UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
-OR-
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
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(Address of principal executive offices) |
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(Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
As of September 3, 2024, the registrant had
LANDS’ END, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED AUGUST 2, 2024
TABLE OF CONTENTS
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Item 1. |
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1 |
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1 |
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Condensed Consolidated Statements of Comprehensive Operations |
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2 |
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3 |
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4 |
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Condensed Consolidated Statements of Changes in Stockholders’ Equity |
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6 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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33 |
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Item 4. |
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34 |
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35 |
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Item 1. |
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35 |
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Item 1A. |
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36 |
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Item 2. |
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37 |
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Item 5. |
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37 |
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Item 6. |
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38 |
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39 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDS’ END, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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13 Weeks Ended |
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26 Weeks Ended |
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(in thousands, except per share data) |
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August 2, |
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July 28, |
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August 2, |
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July 28, 2023 |
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Net revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of sales (exclusive of depreciation and amortization) |
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Gross profit |
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Selling and administrative |
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Depreciation and amortization |
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Other operating expense, net |
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Operating income |
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Interest expense |
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Other (income), net |
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Loss before income taxes |
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Income tax (benefit) expense |
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NET LOSS |
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$ |
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$ |
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$ |
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$ |
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NET LOSS PER COMMON SHARE |
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Basic: |
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Diluted: |
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$ |
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$ |
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Basic weighted average common shares outstanding |
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Diluted weighted average common shares outstanding |
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See accompanying Notes to Condensed Consolidated Financial Statements.
1
LANDS’ END, INC.
Condensed Consolidated Statements of Comprehensive Operations
(Unaudited)
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13 Weeks Ended |
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26 Weeks Ended |
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(in thousands) |
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August 2, 2024 |
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July 28, 2023 |
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August 2, 2024 |
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July 28, 2023 |
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NET LOSS |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustments |
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COMPREHENSIVE LOSS |
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$ |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
LANDS’ END, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) |
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August 2, 2024 |
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July 28, 2023 |
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February 2, |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use asset |
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Goodwill |
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— |
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Intangible asset |
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Other assets |
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TOTAL ASSETS |
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$ |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Current portion of long-term debt |
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$ |
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$ |
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$ |
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Accounts payable |
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Lease liability – current |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term borrowings under ABL Facility |
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Long-term debt, net |
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Lease liability – long-term |
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Deferred tax liabilities |
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Other liabilities |
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TOTAL LIABILITIES |
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STOCKHOLDERS’ EQUITY |
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Common stock, par value $ |
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Additional paid-in capital |
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(Accumulated deficit) Retained earnings |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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( |
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TOTAL STOCKHOLDERS’ EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
3
LANDS’ END, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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26 Weeks Ended |
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(in thousands) |
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August 2, 2024 |
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July 28, 2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of debt issuance costs |
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Loss on disposal of property and equipment |
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Stock-based compensation |
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Deferred income taxes |
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Long-lived asset impairment |
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— |
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Other |
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( |
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( |
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Change in operating assets and liabilities: |
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Accounts receivable, net |
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Inventories, net |
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( |
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Accounts payable |
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( |
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Other operating assets |
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( |
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Other operating liabilities |
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( |
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( |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Sales of property and equipment |
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— |
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Purchases of property and equipment |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from borrowings under ABL Facility |
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Payments of borrowings under ABL Facility |
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( |
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( |
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Payments on term loan |
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( |
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( |
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Payments of debt issuance costs |
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( |
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( |
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Payments for taxes related to net share settlement of equity awards |
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( |
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( |
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Purchases and retirement of common stock, including excise tax paid |
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( |
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( |
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Net cash provided by (used in) financing activities |
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( |
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Effects of exchange rate changes on cash, cash equivalents and restricted cash |
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( |
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NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND |
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( |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD |
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$ |
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$ |
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SUPPLEMENTAL CASH FLOW DATA |
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Unpaid liability to acquire property and equipment |
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$ |
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$ |
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Income taxes paid (refunded) |
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$ |
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$ |
( |
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Interest paid |
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$ |
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$ |
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Operating lease right-of-use-assets obtained in exchange for lease liabilities |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
4
LANDS’ END, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the 26 weeks ended August 2, 2024
(Unaudited)
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Common Stock Issued |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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(in thousands) |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Equity |
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Balance at February 2, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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( |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Vesting of restricted shares |
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— |
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— |
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— |
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— |
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— |
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Common stock withheld related to net share |
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( |
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— |
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( |
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— |
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— |
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( |
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Purchases and retirement of common stock |
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( |
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( |
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( |
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( |
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— |
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( |
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Balance at May 3, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Vesting of restricted shares |
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( |
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— |
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— |
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— |
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Common stock withheld related to net share |
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( |
) |
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— |
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( |
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— |
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— |
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( |
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Purchases and retirement of common stock, including excise tax |
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( |
) |
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( |
) |
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( |
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( |
) |
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— |
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( |
) |
Balance at August 2, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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For the 26 weeks ended July 28, 2023
(Unaudited)
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Common Stock Issued |
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Additional |
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(Accumulated Deficit) Retained |
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Accumulated |
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Total |
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(in thousands) |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at January 27, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Vesting of restricted shares |
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( |
) |
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— |
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— |
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— |
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Common stock withheld related to net share |
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( |
) |
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— |
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( |
) |
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— |
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— |
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( |
) |
Purchases and retirement of common stock |
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( |
) |
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( |
) |
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( |
) |
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— |
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( |
) |
|
Balance at April 28, 2023 |
|
|
|
|
$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
|
|||||
Net loss |
|
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— |
|
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— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Vesting of restricted shares |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchases and retirement of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at July 28, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
LANDS’ END, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business
Lands’ End, Inc. (“Lands’ End” or the “Company”) is a leading digital retailer of solution-based apparel, swimwear, outerwear, accessories, footwear, home products and uniforms. Lands’ End offers products online at www.landsend.com, through third-party distribution channels, our own Company Operated stores and third-party license agreements. Lands’ End also offers products to businesses and schools, for their employees and students, through the Outfitters distribution channel. Lands’ End is a classic American lifestyle brand that creates solutions for life’s every journey. References to www.landsend.com do not constitute incorporation by reference of the information at www.landsend.com, and such information is not part of this Quarterly Report on Form 10-Q or any other filings with the SEC, unless otherwise explicitly stated.
Terms that are commonly used in the Company’s Notes to Condensed Consolidated Financial Statements are defined as follows:
6
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands’ End Annual Report on Form 10-K filed with the SEC on April 3, 2024.
Macroeconomic Challenges
Macroeconomic issues which impact consumer discretionary spending, such as realized inflation-based price increases and high interest rates have continued to have an impact on our business. Apparel purchases historically have been influenced by domestic and global economic conditions, which may negatively impact customer demand and may require higher levels of promotion in order to attract and retain customers. Additionally, the variable interest rates associated with our Debt Facilities are negatively affected by higher interest rate environments. Macroeconomic challenges may lead to increased cost of raw materials, packaging materials, labor, energy, fuel, debt and other inputs necessary for the production and distribution of our products.
Restructuring
During Fiscal 2023, the Company reduced approximately
The Company incurred $
Long-lived Asset Impairment Analysis
Property and equipment are subject to a review for impairment if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”) the Company reviewed the long-lived asset groups for impairment as of August 2, 2024.
During the 13 weeks ended August 2, 2024, the Company considered management’s decision to replace the existing information technology infrastructure with an enterprise resource planning (“ERP”) software system within the next 18 to 24 months to be a triggering event. The Company determined that certain long-lived assets, primarily capitalized internal-use software projects and computer software, would no longer be utilized or have future benefit with the planned ERP platform and recognized impairment in the amount of $
The Company Operated store long-lived asset group, including Operating right-of-use assets, are regularly reviewed for impairment indicators. Impairment is assessed at the individual store level which is the lowest level of identifiable cash flows and considers the estimated undiscounted cash flows over the asset’s remaining life. If estimated undiscounted cash flows are insufficient to recover the investment, an impairment loss is recognized equal to the difference between the estimated fair value of the asset and its
7
carrying value, net of salvage, and any costs of disposition. The fair value estimate is generally the discounted amount of estimated store-specific cash flows.
