SEC which are also sources of authoritative GAAP for SEC registrants
Company Operated stores – Lands’ End retail stores in the Retail distribution channel
Debt Facilities – Collectively, the Term Loan Facility and ABL Facility
Deferred Awards – Time vesting stock awards
EPS – Earnings per share
FASB – Financial Accounting Standards Board
First Quarter 2022 – The 13 weeks ended April 29, 2022
First Quarter 2021 – The 13 weeks ended April 30, 2021
First Quarter 2019 – The 13 weeks ended May 3, 2019
GAAP – Accounting principles generally accepted in the United States
LIBOR – London inter-bank offered rate
Option Awards – Stock option awards
Performance Awards – Performance-based stock awards
SEC – United States Securities and Exchange Commission
Second Quarter 2022 – The 13 weeks ended July 29, 2022
Term Loan Facility – Term loan credit agreement, dated as of September 9, 2020, among the Company, Fortress Credit Corp., as Administrative Agent and Collateral Agent, and the lenders party thereto
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands’ End Annual Report on Form 10-K filed with the SEC on March 24, 2022.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
There were no new accounting standards adopted that had an impact on the Company’s financial statements during the 26 weeks ended July 29, 2022.
NOTE 3. EARNINGS (LOSS) PER SHARE
The numerator for both basic and diluted EPS is net income (loss). The denominator for basic EPS is based upon the number of weighted average shares of Lands’ End common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of Lands’ End common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with GAAP. Potentially dilutive securities for the diluted EPS calculations consist of non-vested equity shares of common stock and in-the-money outstanding options where the current stock price exceeds the option strike price.
The following table summarizes the components of basic and diluted EPS:
(in thousands, except per share amounts)
Dilutive effect of stock awards
734
835
Basic (loss) earnings per share
Diluted (loss) earnings per share
Stock awards are considered anti-dilutive based on the application of the treasury stock method or in the event of a net loss. Anti-dilutive shares excluded from the diluted weighted average shares outstanding were 1,098,859 anti-dilutive shares in the 13 weeks ended July 29, 2022, 89 anti-dilutive shares in the 13 weeks ended July 30, 2021, 1,209,586 anti-dilutive shares in the 26 weeks ended July 29, 2022 and 44 anti-dilutive shares in the 26 weeks ended July 30, 2021.
NOTE 4. OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive (loss) income encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments.
Beginning balance: Accumulated other comprehensive (loss)
(net of tax of $4,184, $2,900, $3,361 and $2,987, respectively)
Other comprehensive (loss) income:
Foreign currency translation adjustments (net of tax of $223, $10, $1,046 and $(77), respectively)
Ending balance: Accumulated other comprehensive (loss)
(net of tax of $4,407, $2,910, $4,407 and $2,910, respectively)
No amounts were reclassified out of Accumulated other comprehensive (loss) during any of the periods presented.
NOTE 5. DEBT
ABL Facility
The Company’s $275.0 million revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs. On July 29, 2021, the Company executed the Third Amendment to the ABL Facility resulting in favorable financial terms and extension of the maturity date of the ABL Facility, as discussed below. The amount available to borrow is subject to the Loan Cap, as defined in the agreement, which considers the Borrowing Base calculated from eligible inventory, trade receivables and credit card receivables as defined in the agreement.
The following table summarizes the Company’s borrowing availability, before consideration of the Loan Cap, under the ABL Facility:
Interest Rate
ABL Facility maximum borrowing
275,000
Less: Outstanding borrowings
3.51%
2.75%
―%
Less: Outstanding letters of credit
13,828
16,693
23,521
Borrowing availability under ABL Facility
126,172
233,307
251,479
As of July 29, 2022, the amount available to borrow under the ABL Facility subject to the Loan Cap, as defined in the agreement which considers the Borrowing Base, was $126.2 million.
Long-Term Debt
On September 9, 2020, the Company 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. The OID and the debt origination fees are presented as a direct deduction from the carrying value of the Term Loan Facility and are amortized over the term of the loan to Interest expense in the Condensed Consolidated Statements of Operations.
8
The Company’s long-term debt consisted of the following:
Term Loan Facility
250,938
12.12%
264,688
10.75%
257,813
Less: Current portion of long-term debt
Less: Unamortized debt issuance costs
8,240
10,918
9,589
Interest; Fees
The Third Amendment to the ABL Facility, effective July 31, 2021, lowered the applicable margin interest rates applicable to the referenced rate, selected at the borrower’s election, either (1) adjusted LIBOR or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month LIBOR rate plus 1.00%, or (c) the Wells Fargo “prime rate”. For all loans, the borrowing margin is based upon the average daily total loans outstanding for the previous quarter. The applicable borrowing margin for LIBOR loans is (i) less than $95.0 million, 1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For base rate loans, the applicable borrowing margin is (i) less than $95.0 million, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00%. The Third Amendment to the ABL Facility replaced the 0.75% LIBOR floor with a 0.00% LIBOR floor.
The interest rates per annum applicable to the loans under the Term Loan Facility are based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) an adjusted LIBOR rate (with a minimum rate of 1.00%) plus 9.75%, or (2) an alternative base rate (which is the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which shall be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month LIBOR rate plus 1.00% per annum) plus 8.75%.