The Company reviewed the remaining long-lived asset groups for impairment as of August 2, 2024. The Company assessed the recoverability of our long-lived asset groups by comparing their projected undiscounted cash flows associated over remaining estimated useful lives of the primary asset in the long-lived asset group against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. As a result of the testing, the undiscounted cash flows of the remaining asset groups exceeded their respective carrying amounts resulting in no impairment as of August 2, 2024.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. The Company is currently assessing the impact of ASU 2023-07 on the Company’s Condensed Consolidated Financial Statement disclosures.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”), which includes requirements that an entity disclose specific categories in the rate reconciliation and provide additional information for reconciling items that are greater than five percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income rate. The standard also requires that entities disclose income (or loss) from continuing operations before income tax expense (or benefit) and income tax expense (or benefit) each disaggregated between domestic and foreign. ASU 2023-09 is effective for the annual periods beginning after December 15, 2024. The Company is currently assessing the impact of ASU 2023-09 on the Company’s Condensed Consolidated Financial Statement disclosures.
In March 2024, FASB issued ASU 2024-02, Codification Improvements—Amendments to Remove References to the Concepts Statements (“ASU 2024-02”), which is intended to simplify the Codification and draw a distinction between authoritative and non-authoritative literature. ASU 2024-02 is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted and can be applied on either a prospective or retroactive basis. The Company is currently assessing the impact of ASU 2024-02 on the Company’s Condensed Consolidated Financial Statements.
NOTE 3. LOSS PER SHARE
The numerator for both basic and diluted earnings (loss) per share is net income (loss) attributable to the Company. The denominator for basic earnings (loss) per share is based upon the number of weighted average shares of the Company’s common stock outstanding during the reporting periods. The denominator for diluted earnings (loss) per share is based upon the number of weighted average shares of the Company’s common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with ASC 260, Earnings Per Share. Potentially dilutive securities for the diluted earnings (loss) per share 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.
8
The following table summarizes the components of basic and diluted loss per share:
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands, except per share amounts) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive impact of stock awards |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Anti-dilutive shares excluded from diluted loss per common share calculation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock awards are considered anti-dilutive based on the application of the treasury stock method or in the event of a net loss.
NOTE 4. OTHER COMPREHENSIVE LOSS
Other comprehensive income (loss) encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments. Our foreign subsidiaries use their foreign currency as their functional currency. Functional currency assets and liabilities are translated into U.S. Dollars using exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates during the period. Resulting translation gains and losses are reported in other comprehensive income (loss), until the substantial liquidation of a subsidiary, at which time accumulated transactions gains or losses are reclassified into net income.
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||
Beginning balance: Accumulated other comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments (net of tax of ($ |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Ending balance: Accumulated other comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
NOTE 5. DEBT
ABL Facility
The Company’s $
9
is calculated from Eligible Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility.
The following table summarizes the Company’s ABL Facility borrowing availability:
|
|
August 2, 2024 |
|
July 28, 2023 |
|
February 2, 2024 |
||||||||||||
(in thousands) |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|||
ABL Facility limit |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|||
Borrowing Base |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Outstanding borrowings |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
||||
Outstanding letters of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
ABL Facility utilization at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
ABL Facility borrowing availability |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|||
Effective with the Fourth Amendment to the ABL Facility executed May 12, 2023, the benchmark interest rate was changed from LIBOR to SOFR plus an adjustment of
The ABL Facility fees include (i) commitment fees of
Long-Term Debt
On December 29, 2023, the Company entered into the Current Term Loan Facility which provides borrowings of $
The Current Term Loan Facility will mature on
10
The Company’s long-term debt consisted of the following:
|
|
August 2, 2024 |
|
July 28, 2023 |
|
February 2, 2024 |
||||||||||||
(in thousands) |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|||
Former Term Loan Facility |
|
$ |
— |
|
|
—% |
|
$ |
|
|
|
$ |
— |
|
|
—% |
||
Current Term Loan Facility |
|
|
|
|
|
|
— |
|
|
—% |
|
|
|
|
||||
Less: Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Less: Unamortized debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Long-term debt, net |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|||
The interest rates per annum applicable to the loans under the Current Term Loan Facility are based on a fluctuating rate of interest equal to, at the Company’s election, either (1) Term Loan Adjusted SOFR loan (subject to a
Effective with the First Amendment to the Former Term Loan Facility executed June 22, 2023, the interest rate benchmark changed from LIBOR to Term Loan Adjusted SOFR. The annual interest rate applicable to the loans under the Former Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Loan Adjusted SOFR rate plus
Both the Current and Former Term Loan Facilities contain customary agency fees.
Debt Facilities
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 Current Term Loan Facility is also secured by a second priority security interest in the same collateral, with certain exceptions.
The Current Term Loan Facility is also secured by a first priority security interest in certain property and assets, including certain fixed assets such as real estate, stock of subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is also secured by a second priority interest in the same collateral, with certain exceptions.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business.
The Current Term Loan Facility contains financial covenants, including a quarterly maximum total leverage ratio test and a monthly minimum liquidity test.
Under the ABL Facility, if excess availability falls below the greater of
11
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 August 2, 2024, the Company was in compliance with its financial covenants in the Debt Facilities.
Events of Default
The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
NOTE 6. STOCK-BASED COMPENSATION
The Company expenses the fair value of all stock awards over their requisite service period, ensuring that the amount of cumulative stock-based compensation expense recognized at any date is at least equal to the portion of the grant-date fair value of the award that is vested at that date. The Company has elected to adjust stock-based compensation expense for an estimated forfeiture rate for those shares not expected to vest and to recognize stock-based compensation expense on a straight-line basis for awards that only have a service requirement with multiple vest dates.
The Company has granted the following types of stock awards to employees at management levels and above, each of which are granted under the Company’s stockholder approved stock plans, other than inducement grants outside of the Company’s stockholder approved stock plans in accordance with Nasdaq Listing Rule 5635(c)(4):
12
The following table provides a summary of the Company’s stock-based compensation expense, which is included in Selling and administrative expense in the Condensed Consolidated Statements of Operations:
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||
Deferred awards |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Performance awards (1) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Option awards |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Deferred Awards
The following table provides a summary of the Deferred Awards activity for the 26 weeks ended August 2, 2024:
|
|
Deferred Awards |
|
|||||
(in thousands, except per share amounts) |
|
Number of |
|
|
Weighted Average |
|
||
Unvested Deferred Awards as of February 2, 2024 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited or expired |
|
|
( |
) |
|
|
|
|
Unvested Deferred Awards as of August 2, 2024 |
|
|
|
|
$ |
|
||
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $
Performance Awards
The following table provides a summary of the Performance Awards activity for the 26 weeks ended August 2, 2024:
|
|
Performance Awards |
|
|||||
(in thousands, except per share amounts) |
|
Number of |
|
|
Weighted Average |
|
||
Unvested Performance Awards as of February 2, 2024 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Change in estimate - performance |
|
|
( |
) |
|
|
|
|
Vested |
|
|
|
|
|
|
||
Forfeited or expired |
|
|
( |
) |
|
|
|
|
Unvested Performance Awards as of August 2, 2024 |
|
|
|
|
$ |
|
||
13
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $
Option Awards
The following table provides a summary of the Option Awards activity for the 26 weeks ended August 2, 2024:
|
|
Option Awards |
|
|||||
(in thousands, except per share amounts) |
|
Number of |
|
|
Weighted Average |
|
||
Option Awards outstanding as of February 2, 2024 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Exercised |
|
|
|
|
|
|
||
Forfeited |
|
|
|
|
|
|
||
Expired |
|
|
( |
) |
|
|
|
|
Option Awards outstanding as of August 2, 2024 |
|
|
|
|
$ |
|
||
The following table provides a summary of information about the Option Awards vested and expected to vest during the contractual term, as well as Option Awards exercisable as of August 2, 2024:
(in thousands, except contractual life and exercise price amounts) |
|
Option Awards |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate Intrinsic Value |
|
||||
Option Awards vested and expected to vest |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
Option Awards exercisable |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
Total unrecognized stock-based compensation expense related to Option Awards expected to vest was approximately $
NOTE 7. STOCKHOLDERS’ EQUITY
Share Repurchase Program
On June 28, 2022, the Company announced that its Board of Directors authorized the Company to repurchase up to $
On March 15, 2024, the Company announced that its Board of Directors authorized the Company to repurchase up to $
14
The following table summarizes the Company’s share repurchases for the 13 and 26 weeks ended August 2, 2024 (under the 2024 Share Repurchase Program) and July 28, 2023 (under the 2022 Share Repurchase Program):
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(Shares and $ in thousands except average per share cost) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||
Number of shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Average per share cost (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The Company retired all shares that were repurchased through the 2024 Share Repurchase Program and the 2022 Share Repurchase Program during the 26 weeks ended August 2, 2024 and July 28, 2023, respectively. 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 (Accumulated deficit) 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 (Accumulated deficit) Retained earnings. Shares purchased at a price less than that of initial issuance is charged only against Additional paid-in capital. The total cost of the broker commissions and excise tax is charged directly to (Accumulated deficit) Retained earnings. For the shares retired during the 13 and 26 weeks ended August 2, 2024, $
NOTE 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
February 2, 2024 |
|
|||
Deferred gift card revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accrued employee compensation and benefits |
|
|
|
|
|
|
|
|
|
|||
Reserve for sales returns and allowances |
|
|
|
|
|
|
|
|
|
|||
Deferred revenue |
|
|
|
|
|
|
|
|
|
|||
Accrued property, sales and other taxes |
|
|
|
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
|
|
|
|
|||
Total Accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|||
NOTE 9. FAIR VALUE MEASUREMENTS OF FINANCIAL ASSETS AND LIABILITIES
Cash and cash equivalents and restricted cash is reflected on the Condensed Consolidated Balance Sheets at fair value based on Level 1 inputs. Cash and cash equivalents and restricted cash amounts are valued based upon statements received from financial institutions. The fair value of restricted cash was $
Carrying amounts and fair values of long-term debt, including current portion, in the Condensed Consolidated Balance Sheets are as follows:
|
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
February 2, 2024 |
|
|||||||||||||||
(in thousands) |
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||||
Long-term debt, including current portion |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The Company’s valuation of long-term debt, including current portion, at fair value is considered a Level 3 instrument under the fair value hierarchy. The Company’s valuation techniques include the Black-Derman-Toy (“BDT”) model as well as market inputs from management. The BDT modeling approach is particularly relevant given the Current Term Loan Facility’s features, including the optional redemption provision. There were
15
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
NOTE 11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
NOTE 12. SEGMENT REPORTING
For the 26 weeks ended August 2, 2024, the Company’s operating segments consisted of: U.S. eCommerce, Europe 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
Lands’ End identifies
16
Net revenue is presented by distribution channel in the following tables:
|
|
13 Weeks Ended |
|
% of Net |
|
|
13 Weeks Ended |
|
% of Net |
|
||||
(in thousands) |
|
August 2, 2024 |
|
Revenue |
|
|
July 28, 2023 |
|
Revenue |
|
||||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
||||
U.S. eCommerce |
|
$ |
|
|
% |
|
$ |
|
|
% |
||||
International |
|
|
|
|
% |
|
|
|
|
% |
||||
Outfitters |
|
|
|
|
% |
|
|
|
|
% |
||||
Third Party |
|
|
|
|
% |
|
|
|
|
% |
||||
Retail |
|
|
|
|
% |
|
|
|
|
% |
||||
Total Net revenue |
|
$ |
|
|
|
|
$ |
|
|
|
||||
|
|
26 Weeks Ended |
|
% of Net |
|
|
26 Weeks Ended |
|
% of Net |
|
||||
(in thousands) |
|
August 2, 2024 |
|
Revenue |
|
|
July 28, 2023 |
|
Revenue |
|
||||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
||||
U.S. eCommerce |
|
$ |
|
|
% |
|
$ |
|
|
% |
||||
International |
|
|
|
|
% |
|
|
|
|
% |
||||
Outfitters |
|
|
|
|
% |
|
|
|
|
% |
||||
Third Party |
|
|
|
|
% |
|
|
|
|
% |
||||
Retail |
|
|
|
|
% |
|
|
|
|
% |
||||
Total Net revenue |
|
$ |
|
|
|
|
$ |
|
|
|
||||
NOTE 13. REVENUE
Net Revenue
Product Sales
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 expected to be received by the customer and for the Retail distribution channel is at the time of sale in the store. The Company recognizes revenue, including shipping and handling fees billed to customers, in the amount expected to be received when control of the Company’s products transfers to customers, and is presented net of various forms of promotions, which range from contractually fixed percentage price reductions to sales returns, discounts, and other incentives that may vary in amount. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available.
The Company’s revenue is disaggregated by distribution channel and geographic location. Revenue by distribution channel is presented in Note 12, Segment Reporting. Revenue by geographic location was:
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Licensing Agreements
The Company generates royalty revenue from licensing the right to use its trademarks to third parties. The licensing agreements generally are exclusive to a product category, selling channel and/or geography, have terms in excess of one year, provide for annual guaranteed minimum royalties and, in most cases, include renewal options. In certain agreements, the licensee pays the Company a fulfillment fee for licensed product sold on the Company’s website and fulfilled from the Company’s distribution center. The trademark royalty revenue and fulfillment fee are included in Net revenue and reported in the Third Party distribution channel. See Note 12, Segment Reporting.
17
In exchange for providing these rights, the license agreements require the licensees to pay the Company a trademark royalty based on net sales as defined in the license agreements. The Company recognizes sales-based royalty revenue at the later of (i) when the related sales of the licensed product occur, or (ii) when the performance obligation has been satisfied, when the Company expects the annual guaranteed minimums will be met, where such provisions exist. If a sales-based royalty is not ultimately expected to exceed a contractually guaranteed minimum royalty amount, the minimum is recognized straight-line as revenue over the contractual period, if all other criteria of revenue recognition have been met.
In certain agreements, the Company agreed to perform transitional activities, such as marketing costs, for the licensed products. The Company receives reimbursement for such costs. The amount of these reimbursements, which are recorded as a reduction of Selling and administrative expenses in the Condensed Consolidated Statements of Operations, for the 13 and 26 weeks ended August 2, 2024 was $
Contract Liabilities
Contract liabilities consist of payments received in advance of the transfer of control to the customer. As products are delivered and control transfers, the Company recognizes the deferred revenue in Net revenue in the Condensed Consolidated Statements of Operations.
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||
Deferred revenue beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Deferred revenue recognized in period |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Revenue deferred in period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deferred revenue end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenue from gift cards is recognized when (i) the gift card is redeemed by the customer for merchandise, or (ii) as gift card breakage, an estimate of gift cards which will not be redeemed where the Company does not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions. Gift card breakage is recorded within Net revenue in the Condensed Consolidated Statements of Operations. Prior to their redemption, gift cards are recorded as a liability and included within Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. The liability is estimated based on expected breakage that considers historical patterns of redemption.
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||
Balance as of beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Gift cards sold |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gift cards redeemed |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gift card breakage |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance as of end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Refund Liabilities
Refund liabilities, primarily associated with product sales returns and retrospective volume rebates, represent variable consideration and are estimated and recorded as a reduction to Net revenue based on historical experience. Refund liabilities, primarily associated with estimated product returns, were $
18
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 February 2, 2024 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:
19
Executive Overview
Description of the Company
Lands’ End is a leading digital retailer of solution-based apparel, swimwear, outerwear, accessories, footwear, home products and uniforms. We offer products online at www.landsend.com, through third-party distribution channels, our own Company Operated stores and third-party license agreements. We also offer products to businesses and schools, for their employees and students, through the Outfitters distribution channel. We are a classic American lifestyle brand that creates solutions for life’s every journey.