The 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 29, 2022, the Company had borrowings of $135.0 million under the ABL Facility.
Customary agency fees are payable in respect of the Debt Facilities.
Maturity; Amortization and Prepayments
The Third Amendment to the ABL Facility extended the maturity from November 16, 2022 to the earlier of (a) July 29, 2026 and (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness.
The Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to 1.25% per quarter. It is subject to mandatory prepayments in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 75% depending on the Company’s total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan may not be voluntarily prepaid during the first two years of its term, without significant penalties. After the initial two-year period, a prepayment premium of 3% applies to voluntary prepayments and certain mandatory prepayments made after September 9, 2022 and on or prior to September 9, 2023, 1% for such prepayments made after September 9, 2023 and on or prior to September 9, 2024 and no premium on such prepayments thereafter.
Guarantees; Security
All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral with certain exceptions.
The Term Loan Facility is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is secured by a second priority interest in the same collateral, with certain exceptions.
9
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, the Company will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0.
The Debt Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance, and providing additional guarantees and collateral in certain circumstances.
As of July 29, 2022, the Company was in compliance with its financial covenants in the Debt Facilities.
Events of Default
The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments, and change of control.
NOTE 6. STOCK-BASED COMPENSATION
The Company expenses the fair value of all stock awards over their respective vesting periods, ensuring that the amount of cumulative stock-based compensation expense recognized at any date is at least equal to the portion of the grant-date fair value of the award that is vested at that date. The Company has elected to adjust stock-based compensation expense for an estimated forfeiture rate for those shares not expected to vest and to recognize stock-based compensation expense on a straight-line basis for awards that only have a service requirement with multiple vest dates.
The Company has granted the following types of stock awards to employees at management levels and above, each of which are granted under the Company’s stockholder approved stock plans, other than inducement grants outside of the Company’s stockholder approved stock plans in accordance with NASDAQ Listing Rule 5635(c)(4):
Deferred Awards are in the form of restricted stock units and only require each recipient to complete a service period for the awards to be earned. Deferred Awards generally vest over three years. The fair value of Deferred Awards is based on the closing price of the Company's common stock on the grant date. Stock-based compensation expense is recognized ratably over the service period and is reduced for estimated forfeitures of those awards not expected to vest due to employee turnover.
Performance Awards are in the form of restricted stock units and have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. For Performance Awards granted, the Target Shares earned can range from 50% to 200% once minimum thresholds have been reached and depend on the achievement of Adjusted EBITDA and revenue performance measures for the cumulative period comprised of three-consecutive fiscal years beginning with the fiscal year of the grant date. The applicable percentage of the Target Shares, as determined by performance, vest after the completion of the applicable three-year performance period and upon determination of achievement of the performance measures by the Compensation Committee of the Board of Directors, and unearned Target Shares are forfeited. The fair value of the Performance Awards granted are based on the closing price of the Company’s common stock on the grant date. Stock-based compensation expense is recognized ratably over the related service period reduced for estimated forfeitures of those awards not expected to vest due to employee turnover and adjusted based on the Company’s estimate of the percentage of the aggregate Target Shares expected to be earned. Typically, the Company accrues for Performance Awards on a 100% payout unless it becomes probable that the outcome will be significantly different, or the performance can be accurately measured. The performance period has been completed for the Performance Awards granted during First Quarter 2019 and, based on the Company’s performance relative to the Adjusted EBITDA and revenue performance measures, these awards vested on March 25, 2022 at 118% of Target Shares. The stock-based compensation expense associated with the Performance Awards granted to employees during First Quarter 2022 and First Quarter 2021 is accrued at 100% and 114% payout, respectively.
10
Option Awards provide the recipient with the option to purchase a set number of shares at a stated exercise price over the term of the contract, which is ten years for all Option Awards currently outstanding. Options are granted with a strike price equal to the stock price on the date of grant and vest ratably over a four-year period. The fair value of each Option Award is estimated on the grant date using the Black-Scholes option pricing model.
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:
Deferred awards
1,350
2,905
2,845
Performance awards
569
2,072
498
3,121
Option awards
103
Total stock-based compensation expense
The following table provides a summary of the Deferred Awards activity for the 26 weeks ended July 29, 2022:
Deferred Awards
Number of
Weighted Average
Grant Date Fair Value
per Share
Unvested deferred awards as of January 28, 2022
913
14.60
Granted
373
20.65
Vested
(390
14.13
Forfeited or expired
(66
16.67
Unvested deferred awards as of July 29, 2022
830
17.38
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $9.8 million as of July 29, 2022, which is expected to be recognized ratably over a weighted average period of 2.1 years. Deferred Awards granted to employees during the 26 weeks ended July 29, 2022 vest ratably over a period of three years.
The following table provides a summary of the Performance Awards activity for the 26 weeks ended July 29, 2022:
Performance Awards
Unvested performance awards as of January 28, 2022
436
21.15
Granted (1)
248
(270
15.73
(38
24.39
Unvested performance awards as of July 29, 2022
376
(1)
Performance shares granted assume achievement performance at 100% of target.
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $6.1 million as of July 29, 2022, which is expected to be recognized ratably over a weighted average period of 2.2 years. Performance Awards granted to employees during the 26 weeks ended July 29, 2022 vest, if earned, after completion of the applicable three-year performance period.
There were no unvested Option Awards as of July 29, 2022. The Option Awards have a life of ten years and vested ratably over the first four years. As of July 29, 2022, 343,135 shares related to Option Awards were exercisable. No options have been exercised as of July 29, 2022.
11
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 $50.0 million of the Company’s common stock through February 2, 2024 (the “Share Repurchase Program”). Under the Share Repurchase Program, the Company may repurchase its common stock through open market purchases, in privately negotiated transactions, or by other means in accordance with federal securities laws, including Rule 10b-18 of the Exchange Act. The amount and timing of purchases will be determined by the Company’s management depending upon market conditions and other factors and may be made pursuant to a Rule 10b5-1 trading plan. The Share Repurchase Program may be suspended or discontinued at any time. As of July 29, 2022, additional purchases of up to $47.6 million could be made under the Share Repurchase Program.
The following table summarizes the Company’s share repurchases through July 29, 2022:
(Shares and $ in thousands except average per share cost)
Number of shares repurchased
212
Total cost
2,353
Average per share cost
11.10
The Company retired all shares that were repurchased through the Share Repurchase Program during Second Quarter 2022. 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. The total cost of the broker commissions is charged directly to Retained earnings. For all shares retired in the Second Quarter 2022, $0.1 million was charged to Retained earnings.
NOTE 8. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
Deferred gift card revenue
31,444
28,341
33,070
Accrued employee compensation and benefits
24,817
45,413
58,833
Reserve for sales returns and allowances
19,857
17,432
23,421
Accrued taxes
7,863
10,592
11,999
Deferred revenue
9,757
18,355
8,560
7,277
10,152
10,380
Total other current liabilities
NOTE 9. 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 $2.1 million as of July 29, 2022 and July 30, 2021, respectively, and $1.8 million as of January 28, 2022, based on Level 1 inputs. Restricted cash amounts are valued based upon statements received from financial institutions.
Carrying values and fair values of long-term debt, including current portion, in the Condensed Consolidated Balance Sheets are as follows:
Carrying
Fair
Value
Long-term debt, including current portion
239,079
263,030
256,439
Long-term debt, including current portion, was valued utilizing Level 3 valuation techniques based on a third-party valuation model to complete the analysis on July 29, 2022, July 30, 2021 and January 28, 2022. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of July 29, 2022, July 30, 2021 and January 28, 2022.
12
NOTE 10. INCOME TAXES
Provision for Income Taxes
At the end of each quarter, the Company estimates its effective income tax rate pursuant to ASC 740. The rate for the period consists of the tax rate expected to be applied for the full year to ordinary income adjusted for any discrete items recorded in the period.
The Company recorded a tax benefit at an overall effective tax rate of 29.8% for the 13 weeks ended July 29, 2022 and a tax expense at an overall effective tax rate of 28.3% for the 13 weeks ended July 30, 2021. The Company recorded a tax benefit at an overall rate of 36.9% for the 26 weeks ended July 29, 2022 and tax expense at an overall effective tax rate of 26.4% for the 26 weeks ended July 30, 2021. The overall effective tax rate for the 26 weeks ended July 29, 2022 reflects a tax benefit as a result of stock-based compensation recorded in the first quarter.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. Provisions of the IRA include a 15% corporate minimum tax and a 1% excise tax on stock buybacks amongst others. The Company is assessing the impacts, if any, the IRA will have on its financial statements.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
As disclosed in the Company’s Annual Report on Form 10-K for the year ended January 28, 2022, the Company is the defendant in 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 (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
13
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 relate to claims for property damage and breach of warranty. Lands’ End continues to vigorously defend these lawsuits and believes they are without merit.
NOTE 12. SEGMENT REPORTING
The Company’s operating segments consist of: U.S. eCommerce, Europe eCommerce, Japan eCommerce, Outfitters, Third Party and Retail. The Company determined that each of the operating segments have similar economic and other qualitative characteristics, thus the results of the operating segments are aggregated into one reportable external segment.
Lands’ End identifies five separate distribution channels for revenue reporting purposes:
U.S. eCommerce offers products through the Company’s eCommerce website.
International offers products primarily to consumers located in Europe and Japan through eCommerce international websites and third-party affiliates.
Outfitters sells uniform and logo apparel to businesses and their employees, as well as to student households through school relationships, located primarily in the U.S.
Third Party sells the same products as U.S. eCommerce but direct to consumers through third-party marketplace websites and through domestic wholesale customers.
Retail sells products through Company Operated stores.
Net revenue is presented by distribution channel in the following table:
Net revenue:
U.S. eCommerce
203,288
237,618
378,181
441,191
International
36,373
47,819
80,551
104,263
Outfitters
70,669
65,633
124,631
106,313
Third Party
27,290
19,098
48,932
30,902
Retail
13,558
13,941
22,548
22,737
Total Net revenue
NOTE 13. 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.