Lands’ End was founded in 1963 by Gary Comer and his partners to sell sailboat hardware and equipment by catalog. While our product focus has shifted significantly over the years, we have continued to adhere to our founder’s motto as one of our guiding principles: “Take care of the customer, take care of the employee and the rest will take care of itself.”
We have one external reportable segment and identify our operating segments according to how our business activities are managed and evaluated. Our operating segments consisted of: U.S. eCommerce, Europe 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:
Macroeconomic Challenges
Macroeconomic issues which impact consumer discretionary spending, such as realized inflation-based price increases and high interest rates, have continued to have an impact on our business. Apparel purchases historically have been influenced by domestic and global economic conditions, which may negatively impact customer demand and may require higher levels of promotion in order to attract and retain customers. Additionally, the variable interest rates associated with our Debt Facilities are negatively affected by higher interest rate environments. Macroeconomic challenges may lead to increased cost of raw materials, packaging materials, labor, energy, fuel, debt and other inputs necessary for the production and distribution of our products.
Restructuring
During Fiscal 2023, we reduced approximately 10% of our corporate office and Hong Kong sourcing office positions and incurred restructuring charges, primarily severance and benefit and other related costs. The reductions in the Hong Kong sourcing office
20
were organizational changes to move positions to our corporate headquarters to centralize product development to better align with our speed-to-market initiatives. The reductions in the corporate office positions were made to better align with the evolving needs of our business and to invest in key growth areas. For the 26 weeks ended August 2, 2024, we incurred restructuring charges, primarily severance and benefit costs, related to cost optimization of business operations and strategic initiatives.
We incurred $2.3 million and $0.4 million of restructuring costs during the Second Quarter 2024 and Second Quarter 2023, respectively. Restructuring costs of $2.7 million and $0.4 million were incurred Year-to-Date 2024 and Year-to-Date 2023, respectively, and were recorded in Other operating expense, net in the Condensed Consolidated Statements of Operations. As of August 2, 2024, approximately $2.9 million of the restructuring costs had yet to be paid and are included in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
Seasonality
We experience seasonal fluctuations in our Net revenue and operating results and historically have realized a significant portion of our net revenue and earnings for the year during our fourth fiscal quarter. We generated approximately 34.0% of our net revenue in the fourth quarters of Fiscal 2023 and Fiscal 2022.
Working capital requirements typically increase during the second and third quarters of the fiscal year as inventory builds to support peak selling periods and, accordingly, working capital requirements typically decrease during the fourth quarter of the fiscal year as inventory is sold. Cash provided by operating activities is typically higher in the fourth quarter of the fiscal year due to reduced working capital requirements during that period.
Results of Operations
The following tables set forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue:
|
|
13 Weeks Ended |
|
|||||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||||||||
Net revenue |
|
$ |
317,173 |
|
|
|
100.0 |
% |
|
$ |
323,363 |
|
|
|
100.0 |
% |
Cost of sales (exclusive of depreciation and amortization) |
|
|
165,288 |
|
|
|
52.1 |
% |
|
|
183,766 |
|
|
|
56.8 |
% |
Gross profit |
|
|
151,885 |
|
|
|
47.9 |
% |
|
|
139,597 |
|
|
|
43.2 |
% |
Selling and administrative |
|
|
135,510 |
|
|
|
42.7 |
% |
|
|
123,866 |
|
|
|
38.3 |
% |
Depreciation and amortization |
|
|
8,692 |
|
|
|
2.7 |
% |
|
|
9,543 |
|
|
|
3.0 |
% |
Other operating expense, net |
|
|
5,197 |
|
|
|
1.6 |
% |
|
|
390 |
|
|
|
0.1 |
% |
Operating income |
|
|
2,486 |
|
|
|
0.8 |
% |
|
|
5,798 |
|
|
|
1.8 |
% |
Interest expense |
|
|
10,447 |
|
|
|
3.3 |
% |
|
|
12,024 |
|
|
|
3.7 |
% |
Other (income), net |
|
|
(84 |
) |
|
|
(0.0 |
)% |
|
|
(169 |
) |
|
|
(0.1 |
)% |
Loss before income taxes |
|
|
(7,877 |
) |
|
|
(2.5 |
)% |
|
|
(6,057 |
) |
|
|
(1.9 |
)% |
Income tax (benefit) expense |
|
|
(2,626 |
) |
|
|
(0.8 |
)% |
|
|
1,961 |
|
|
|
0.6 |
% |
NET LOSS |
|
$ |
(5,251 |
) |
|
|
(1.7 |
)% |
|
$ |
(8,018 |
) |
|
|
(2.5 |
)% |
21
|
|
26 Weeks Ended |
|
|||||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||||||||
Net revenue |
|
$ |
602,644 |
|
|
|
100.0 |
% |
|
$ |
632,921 |
|
|
|
100.0 |
% |
Cost of sales (exclusive of depreciation and amortization) |
|
|
311,779 |
|
|
|
51.7 |
% |
|
|
355,387 |
|
|
|
56.2 |
% |
Gross profit |
|
|
290,865 |
|
|
|
48.3 |
% |
|
|
277,534 |
|
|
|
43.8 |
% |
Selling and administrative |
|
|
262,911 |
|
|
|
43.6 |
% |
|
|
242,380 |
|
|
|
38.3 |
% |
Depreciation and amortization |
|
|
17,697 |
|
|
|
2.9 |
% |
|
|
18,844 |
|
|
|
3.0 |
% |
Other operating expense, net |
|
|
5,538 |
|
|
|
0.9 |
% |
|
|
592 |
|
|
|
0.1 |
% |
Operating income |
|
|
4,719 |
|
|
|
0.8 |
% |
|
|
15,718 |
|
|
|
2.5 |
% |
Interest expense |
|
|
20,783 |
|
|
|
3.4 |
% |
|
|
24,307 |
|
|
|
3.8 |
% |
Other (income), net |
|
|
(172 |
) |
|
|
(0.0 |
)% |
|
|
(356 |
) |
|
|
(0.1 |
)% |
Loss before income taxes |
|
|
(15,892 |
) |
|
|
(2.6 |
)% |
|
|
(8,233 |
) |
|
|
(1.3 |
)% |
Income tax (benefit) expense |
|
|
(4,199 |
) |
|
|
(0.7 |
)% |
|
|
1,437 |
|
|
|
0.2 |
% |
NET LOSS |
|
$ |
(11,693 |
) |
|
|
(1.9 |
)% |
|
$ |
(9,670 |
) |
|
|
(1.5 |
)% |
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.
Definitions, Reconciliations and Uses of Non-GAAP Financial Measures
In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we report the following non-GAAP measures: Adjusted net income (loss) and Adjusted EBITDA. Adjusted net income (loss) is also expressed on a diluted per share basis.
We believe presenting non-GAAP financial measures provides useful information to investors, allowing them to assess how the business performed excluding the effects of significant non-recurring or non-operational amounts. We believe the use of the non-GAAP financial measures facilitates comparing the results being reported against past and future results by eliminating amounts that we believe are not comparable between periods and assists investors in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s own methods for evaluating business performance.
Our management uses Adjusted net income (loss) and Adjusted EBITDA to evaluate the operating performance of our business for comparable periods and to discuss our business with our Board of Directors, institutional investors and other market participants. Adjusted EBITDA is also used as the basis for a performance measure used in executive incentive compensation.
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 net income (loss) and Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as these measures may exclude a number of important cash and non-cash recurring items.
Adjusted net income (loss) is defined as net income (loss) excluding significant non-recurring or non-operational items as set forth below. Adjusted net income (loss) is also presented on a diluted per share basis. While Adjusted net income (loss) is a non-GAAP measurement, management believes that it is an important indicator of operating performance and useful to investors.