14
The Company’s revenue is disaggregated by distribution channel and geographic location. Revenue by distribution channel is presented in Note 12, Segment Reporting. Revenue by geographic location was:
United States
310,151
330,890
565,425
591,296
Europe
29,311
38,019
65,440
84,906
Asia
7,742
10,490
16,439
20,549
3,974
4,710
7,539
8,655
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. The following table summarizes the deferred revenue associated with payments received in advance of the transfer of control to the customer, which is reported in Other current liabilities in the Condensed Consolidated Balance Sheets, as well as amounts recognized through Net revenue for each period presented. The majority of deferred revenue as of July 29, 2022 is expected to be recognized in Net revenue in the fiscal quarter ending October 28, 2022, as products are delivered to customers.
Deferred revenue beginning of period
6,074
25,374
17,187
Deferred revenue recognized in period
(5,860
(25,160
(8,346
(16,973
Revenue deferred in period
9,543
18,141
Deferred revenue end of period
Revenue from gift cards is recognized when (i) the gift card is redeemed by the customer for merchandise, or (ii) as gift card breakage, an estimate of gift cards which will not be redeemed where the Company does not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions. Gift card breakage is recorded within Net revenue in the Condensed Consolidated Statements of Operations. Prior to their redemption, gift cards are recorded as a liability and included within Other current liabilities in the Condensed Consolidated Balance Sheets. The liability is estimated based on expected breakage that considers historical patterns of redemption. The following table provides the reconciliation of the contract liability related to gift cards:
Balance as of beginning of period
32,015
27,466
26,798
Gift cards sold
17,042
13,949
31,670
24,996
Gift cards redeemed
(17,245
(12,963
(32,713
(23,228
Gift card breakage
(368
(111
(583
(225
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 29, 2022, July 30, 2021 and January 28, 2022, $19.9 million, $17.4 million and $23.4 million, respectively, of refund liabilities, primarily associated with product returns, were reported in Other current liabilities in the Condensed Consolidated Balance Sheets. An asset for product returns is recorded in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.
NOTE 14. SUBSEQUENT EVENT
In July 2022, the Board of Directors approved a plan to wind down and cease operations of Lands’ End Japan KK. Lands’ End Japan KK represents the Japan eCommerce operating segment. For a discussion of this operating segment, see Note 12, Segment Reporting. The closing and subsequent disposal of the assets does not represent a strategic shift with a major effect on the consolidated financial condition of the Company. While the incremental costs associated with the closing cannot be estimated at this time, based on current information the Company does not expect these costs will have a material impact on our Condensed Consolidated Financial Statements and disclosures.
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. See “Cautionary Statement Concerning Forward-Looking Statements” below, “Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended January 28, 2022 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q, for a discussion of the uncertainties, risks and assumptions associated with these statements.
As used in this Quarterly Report on Form 10-Q, references to the “Company”, “Lands’ End”, “we”, “us”, “our” and similar terms refer to Lands’ End, Inc. and its subsidiaries. Our fiscal year ends on the Friday preceding the Saturday closest to January 31. Other terms that are commonly used in this Quarterly Report on Form 10-Q are defined as follows:
Adjusted EBITDA – Net income (loss) appearing on the Consolidated Statements of Operations net of Income tax expense, Interest expense, Depreciation and amortization and certain significant items
COVID – Coronavirus disease 2019 (COVID-19) caused by severe respiratory syndrome coronavirus 2 (SARS-CoV-2)
First Quarter 2020 – The 13 weeks ended May 1, 2020
Fiscal 2022 – The 52 weeks ending January 27, 2023
Fiscal 2021 – The 52 weeks ended January 28, 2022
Fiscal 2020 – The 52 weeks ended January 29, 2021
Second Quarter 2021 – The 13 weeks ended July 30, 2021
Year-to-Date 2022 – The 26 weeks ended July 29, 2022
Year-to-Date 2021 – The 26 weeks ended July 30, 2021
Executive Overview
Description of the Company
Lands’ End is a leading uni-channel retailer of casual clothing, accessories, footwear and home products. Operating out of America’s heartland, we believe our vision and values make a strong connection with our core customers. We offer products online at www.landsend.com, through our own Company Operated stores and through third-party distribution channels. We are a classic American lifestyle brand with a passion for quality, legendary service and real value. We seek to deliver timeless style for women, men, kids and the home.
Lands’ End was founded in 1963 by Gary Comer and his partners to sell sailboat hardware and equipment by catalog. While our product focus has shifted significantly over the years, we have continued to adhere to our founder’s motto as one of our guiding principles: “Take care of the customer, take care of the employee and the rest will take care of itself.”
We seek to provide a common customer experience regardless of whether our customers are interacting with us on our company websites, at our Company Operated stores or through third-party distribution channels.
We have one external reportable segment and identify our operating segments according to how our business activities are managed and evaluated. Our operating segments consist of: U.S. eCommerce, Europe eCommerce, Japan eCommerce, Outfitters, Third Party and Retail. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into one external reportable segment.
Distribution Channels
We identify five separate distribution channels for revenue reporting purposes:
U.S. eCommerce offers products through our eCommerce website.
International offers products primarily to consumers located in Europe and Japan through our eCommerce international websites and third-party affiliates.