22
The following tables set forth, for the periods indicated, a reconciliation of Net loss to Adjusted net loss and Adjusted diluted net loss per share:
Unaudited |
|
13 Weeks Ended |
|
|||||
(in thousands, except per share amounts) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||
Net loss |
|
$ |
(5,251 |
) |
|
$ |
(8,018 |
) |
Long-lived asset impairment |
|
|
2,805 |
|
|
|
— |
|
Exit costs |
|
|
687 |
|
|
|
— |
|
Restructuring |
|
|
2,338 |
|
|
|
390 |
|
Lands’ End Japan closure |
|
|
— |
|
|
|
23 |
|
Tax effects on adjustments (1) |
|
|
(1,297 |
) |
|
|
(22 |
) |
ADJUSTED NET LOSS |
|
$ |
(718 |
) |
|
$ |
(7,627 |
) |
ADJUSTED DILUTED NET LOSS PER SHARE |
|
$ |
(0.02 |
) |
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
||
Diluted weighted average common shares outstanding |
|
|
31,376 |
|
|
|
32,117 |
|
Unaudited |
|
26 Weeks Ended |
|
|||||
(in thousands, except per share amounts) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||
Net loss |
|
$ |
(11,693 |
) |
|
$ |
(9,670 |
) |
Long-lived asset impairment |
|
|
2,805 |
|
|
|
— |
|
Exit costs |
|
|
687 |
|
|
|
— |
|
Restructuring |
|
|
2,680 |
|
|
|
390 |
|
Lands’ End Japan closure |
|
|
— |
|
|
|
99 |
|
Tax effects on adjustments (1) |
|
|
(1,384 |
) |
|
|
(41 |
) |
ADJUSTED NET LOSS |
|
$ |
(6,905 |
) |
|
$ |
(9,222 |
) |
ADJUSTED DILUTED NET LOSS PER SHARE |
|
$ |
(0.22 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
||
Diluted weighted average common shares outstanding |
|
|
31,407 |
|
|
|
32,280 |
|
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.
23
The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue and a reconciliation of Net loss to Adjusted EBITDA:
Unaudited |
|
13 Weeks Ended |
|
|||||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||||||||
Net loss |
|
$ |
(5,251 |
) |
|
|
(1.7 |
)% |
|
$ |
(8,018 |
) |
|
|
(2.5 |
)% |
Income tax benefit |
|
|
(2,626 |
) |
|
|
(0.8 |
)% |
|
|
1,961 |
|
|
|
0.6 |
% |
Interest expense |
|
|
10,447 |
|
|
|
3.3 |
% |
|
|
12,024 |
|
|
|
3.7 |
% |
Other (income), net |
|
|
(84 |
) |
|
|
(0.0 |
)% |
|
|
(169 |
) |
|
|
(0.1 |
)% |
Operating income |
|
|
2,486 |
|
|
|
0.8 |
% |
|
|
5,798 |
|
|
|
1.8 |
% |
Depreciation and amortization |
|
|
8,692 |
|
|
|
2.7 |
% |
|
|
9,543 |
|
|
|
3.0 |
% |
Long-lived asset impairment |
|
|
2,805 |
|
|
|
0.9 |
% |
|
|
— |
|
|
|
— |
% |
Exit costs |
|
|
687 |
|
|
|
0.2 |
% |
|
|
— |
|
|
|
— |
% |
Restructuring |
|
|
2,338 |
|
|
|
0.7 |
% |
|
|
390 |
|
|
|
0.1 |
% |
Lands’ End Japan closure |
|
|
— |
|
|
|
— |
% |
|
|
23 |
|
|
|
0.0 |
% |
Loss (gain) on disposal of property and equipment |
|
|
53 |
|
|
|
0.0 |
% |
|
|
(23 |
) |
|
|
(0.0 |
)% |
Other |
|
|
— |
|
|
|
— |
% |
|
|
94 |
|
|
|
0.0 |
% |
Adjusted EBITDA |
|
$ |
17,061 |
|
|
|
5.4 |
% |
|
$ |
15,825 |
|
|
|
4.9 |
% |
Unaudited |
|
26 Weeks Ended |
|
|||||||||||||
(in thousands) |
|
August 2, 2024 |
|
|
July 28, 2023 |
|
||||||||||
Net loss |
|
$ |
(11,693 |
) |
|
|
(1.9 |
)% |
|
$ |
(9,670 |
) |
|
|
(1.5 |
)% |
Income tax benefit |
|
|
(4,199 |
) |
|
|
(0.7 |
)% |
|
|
1,437 |
|
|
|
0.2 |
% |
Interest expense |
|
|
20,783 |
|
|
|
3.4 |
% |
|
|
24,307 |
|
|
|
3.8 |
% |
Other (income), net |
|
|
(172 |
) |
|
|
(0.0 |
)% |
|
|
(356 |
) |
|
|
(0.1 |
)% |
Operating income |
|
|
4,719 |
|
|
|
0.8 |
% |
|
|
15,718 |
|
|
|
2.5 |
% |
Depreciation and amortization |
|
|
17,697 |
|
|
|
2.9 |
% |
|
|
18,844 |
|
|
|
3.0 |
% |
Long-lived asset impairment |
|
|
2,805 |
|
|
|
0.5 |
% |
|
|
— |
|
|
|
— |
% |
Exit costs |
|
|
687 |
|
|
|
0.1 |
% |
|
|
— |
|
|
|
— |
% |
Restructuring |
|
|
2,680 |
|
|
|
0.4 |
% |
|
|
390 |
|
|
|
0.1 |
% |
Lands’ End Japan closure |
|
|
— |
|
|
|
— |
% |
|
|
99 |
|
|
|
0.0 |
% |
Loss on disposal of property and equipment |
|
|
52 |
|
|
|
0.0 |
% |
|
|
100 |
|
|
|
0.0 |
% |
Other |
|
|
— |
|
|
|
— |
% |
|
|
189 |
|
|
|
0.0 |
% |
Adjusted EBITDA |
|
$ |
28,640 |
|
|
|
4.8 |
% |
|
$ |
35,340 |
|
|
|
5.6 |
% |
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in five separate distribution channels for revenue reporting purposes: U.S. eCommerce, International, Outfitters, Third Party and Retail. A key measure in the evaluation of our business is revenue performance by distribution channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.
We use Net revenue to evaluate revenue performance for the U.S. eCommerce, International, Outfitters and Third Party distribution channels. We use GMV, which equals total order value of all merchandise sold to customers through business-to-consumer and business-to-business channels, as well as the retail value of the merchandise sold through third party distribution channels, as an important indicator of the performance of the comparable growth of the total brand. For our Retail distribution channel, we use Same Store Sales as a key measure in evaluating performance. A Company Operated store is included in U.S. Same Store Sales calculations when it has been open for at least 14 months. Online sales and sales generated through our in-store web portal are considered revenue in our U.S. eCommerce and are excluded from U.S. Same Store Sales.
24
Discussion and Analysis
Second Quarter 2024 compared with Second Quarter 2023
Gross Merchandise Value
Gross Merchandise Value (“GMV”) increased mid-single digits compared to Second Quarter 2023.
Net Revenue
Net revenue was $317.2 million for Second Quarter 2024, a decrease of $6.1 million or 1.9%, from $323.3 million during Second Quarter 2023.
U.S. eCommerce Net revenue was $188.3 million for Second Quarter 2024, a decrease of $7.6 million or 3.9%, from $195.9 million during Second Quarter 2023. The decrease in U.S. eCommerce was primarily driven by the transition of kids and footwear products from a direct to a license model, lower promotional activity and improved inventory management resulting in increased gross profit from higher gross margins. Excluding the impact of transitioning the kids and footwear products to licensing arrangements, U.S. eCommerce revenue increased by mid-single digits year-over-year.
International eCommerce Net revenue was $23.0 million for Second Quarter 2024, an increase of $0.2 million or 0.9%, from $22.8 million during Second Quarter 2023. The increase in International eCommerce was primarily driven by an increase in full price sales, lower promotional activity and improved inventory management resulting in increased gross profit from higher gross margins.
Outfitters Net revenue was $63.2 million for Second Quarter 2024, a decrease of $4.8 million or 7.1%, from $68.0 million during Second Quarter 2023. The school uniform channel delivered a strong start to back to school season with a mid-single digit revenue increase over last year. The business uniform channel decreased year-over-year primarily due to the timing changes with certain national accounts and some pricing resistance from smaller accounts as a result of macroeconomic challenges.
Third Party Net revenue was $30.1 million for Second Quarter 2024, an increase of $5.7 million or 23.4%, from $24.4 million during Second Quarter 2023. The increase was primarily due to revenue generated from licensing and wholesale arrangements.
Retail Net revenue was $12.6 million for Second Quarter 2024, an increase of $0.4 million or 3.3%, from $12.2 million during Second Quarter 2023. Our U.S. Company Operated stores experienced an increase of 11.7% in Same Store Sales as compared to Second Quarter 2023. On August 2, 2024 there were 24 U.S. Company Operated stores, compared to 27 U.S. Company Operated stores on July 28, 2023.
Gross Profit
Gross profit was $151.9 million for Second Quarter 2024, an increase of $12.3 million or 8.8% from $139.6 million during Second Quarter of 2023. Gross margin increased approximately 470 basis points to 47.9% in Second Quarter 2024, compared with 43.2% in Second Quarter 2023. The gross margin improvement was primarily driven by leveraging the strength in product solutions and newness across the channels, lower promotional activity, reduction in clearance inventory and improved supply chain costs.
Selling and Administrative Expenses
Selling and administrative expenses increased $11.6 million to $135.5 million or 42.7% of total Net revenue in Second Quarter 2024 compared with $123.9 million or 38.3% of Net revenue in Second Quarter 2023. The approximately 440 basis points increase was driven by higher digital marketing spend focused on new customer acquisition, third party professional services and higher incentive related personnel costs.
Depreciation and Amortization
Depreciation and amortization expense decreased $0.8 million to $8.7 million in Second Quarter 2024 compared with $9.5 million in Second Quarter 2023.
25
Other Operating Expense
Other operating expense, net was $5.2 million in Second Quarter 2024 compared to $0.4 million in Second Quarter 2023. The increase was primarily attributed to a $2.8 million non-cash charge related to long-lived asset impairment and $2.3 million of restructuring costs.
Operating Income (Loss)
As a result of above factors, Operating income was $2.5 million in Second Quarter 2024 compared to $5.8 million of Operating income in Second Quarter 2023.
Interest Expense
Interest expense was $10.4 million in Second Quarter 2024 compared to $12.0 million in Second Quarter 2023. The $1.6 million decrease was driven by lower ABL Facility interest related to lower average outstanding balances.
Other Expense (Income)
Other income was $0.1 million in Second Quarter 2024 compared to $0.2 million in Second Quarter 2023.
Income Tax (Benefit) Expense
We recorded an income tax benefit at an overall effective rate of 33.4% for the Second Quarter 2024 and an income tax expense at an overall effective rate of (32.4)% for the Second Quarter 2023. The overall effective tax rate for the Second Quarter 2024 varies from the U.S. federal statutory rate of 21% as a result of state taxes, non-deductible expenses, and the impact of stock-based compensation adjustments. The overall effective tax rate for the Second Quarter 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation.
Net Income (Loss)
As a result of the above factors, Net loss was $5.3 million and diluted net loss per share was $0.17 in Second Quarter 2024 compared with Net loss of $8.0 million and diluted net loss per share was $0.25 in Second Quarter 2023.
Adjusted Net Income (Loss)
Adjusted net loss was $0.7 million and Adjusted diluted net loss per share was $0.02 in Second Quarter 2024, driven by a non-cash charge related to long-lived asset impairment and restructuring costs, compared to Adjusted net loss of $7.6 million and Adjusted diluted net loss per share of $0.24 in Second Quarter 2023.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $17.1 million in Second Quarter 2024 and $15.8 million in Second Quarter 2023, respectively.
Year-to-Date 2024 compared with Year-to-Date 2023
Gross Merchandise Value
Gross Merchandise Value (“GMV”) increased low single digits compared to Year-to-Date 2023.
Net Revenue
Net revenue was $602.6 million for Year-to-Date 2024 a decrease of $30.3 million or 4.8% from $632.9 million during Year-to-Date 2023. Excluding the $29.6 million in revenue from inventory sales to Delta Air Lines at the conclusion of their five-year contract in the First Quarter 2023, Net revenue Year-to-Date 2024 decreased 0.1%.
U.S. eCommerce Net revenue was $358.9 million for Year-to-Date 2024, a decrease of $14.7 million or 3.9%, from $373.6 million during the Year-to-Date 2023. The decrease in U.S. eCommerce was primarily driven by the transition of kids and footwear
26
products from a direct to a license model, continued promotional productivity within swim, outerwear and newness in adjacent product categories and improved inventory management resulting in higher margins with lower clearance inventory sales. Excluding the impact of transitioning the kids and footwear products to licensing arrangements, U.S. eCommerce Year-to-Date 2024 revenue increased by mid-single digits year-over-year.
International eCommerce Net revenue was $47.9 million for Year-to-Date 2024, a decrease of $0.3 million or 0.6%, from $48.2 million during the Year-to-Date 2023. The decrease in International eCommerce was due to an increase in full price sales, lower promotional activity and improved inventory management resulting in increased gross profit from higher gross margins.
Outfitters Net revenue was $105.8 million for Year-to-Date 2024, a decrease of $36.2 million or 25.5%, from $142.0 million during the Year-to-Date 2023. Compared to the Year-to-Date 2023, the decrease was primarily driven by inventory sales to Delta Air Lines at the conclusion of their five-year contract in the First Quarter 2023. Excluding the $29.6 million revenue from the Delta Air Lines business, Net revenue for the Outfitters business decreased by 5.9%.
Third Party Net revenue was $67.6 million for Year-to-Date 2024, an increase of $20.2 million or 42.6% from $47.4 million during the Year-to-Date 2023. The increase was primarily due to revenue generated from licensing arrangements including $10.5 million of Lands’ End produced inventory sold to a licensee in First Quarter 2024 in connection with the transition of kids products from a direct to a license model. Online marketplaces saw increased gross profit from improved gross margins primarily driven by the expansion of the Company’s strategy to focus on higher quality sales.
Retail Net revenue was $22.4 million for Year-to-Date 2024, an increase of $0.6 million or 2.8%, from $21.8 million during the Year-to-Date 2023. Our U.S. Company Operated stores experienced an increase of 11.8% in Same Store Sales as compared to Year-to-Date 2023. On August 2, 2024 there were 24 U.S. Company Operated stores compared to 27 U.S. Company Operated stores on July 28, 2023.
Gross Profit
Gross profit was $290.9 million for Year-to-Date 2024, an increase of $13.4 million or 4.8% from $277.5 million during Year-to-Date 2023. Gross margin increased to 48.3% in Year-to-Date 2024, compared with 43.8% in Year-to-Date 2023. The 450 basis point improvement in gross margin was primarily driven by leveraging the strength in the swimwear, outerwear and newness in adjacent product categories across the channels, reduction in clearance inventory and improvements in supply chain costs for Year-to-Date 2024 compared to the prior year.
Selling and Administrative Expenses
Selling and administrative expenses increased $20.5 million to $262.9 million or 43.6% of total Net revenue in Year-to-Date 2024 compared with $242.4 million or 38.3% of Net revenue in Year-to-Date 2023. The approximately 530 basis point increase was driven by deleveraging from lower revenues, higher digital marketing spend focused on new customer acquisition, third party professional services and higher incentive related personnel costs.
Depreciation and Amortization
Depreciation and amortization expense was $17.7 million in Year-to-Date 2024, a decrease of $1.1 million or 5.9%, compared with $18.8 million in Year-to-Date 2023.
Other Operating Expense
Other operating expense, net was $5.5 million in Year-to-Date 2024, an increase of $4.9 million, compared with $0.6 million in Year-to-Date 2023. The increase was primarily attributed to a $2.8 million non-cash charge related to long-lived asset impairment and $2.7 million of restructuring costs.
Operating Income (Loss)
As a result of the above factors, Operating income was $4.7 million in Year-to-Date 2024 compared to Operating income of $15.7 million in Year-to-Date 2023.
27
Interest Expense
Interest expense was $20.8 million in Year-to-Date 2024 compared to $24.3 million in Year-to-Date 2023. The $3.5 million decrease was driven by lower ABL Facility interest related to lower average outstanding balances.