Outfitters sells uniform and logo apparel to businesses and their employees, as well as to school households through school relationships, located primarily in the U.S.
Retail sells products through our Company Operated stores.
Global Supply Chain and Macroeconomic Challenges
Like many companies, we continue to experience global supply chain challenges and disruptions. These global supply chain challenges and disruptions have caused manufacturing and transportation delays and increased transportation and distribution costs. We have extended our seasonal product calendars to account for the longer supply chain lead times in an attempt to avoid potential delays and out-of-stock positions. In addition, we have rerouted shipments as we attempt to mitigate our exposure of unpredictable transportation delays with potential labor disruptions.
Macroeconomic issues, such as recent inflationary pressures, have had an impact on our business. Since apparel purchases are discretionary expenditures that historically have been influenced by domestic and global economic conditions, higher prices of consumer goods due to inflation may result in less discretionary spending for consumers which may negatively impact customer demand. Additionally, macroeconomic challenges have led to increased cost of raw materials, packaging materials, labor, energy, fuel and other inputs necessary for the production and distribution of our products and may impact our gross margin.
We expect the global supply chain challenges, increased transportation and distribution costs and inflationary pressures to continue through the remainder of Fiscal 2022.
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
Seasonality
We experience seasonal fluctuations in our Net revenue and operating results and historically have realized a significant portion of our net revenue and earnings for the year during our fourth fiscal quarter. We generated 33.9% and 37.7% of our net revenue in the fourth quarter of Fiscal 2021 and Fiscal 2020 respectively. The Fiscal 2021 percentage decrease of net revenue in the fourth quarter was primarily attributed to the global supply chain challenges. Thus, lower than expected fourth quarter net revenue has had and may continue to have an adverse impact on our annual operating results.
17
Working capital requirements typically increase during the second and third quarters of the fiscal year as inventory builds to support peak shipping/selling periods and, accordingly, typically decrease during the fourth quarter of the fiscal year as inventory is shipped/sold. Cash provided by operating activities is typically higher in the fourth quarter of the fiscal year due to reduced working capital requirements during that period.
Results of Operations
The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue:
100.0
%
59.0
53.7
41.0
46.3
36.6
35.6
2.8
2.5
0.0
1.6
8.2
2.3
(0.0
)%
(0.9
5.9
(0.3
1.7
(0.6
4.2
58.3
53.9
41.7
46.1
37.3
37.2
3.0
1.4
6.1
2.6
(0.1
(1.1
3.6
(0.4
0.9
(0.7
2.7
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 $2.2 million in Second Quarter 2022 compared to Net income of $16.2 million in Second Quarter 2021. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit), Interest expense, Depreciation and amortization and certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our business for comparable periods and as a basis for an executive compensation metric. The methods we use to calculate our non-GAAP financial measures may differ significantly from methods other companies use to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.
18
While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance, and is useful to investors, because:
EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax.
Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.
Other – amortization of transaction related costs associated with Third Party distribution channel for the 13 and 26 weeks ended July 29, 2022 and July 30, 2021.
Loss on disposal of property and equipment – management considers the net gain or loss on asset valuation to result from investing decisions rather than ongoing operations for the 13 weeks ended July 29, 2022 and 26 weeks ended July 29, 2022 and July 30, 2021.
344
0.1
250
Adjusted EBITDA
15,808
4.5
41,390
10.8
688
500
29,633
63,855
9.1
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in five separate distribution channels for revenue reporting purposes: U.S. eCommerce, International, Outfitters, Third Party and Retail. A key measure in the evaluation of our business is revenue performance by distribution channel. We also consider Gross margin and Selling and administrative expenses in evaluating the performance of our business.
We use Net revenue to evaluate revenue performance for the U.S. eCommerce, International, Outfitters and Third Party distribution channels. For our Retail distribution channel, we use Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations when it has been open for at least 14 months. Online sales and sales generated through our in-store web portal are considered revenue in our U.S. eCommerce and International distribution channels and are excluded from Same Store Sales. From First Quarter 2020 through Third Quarter 2021, due to the COVID pandemic, we temporarily ceased using Same Store Sales as a key measure in evaluating performance as we did not believe there was meaningful comparability during those periods.
19
Discussion and Analysis
Second Quarter 2022 compared with Second Quarter 2021
Net Revenue
Net revenue was $351.2 million for Second Quarter 2022, a decrease of $32.9 million or 8.6%, from $384.1 million during the Second Quarter 2021.
U.S. eCommerce Net revenue was $203.3 million for Second Quarter 2022, a decrease of $34.3 million or 14.4%, from $237.6 million during the Second Quarter 2021. Compared to Second Quarter 2021, the decrease in revenue in Second Quarter 2022 was caused by delayed receipts of key products due to the global supply chain and macroeconomic challenges.
International eCommerce Net revenue was $36.4 million for Second Quarter 2022, a decrease of $11.4 million or 23.9%, from $47.8 million during the Second Quarter 2021. The decrease in revenue in Second Quarter 2022 was caused by delayed receipts of key products due to the global supply chain challenges and macroeconomic challenges.