Other Expense (Income)
Other income was $0.2 million in Year-to-Date 2024 compared to $0.4 million in Year-to-Date 2023.
Income Tax (Benefit) Expense
We recorded an income tax benefit at an overall effective rate of 26.4% for Year-to-Date 2024 and an income tax expense at an overall effective rate of (17.5)% for Year-to-Date 2023. The overall effective tax rate for Year-to-Date 2024 varies from the U.S. federal statutory rate of 21% as a result of state taxes, non-deductible expenses, and the impact of stock-based compensation adjustments. The overall effective tax rate for Year-to-Date 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation.
Net Income (Loss)
As a result of the above factors, Net loss was $11.7 million and diluted loss per share was $0.37 in Year-to-Date 2024 compared with Net loss of $9.7 million and diluted loss per share of $0.30 in Year-to-Date 2023.
Adjusted Net Income (Loss)
As a result of the above factors, Adjusted net loss was $6.9 million and Adjusted diluted net loss per share was $0.22 in Year-to-Date 2024 compared with Adjusted net loss of $9.2 million and Adjusted diluted net loss per share of $0.29 in Year-to-Date 2023.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $28.6 million in Year-to-Date 2024 compared to $35.3 million in Year-to-Date 2023. Excluding the $13.5 million from the conclusion of the Delta Air Lines business in Year-to-Date 2023, Adjusted EBITDA increased by 31.3%.
Liquidity and Capital Resources
Liquidity
Our primary need for liquidity is to fund working capital requirements of our business, which are inventory purchases, payments on debt, capital expenditures 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 $20.0 million on August 2, 2024, 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.
ABL Facility
Our $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs and matures on July 29, 2026. The amount available to borrow is the lesser of (1) the Aggregate Commitments of $275.0 million (“ABL Facility Limit”) or (2) the Borrowing Base or Loan Cap which is calculated from Eligible Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility. The balance outstanding on August 2, 2024 and July 28, 2023 was $20.0 million and $70.0 million, respectively. The balance of outstanding letters of credit was $8.1 million and $8.6 million on August 2, 2024 and July 28, 2023,
28
respectively. The borrowing availability under the ABL Facility was $117.5 million and $128.8 million as of August 2, 2024 and July 28, 2023, respectively.
Effective with the Fourth Amendment to the ABL Facility executed May 12, 2023, the benchmark interest rate was changed from LIBOR to SOFR plus an adjustment of 0.10% for all loans (“ABL Adjusted SOFR”). Loan interest rates are selected at the borrower’s election, is either (1) ABL Adjusted SOFR, or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month ABL Adjusted SOFR rate plus 1.00%, or (c) the Wells Fargo “prime rate”. The borrowing margin for ABL Adjusted SOFR loans is (i) less than $95.0 million, 1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For base rate loans, the borrowing margin is (i) less than $95.0 million, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00% (“Applicable Borrowing Margin”). The Applicable Borrowing Margin for all loans is based upon the average daily total loans outstanding for the previous quarter. The Fourth Amendment had no material interest rate impact.
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, (ii) customary letter of credit fees and (iii) customary annual agent fees. As of August 2, 2024, we had $20.0 million borrowings outstanding under the ABL Facility.
Long-Term Debt
On December 29, 2023, we entered into the Current Term Loan Facility which provides borrowings of $260.0 million, the proceeds of which were used to repay all of the indebtedness under the Former Term Loan Facility and to pay fees and expenses in connection with the financing. Origination costs, including a 3% original issue discount of $7.8 million and debt origination fees of $3.8 million, were incurred in connection with entering into the Current Term Loan Facility.
The Current Term Loan Facility will mature on December 29, 2028, and will amortize at a rate equal to 1.25% per quarter. Depending upon the Company’s Total Leverage Ratio, as defined in the Current Term Loan Facility, mandatory prepayments in an amount equal to a percentage of the Company’s excess cash flows in each fiscal year, ranging from 0% to 75% are required. The Current Term Loan Facility also has typical prepayment requirements for the proceeds of certain asset sales, casualty events and extraordinary receipts. Voluntary prepayment and certain mandatory prepayments made (i) on or before December 29, 2024 would result in a prepayment premium equal to 3% of the principal amount of the loan prepaid plus a yield maintenance fee, (ii) between December 30, 2024 and December 29, 2025 would result in a prepayment premium equal to 2% of the principal amount of the loan prepaid, (iii) between December 30, 2025 and December 29, 2026, would result in a prepayment premium equal to 1% of the principal amount of the loan prepaid, (iv) between December 30, 2026 and December 29, 2027, would result in a prepayment premium equal to 0.5% of the principal amount of the loan prepaid and (v) thereafter no prepayment premium is due.
The interest rates per annum applicable to the loans under the Current Term Loan Facility are based on a fluctuating rate of interest equal to, at the Company’s election, either (1) Term Loan Adjusted SOFR loan (subject to a 2% floor) plus an applicable margin, or (2) an alternative base rate loan plus an applicable margin. The applicable margin is based on the Company’s net leverage and will be, (i) for Term Loan Adjusted SOFR loans, 8.25% per annum if the total leverage ratio is greater than or equal to 2.75:1.00, 8.00% per annum if the total leverage ratio is less than 2.75:1.00 but greater than or equal to 2.25:1.00, and 7.75% per annum if the total leverage ratio is less than 2.25:1.00 and (ii) for base rate loans, 7.25% per annum if the total leverage ratio is greater than or equal to 2.75:1.00, 7.00% per annum if the total leverage ratio is less than 2.75:1.00 but greater than or equal to 2.25:1.00, and 6.75% per annum if the total leverage ratio is less than 2.25:1.00. In each case, the net leverage is determined as of the last day of each applicable measurement period.
Effective with the First Amendment to the Former Term Loan Facility executed June 22, 2023, the interest rate benchmark changed from LIBOR to Term Loan Adjusted SOFR. The annual interest rate applicable to the loans under the Former Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Loan Adjusted SOFR rate 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 was to be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month Term Loan Adjusted SOFR rate plus 1.00% per annum) plus 8.75%.
Both the Current and Former Term Loan Facilities contain customary agency fees.
29
Debt Facilities
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 Current Term Loan Facility is also secured by a second priority security interest in the same collateral, with certain exceptions.
The Current Term Loan Facility is also secured by a first priority security interest in certain property and assets, including certain fixed assets such as real estate, stock of subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is also secured by a second priority interest in the same collateral, with certain exceptions.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business.
The Current Term Loan Facility contains financial covenants, including a quarterly maximum total leverage ratio test and a monthly minimum liquidity test.
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 August 2, 2024, 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.
Cash Flows and Capital Expenditures
Cash Flows from Operating Activities
Net cash provided by operating activities was $4.9 million during Year-to-Date 2024 compared to $54.8 million during Year-to-Date 2023. Through our concerted efforts to decrease inventory levels during 2023, we provided cash of $30.4 million through the end of Second Quarter 2023. We have maintained our lower inventory level realized at the end of Fiscal 2023 through efficient inventory management and therefore we used cash of $10.3 million through the end of Second Quarter 2024.
Cash Flows from Investing Activities
Net cash used in investing activities was $11.5 million and $22.9 million during Year-to-Date 2024 and Year-to-Date 2023, respectively. Cash used in investing activities for both periods was primarily used for investments to update our digital information technology infrastructure. The decrease in Year-to-Date 2024 was a result of the timing of capitalized expenditures in the second half of Fiscal 2023 and First Quarter 2024.
For Fiscal 2024, we plan to invest approximately $35.0 million in capital expenditures for strategic investments and infrastructure, primarily in technology and general corporate needs.
30
Cash Flows from Financing Activities
Net cash provided by financing activities was $6.9 million during Year-to-Date 2024, compared with net cash used in financing activities of $44.9 million during Year-to-Date 2023. The increase in net cash provided by financing activities is primarily due to borrowings on the ABL Facility.
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 February 2, 2024.