Outfitters Net revenue was $70.7 million for Second Quarter 2022, an increase of $5.1 million or 7.7%, from $65.6 million during the Second Quarter 2021. Compared to Second Quarter 2021, the increase was attributed to stronger demand within school uniform households and national accounts.
Third Party Net revenue was $27.3 million for Second Quarter 2022, an increase of $8.2 million or 42.9%, from $19.1 million during the Second Quarter 2021. The increase was primarily attributed to growth in the Kohl’s online marketplace, and growth in other new and existing online marketplaces.
Retail Net revenue was $13.5 million for Second Quarter 2022, a decrease of $0.5 million or 2.8%, from $14.0 million during the Second Quarter 2021. Our U.S. Company Operated stores experienced a decrease of 0.9% in Same Store Sales as compared to the Second Quarter 2021. On July 29, 2022 there were 30 U.S. Company Operated stores compared to 31 U.S. Company Operated stores on July 30, 2021.
Gross Profit
Gross profit was $144.0 million for Second Quarter 2022, a decrease of $33.8 million or 19.0% from $177.8 million during the Second Quarter of 2021. Gross margin decreased approximately 530 basis points to 41.0% in Second Quarter 2022, compared with 46.3% in Second Quarter 2021. Compared to Second Quarter 2021, the gross margin decline was attributable to an incremental $11.7 million of transportation costs due to the global supply chain challenges, in addition to increased promotional activity, and margin mix from growth in our Third Party business.
Selling and Administrative Expenses
Selling and administrative expenses decreased $8.0 million to $128.6 million or 36.6% of total Net revenue in Second Quarter 2022 compared with $136.6 million or 35.6% of Net revenue in Second Quarter 2021. The approximately 100 basis point increase was driven by deleverage on lower sales partially offset by continued expense controls.
Depreciation and Amortization
Depreciation and amortization expense was $9.9 million in Second Quarter 2022, an increase of $0.1 million or 0.9% compared with $9.8 million in Second Quarter 2021.
Other Operating Expense
Other operating expense was insignificant in Second Quarter 2022 for loss on disposal of property and equipment compared to no Other operating expense in Second Quarter 2021.
Operating Income
Operating income was $5.5 million in Second Quarter 2022 compared to $31.3 million in Second Quarter 2021. The $25.8 million decrease was driven by the decrease in Gross profit due to increased transportation costs attributed to the global supply chain challenges slightly offset by lower selling and administrative expenses.
20
Interest Expense
Interest expense remained unchanged at $8.8 million in Second Quarter 2022 and Second Quarter 2021, respectively.
Other Income
Other income was $0.2 million in Second Quarter 2022 compared to Other income of $0.1 million in Second Quarter 2021.
Income Tax (Benefit) Expense
We recorded an income tax benefit at an overall effective tax rate of 29.8% for Second Quarter 2022 and income tax expense at an overall effective tax rate of 28.3% for Second Quarter 2021.
Net Income (Loss)
As a result of the above factors, Net loss was $2.2 million and diluted loss per share was $0.07 in Second Quarter 2022 compared with Net income of $16.2 million and diluted earnings per share of $0.48 in Second Quarter 2021.
As a result of the above factors, Adjusted EBITDA was $15.8 million in Second Quarter 2022 compared to $41.4 million in Second Quarter 2021.
Year-to-Date 2022 compared with Year-to-Date 2021
Net revenue was $654.8 million for Year-to-Date 2022, a decrease of $50.6 million or 7.2%, from $705.4 million during the Year-to-Date 2021.
U.S. eCommerce Net revenue was $378.2 million for Year-to-Date 2022, a decrease of $63.0 million or 14.3%, from $441.2 million during the Year-to-Date 2021. The decrease in revenue was caused by delayed receipts of key products due to global supply chain and macroeconomic challenges.
International eCommerce Net revenue was $80.6 million for Year-to-Date 2022, a decrease of $23.6 million or 22.7%, from $104.2 million during the Year-to-Date 2021. The decrease in revenue was caused by delayed receipts of key products due to the global supply chain challenges and macroeconomic challenges.
Outfitters Net revenue was $124.6 million for Year-to-Date 2022, an increase of $18.3 million or 17.2%, from $106.3 million during the Year-to-Date 2021. Compared to the Year-to-Date 2021, the increase was primarily attributed to stronger demand within school uniform households, national accounts, and small and mid-sized business customers.
Third Party Net revenue was $48.9 million for Year-to-Date 2022, an increase of $18.0 million or 58.3%, from $30.9 million during the Year-to-Date 2021. The increase was driven by growth in the Kohl’s online marketplace, expanding the number of the Kohl’s stores in the Third Quarter 2021, and growth in new and existing online marketplaces.
Retail Net revenue was $22.5 million for Year-to-Date 2022, a decrease of $0.3 million or 0.8%, from $22.8 million during the Year-to-Date 2021. Our U.S. Company Operated stores experienced an increase of 0.8% in Same Store Sales as compared to the Year-to-Date 2021. On July 29, 2022 there were 30 U.S. Company Operated stores compared to 31 U.S. Company Operated stores on July 30, 2021.
Gross profit was $273.2 million for Year-to-Date 2022, a decrease of $52.3 million or 16.1% from $325.5 million during Year-to-Date of 2021. Gross margin decreased to 41.7% in Year-to-Date 2022, compared with 46.2% in Year-to-Date 2021. Compared to Year-to-Date 2021, gross margin decreased due to an incremental $26.1 million of transportation costs due to global supply chain challenges, in addition to increased promotional activity, and margin mix from growth in our Third Party business.
21
Selling and administrative expenses decreased $17.9 million to $244.3 million or 37.3% of total Net revenue in Year-to-Date 2022 compared with $262.2 million or 37.2% of Net revenue in Year-to-Date 2021. The approximately 10 basis point increase was a result of deleverage on lower sales offset by continued expense controls and lower digital marketing spend.
Depreciation and amortization expense was $19.5 million in Year-to-Date 2022, a decrease of $0.2 million or 1.2%, compared with $19.7 million in Year-to-Date 2021.
Other operating expense, net was insignificant in Year-to-Date 2022 compared to $0.4 million in Year-to-Date 2021. The decrease was a result of a reduction in loss on disposal of property and equipment.
Operating Income (Loss)
Operating income was $9.4 million in Year-to-Date 2022 compared to Operating income of $43.2 million in Year-to-Date 2021. The $33.8 million decrease was caused by the decrease in Gross profit due to increased transportation costs attributed to the global supply chain challenges slightly offset by lower selling and administrative expenses.
Interest expense was $17.0 million in Year-to-Date 2022 compared to $17.9 million in Year-to-Date 2021. The $0.9 million decrease was primarily attributed to lower interest rates as a result of the Third Amendment to the ABL Facility and lower interest on the Term Loan Facility due to scheduled principal payments.
Other income remained unchanged at $0.3 million in Year-to-Date 2022 and Year-to-Date 2021, respectively.
We recorded an income tax benefit at an overall effective tax rate of 36.9% for Year-to-Date 2022 and an income tax expense of 26.4% for Year-to-Date 2021. The Year-to-Date 2022 rate is lower than Year-to-Date 2021 primarily due to the generation of pretax loss in 2022 compared to a pretax income in 2021.
As a result of the above factors, Net loss was $4.5 million and diluted loss per share was $0.14 in Year-to-Date 2022 compared with Net income of $18.9 million and diluted earnings per share of $0.56 in Year-to-Date 2021.
As a result of the above factors, Adjusted EBITDA was $29.6 million in Year-to-Date 2022 compared to $63.9 million in Year-to-Date 2021.
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 $135.0 million on July 29, 2022, other than letters of credit. Cash generated from our net revenue and profitability, and to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a significant amount of net revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year. We expect that our cash on hand and cash flows from operations, along with revolving on the ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months.
22
Description of Material Indebtedness
Debt Arrangements
Our $275.0 million revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs. On July 29, 2021, we executed the Third Amendment to the ABL Facility resulting in favorable financial terms and extension of the maturity date of the ABL Facility, as discussed below. The amount available to borrow is subject to the Loan Cap, as defined in the agreement, which considers the Borrowing Base calculated from eligible inventory, trade receivables and credit card receivables as defined in the agreement. The balance outstanding was $135.0 million and $25.0 million on July 29, 2022 and July 30, 2021, respectively. The balance of outstanding letters of credit was $13.8 million and $16.7 million on July 29, 2022 and July 30, 2021, respectively.
On September 9, 2020, we entered into the Term Loan Facility which provided borrowings of $275.0 million. Origination costs, including an Original Issue Discount (OID) of 3% and $5.1 million in debt origination fees were paid upon entering into the Term Loan Facility.
The Third Amendment to the ABL Facility, effective July 31, 2021, lowered the applicable margin interest rates applicable to the referenced rate, selected at the borrower’s election, either (1) adjusted LIBOR or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month LIBOR rate plus 1.00%, or (c) the Wells Fargo “prime rate”. For all loans, the borrowing margin is based upon the average daily total loans outstanding for the previous quarter. The applicable borrowing margin for LIBOR loans is (i) less than $95.0 million, 1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For base rate loans, the applicable borrowing margin is (i) less than $95.0 million, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00%. The Third Amendment to the ABL Facility replaced the 0.75% LIBOR floor with a 0.0% LIBOR floor.
The interest rates per annum applicable to the loans under the Term Loan Facility are based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) an adjusted LIBOR (with a minimum rate of 1.00%) plus 9.75% or (2) an alternative base rate (which is the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which shall be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month LIBOR rate plus 1.00% per annum) plus 8.75%.
The ABL Facility fees include (i) commitment fees of 0.25% based upon the average daily unused commitment (aggregate commitment less loans and letter of credit outstanding) under the ABL Facility for the preceding fiscal quarter and (ii) customary letter of credit fees. As of July 29, 2022, we had borrowings of $135.0 million under the ABL Facility.
The Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to 1.25% per quarter. It is subject to mandatory prepayments in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 75% depending on our total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan may not be voluntarily prepaid during the first two years of its term, without significant penalties. After the initial two-year period, a prepayment premium of 3% applies to voluntary prepayments and certain mandatory prepayments made after September 9, 2022 and on or prior to September 9, 2023, 1% for such prepayments made after September 9, 2023 and on or prior to September 9, 2024, and no premium on such prepayments thereafter.