Financial Instruments with Off-Balance-Sheet Risk
The ABL Facility is available for working capital and other general corporate liquidity needs. The balance outstanding on August 2, 2024 and July 28, 2023 was $20.0 million and $70.0 million, respectively. The balance of outstanding letters of credit was $8.1 million and $8.6 million on August 2, 2024 and July 28, 2023, 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 February 2, 2024. There have been no significant changes in our critical accounting policies or their application since February 2, 2024.
Recent Accounting Pronouncements
See Part I, Item 1, Note 2, Recently Issued Accounting Pronouncements Not Yet Adopted, of the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.
31
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 GMV, net sales, gross margin, operating expenses, operating income, net income, adjusted 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 February 2, 2024 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
The Company’s international subsidiaries operate with functional currencies other than the U.S. dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. dollars, the Company must translate all components of these financial statements from the functional currencies into U.S. dollars at exchange rates in effect during or at the end of the reporting period. Net revenue generated from the International distribution channel represented approximately 8% of our total Net revenue during the Year-to-Date 2024. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of net revenue, expenses, assets and liabilities. Assuming a 10% change in foreign currency exchange rates, our Net revenue for Year-to-Date 2024 would have increased or decreased by approximately $4.8 million. Translation gains or losses, which are recorded in other comprehensive income or loss, result from translation of the assets and liabilities of our international subsidiaries into U.S. dollars. Foreign currency translation losses, net, for Year-to-Date 2024 totaled approximately $0.2. million related to our international subsidiaries in United Kingdom and Germany. Additionally, the Company has foreign currency denominated intercompany receivables and payables that when settled result in a transaction gain or loss. A 10% change in foreign currency exchanges rates would not result in a significant transaction gain or loss in earnings. The Company does not utilize financial instruments for trading purposes or hedging and have not used any derivative financial instruments to limit foreign currency exchange rate exposures. The Company does not consider our foreign earnings to be permanently reinvested.
As of August 2, 2024, the Company had $10.7 million of cash and cash equivalents denominated in foreign currency, principally in euro, British pound sterling and Hong Kong dollar.
Interest Rate Risk
The Company is subject to interest rate risk with the Current 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 2.00% SOFR floor) associated with the Current 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.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our 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 Chief Financial Officer have concluded that, as of August 2, 2024, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the most recently completed fiscal quarter ended August 2, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
As disclosed in the Company’s Annual Report on Form 10-K for the year ended February 2, 2024, Lands’ End is the defendant in three separate lawsuits, each of which allege adverse health events and personal property damage as a result of wearing uniforms manufactured by Lands’ End: (1) Gilbert et al. v. Lands’ End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-00823-JDP, complaint filed October 3, 2019; (2) Andrews et al. v. Lands’ End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-01066-JDP, complaint filed on December 31, 2019, on behalf of 521 named plaintiffs, later amended to include 1,089 named plaintiffs; and (3) Davis et al. v. Lands’ End, Inc. and Lands’ End Business Outfitters, Inc., United States District Court for the Western District of Wisconsin, Case No. 3:20-cv-00195, complaint filed on March 4, 2020. Plaintiffs in Gilbert, Andrews, and Davis seek nationwide class certification on behalf of similarly situated Delta employees.
By order dated April 20, 2020, the Court consolidated the Gilbert and Andrews cases (the “Consolidated Wisconsin Action”) and stayed the Davis case. Plaintiffs in the Consolidated Wisconsin Action and Davis each assert that the damages sustained by the members of the proposed class exceed $5,000,000. Plaintiffs in each case seek damages for personal injuries, pain and suffering, severe emotional distress, financial or economic loss, including medical services and expenses, lost income and other compensable injuries. Plaintiffs in the Consolidated Wisconsin Action seek class certification with respect to performance of the uniforms and warranty claims and maintain individual claims for personal injury by numerous named plaintiffs.
On August 18, 2021, the Court ruled on several pending motions in the Consolidated Wisconsin Action. The Court denied Plaintiffs’ motion for class certification with respect to performance of the uniforms and warranty claims. The Court denied Plaintiffs’ motion for partial summary judgment regarding crocking claims and granted Lands’ End’s motion for partial summary judgment related to certain warranty claims. In addition, giving effect to both the addition and voluntary dismissal of individual plaintiffs over the course of the litigation, the number of individual plaintiffs had been reduced from 1,089 to 603 as of August 18, 2021. On September 1, 2021, Plaintiffs filed a Rule 23(f) petition, seeking interlocutory review of the Court’s decision denying class certification. On September 22, 2021, the U.S. Court of Appeals for the Seventh Circuit denied plaintiffs’ petition.
On July 8, 2022, the Court issued an Opinion and Order in the Consolidated Wisconsin Action (the “July 8 Opinion”), ruling in the Company’s favor on several additional pending motions. The Court granted the Company’s motion to exclude Plaintiffs’ expert opinions because the opinions were not based on reliably applied and scientifically valid methods. Accordingly, because Plaintiffs failed to submit evidence sufficient to show that the uniforms were defective or that a defect in the uniforms caused Plaintiffs’ alleged health problems, the Court granted the Company’s motion for summary judgement on Plaintiffs’ personal injury claims.
After giving effect to the July 8 Opinion, the remaining claims under the Consolidated Wisconsin Action related to claims for property damage and breach of warranty. Following these rulings and an order of the court dated December 1, 2022, 277 named Plaintiffs remained in the case who claim they have suffered personal property damage as a result of dye transferring to personal items, with aggregate claims of approximately $110,000 in damages. The Court set a deadline for the parties to voluntarily resolve these remaining outstanding claims, and on July 19, 2023 the parties reported to the Court that they had reached a settlement in principle of the matter, and subsequently entered into a Confidential Settlement, fully resolving the outstanding property damage claims, which were the only remaining claims in the action.
Following the entry of the Final Order by the Court on October 12, 2023, Plaintiffs filed an appeal to the Seventh Circuit. On November 13, 2023, the Court of Appeals for the Seventh Circuit issued an Order suspending the briefing schedule pending a remand to the district court for the limited purpose of issuing a revised final judgement order. On February 15, 2024, the Court of Appeals for the Seventh District remanded the case to the District Court for entry of a final judgement. On February 20, 2024, the District Court entered final judgement in favor of Lands’ End. On March 18, 2024, the Court of Appeals for the Seventh Circuit issued a briefing schedule. All briefs have been filed and the parties await the decision of the appellate court. Lands’ End continues its vigorous defense of this case and believes the claims are without merit.
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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 February 2, 2024, filed with the SEC on April 3, 2024.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents a month-to-month summary of information with respect to purchases of common stock made during Second Quarter 2024 pursuant to the 2024 Share Repurchase Program announced on March 15, 2024:
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 (3) |
|
||||
May 4 - May 31 |
|
|
1,500 |
|
|
$ |
13.48 |
|
|
|
1,500 |
|
|
$ |
23,967 |
|
June 1 - July 5 |
|
|
152,478 |
|
|
$ |
13.75 |
|
|
|
152,478 |
|
|
$ |
21,984 |
|
July 6 - August 2 |
|
|
99,942 |
|
|
$ |
16.16 |
|
|
|
99,942 |
|
|
$ |
20,256 |
|
Total |
|
|
253,920 |
|
|
$ |
14.70 |
|
|
|
253,920 |
|
|
|
|
|
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the fiscal quarter ended August 2, 2024, none of the Company’s directors or executive officers
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ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
Exhibit Number |
|
Exhibit Description |
|
|
|
|
Amended and Restated Certificate of Incorporation of Lands’ End, Inc. (incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K filed by Lands’ End, Inc. on March 24, 2022 (File No. 001-09769)). |
|
|
|
|
|
Amended and Restated Bylaws of Lands’ End, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Lands’ End, Inc. on April 8, 2014 (File No. 001-09769)). |
|
|
|
|
|
Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.* |
|
|
|
|
|
Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.* |
|
|
|
|
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Document* |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document* |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document*
|
104 |
|
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)* |
* Filed herewith.
** Furnished herewith.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Lands’ End, Inc.
(Registrant)
By: |
/s/ Bernard McCracken |
|
Name: |
Bernard McCracken |
|
Title: |
Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
|
Date: September 5, 2024
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