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.
23
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.
Under the ABL Facility, if excess availability falls below the greater of 10% of the Loan Cap amount or $15.0 million, we will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0.
The Debt Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
As of July 29, 2022, we were in compliance with our financial covenants in the Debt Facilities.
Cash Flows from Operating Activities
Net cash used in operating activities was $117.5 million during Year-to-Date 2022 compared to net cash provided by operating activities of $30.5 million during Year-to-Date 2021. The $148.0 million increase in cash used in operating activities was primarily caused by a decrease in net income and an increase year over year in inventories and year over year change in other current liabilities. The $104.9 million increase in inventory compared to Year-to-Date 2021 was primarily attributable to an increase of earlier receipts and in-transit shipments for fall and holiday inventory compared to prior years and increased transportation costs due to global supply chain challenges.
Cash Flows from Investing Activities
Net cash used in investing activities was $14.8 million and $12.0 million during Year-to-Date 2022 and Year-to-Date 2021, respectively. Cash used in investing activities for both periods was primarily used for investments to update our digital information technology infrastructure.
For Fiscal 2022, we plan to invest approximately $37.0 million in capital expenditures for strategic investments and infrastructure, primarily in technology and general corporate needs.
Cash Flows from Financing Activities
Net cash provided by financing activities was $121.5 million during Year-to-Date 2022, compared with net cash used in financing activities of $12.9 million during Year-to-Date 2021. The increase in net cash provided by financing activities is primarily due to increased borrowings under the ABL Facility to cover higher than normal inventory levels due to global supply chain challenges resulting in earlier receipts and higher in-transit shipments of fall and holiday inventory compared to prior years and increased transportation costs.
Contractual Obligations and Off-Balance-Sheet Arrangements
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2022.
24
Financial Instruments with Off-Balance-Sheet Risk
The $275.0 million ABL Facility includes a $70.0 million sublimit for letters of credit and the Third Amendment to the ABL Facility extended the maturity from November 16, 2022 to the earlier of (a) July 29, 2026 and (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness. The ABL Facility is available for working capital and other general corporate liquidity needs. The balance outstanding on July 29, 2022 and July 30, 2021 was $135.0 million and $25.0 million, respectively. The balance of outstanding letters of credit was $13.8 million and $16.7 million on July 29, 2022 and July 30, 2021, respectively.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended January 28, 2022. There have been no significant changes in our critical accounting policies or their application since January 28, 2022. During Second Quarter 2022, we implemented our accounting policy for repurchases of common stock.
Repurchases of Common Stock
Shares of the Company’s common stock are repurchased by the Company through open market transactions. In the Second Quarter 2022, all purchases of common stock under the Share Repurchase Program have been at prices that exceeded the par value of the repurchased common stock, and the amounts of the purchase prices that exceeded par value were 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. The total cost of the broker commissions is charged directly to Retained earnings. The Company plans to periodically retire all shares repurchased under the Share Repurchase Program. All shares repurchased during Second Quarter 2022 were retired during Second Quarter 2022.
Recent Accounting Pronouncements
We have considered all recent accounting pronouncements and have concluded that there are no recent accounting pronouncements that may have a material impact on our Condensed Consolidated Financial Statements and disclosures.
25
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross margin, operating expenses, operating income, net income, adjusted EBITDA, cash flow, financial condition, financings, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, market opportunities and general market and industry conditions. We generally identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely,” “targeting” or the negative version of these words or comparable words. Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 28, 2022 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. A significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of July 29, 2022, we had $15.5 million of cash denominated in foreign currencies, principally in British pound sterling, Euro and Japanese yen. We do not utilize financial instruments for trading purposes or hedging and have not used any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with the Term Loan Facility and the ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates (above the 1.00% LIBOR floor) associated with the Term Loan Facility would result in a $2.5 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn to a principal amount equal to $275.0 million, each one percentage point change in interest rates would result in a $2.8 million change in our annual cash interest expense.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and our President and Chief Financial Officer have concluded that, as of July 29, 2022, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
For a description of our legal proceedings, see Note 11, Commitments and Contingencies in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which description of legal proceedings is incorporated by reference herein.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 28, 2022, filed with the SEC on March 24, 2022.
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 2022 pursuant to the 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 30 - May 27
May 28 - July 1
80,860
10.99
49,111
July 2 - July 29
131,193
11.16
47,647
212,053
All shares of common stock were retired following purchase.
(2)
Average price paid per share excludes broker commissions.
(3)
On June 28, 2022, the Company announced that its Board of Directors authorized the Company to repurchase up to $50.0 million of the Company’s common stock through February 2, 2024 (the “Share Repurchase Program”). The Share Repurchase Program may be suspended or discontinued at any time.
Index of Exhibits
ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
3.1
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)).
3.2
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)).
31.1
Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2
Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
32.1
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.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*
101.SCH
Inline XBRL Taxonomy Extension Schema Document*
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.
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.
(Registrant)
By:
/s/ James Gooch
Name:
James Gooch
Title:
President and Chief Financial Officer
(Principal Financial Officer)
Date: September 1, 2022