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Lands' End Announces Second Quarter of Fiscal 2014 Results

DODGEVILLE, Wis., Sept. 10, 2014 (GLOBE NEWSWIRE) -- Lands' End, Inc. (Nasdaq:LE) today announced financial results for the second quarter ended August 1, 2014.

Second Quarter Highlights:

  • Merchandise sales and services, net increased 5.4% to $347.2 million from the second quarter last year. This was comprised of an increase in the Direct segment of 7.1% to $292.6 million and a decrease in the Retail segment of 2.9% to $54.6 million. Same store sales increased 2.8%.
  • Gross margin increased 310 basis points to 48.5% from the second quarter last year.
  • Selling and administrative expenses increased 9.8% to $138.3 million from the second quarter last year and included approximately $3.8 million of incentive compensation expense and $2.9 million of stand-alone public company related costs compared with a $2.4 million reversal of incentive compensation expense and no stand-alone public company related costs in the second quarter last year.
  • Operating income increased 37.6% to $25.3 million from the second quarter last year.
  • Net income increased 4.9% to $11.8 million from the second quarter last year and included interest expense of $6.2 million compared with no interest expense in the second quarter last year.
  • Diluted earnings per share were $0.37 in the second quarter compared with $0.35 last year
  • Adjusted EBITDA1 increased 26.6% to $30.1 million from the second quarter last year.

Edgar Huber, Lands' End's President and Chief Executive Officer, stated, "We are pleased with our second quarter results and our progress towards growing the business and building Lands' End into a global lifestyle brand. While the overall retail environment remained challenging, we continued to see positive customer response to our merchandising and marketing initiatives and remain focused on improving the contemporary relevance of the Lands' End brand. Improved merchandise assortment, modern creative presentation, better inventory management and continued expense controls all contributed to another quarter of strong sales and margin increases. In the second quarter, merchandise sales and services revenue increased 5.4% to $347.2 million while gross margin improved 310 basis points to 48.5% and operating income increased 37.6% to $25.3 million. Lands' End has now achieved double digit year-over-year Adjusted EBITDA growth for more than four consecutive quarters. We believe we are well positioned to continue executing against our strategic initiatives to drive long-term sales and earnings growth."

Second Quarter Results

Merchandise sales and services, net increased 5.4% to $347.2 million in the second quarter of 2014 from $329.6 million in the second quarter of 2013. Merchandise sales and services, net in the Direct segment increased 7.1% to $292.6 million driven by growth in all direct businesses due to improved sell through of current season merchandise. Merchandise sales and services, net in the Retail segment decreased 2.9% to $54.6 million driven by a decrease in the number of Lands' End Shops at Sears and a decrease in Shop Your Way redemption credits resulting from the commercial agreements entered into with Sears Holdings Corporation and its subsidiaries as part of the Company's separation, partially offset by an increase in same store sales. Same store sales in the Retail segment increased 2.8%, driven by higher sales in the Company's Lands' End Shops at Sears. On August 1, 2014, the Company operated 247 Lands' End Shops at Sears and 14 Lands' End Inlet stores.

Gross profit increased 12.5% to $168.4 million and gross margin increased 310 basis points to 48.5% in the second quarter of 2014 compared with $149.7 million and 45.4%, respectively, in the second quarter of 2013. The increase in gross margin was driven by increases in gross margin in the Direct segment, which improved 320 basis points to 49.2%, and in the Retail segment of 200 basis points to 44.7%. The Gross margin increases in both the Direct and Retail segments were attributable to improved merchandise assortment architecture and a more targeted promotional strategy.

Selling and administrative expenses increased 9.8% to $138.3 million in the second quarter of 2014 from $125.9 million in the second quarter of 2013. The second quarter of 2014 included approximately $3.8 million of incentive compensation expenses and $2.9 million of stand-alone public company related expenses. In the second quarter of 2013, the company had a $2.4 million reversal of incentive compensation expenses due to changes in the estimated annual incentive compensation and no stand-alone public company related expenses. The net increase in stand-alone public company and incentive compensation related expenses in the second quarter of 2014 from the second quarter of 2013 was approximately $9.1 million.

Depreciation and amortization expense decreased 9.7% to $4.8 million in the second quarter of 2014 from $5.3 million in the second quarter of 2013 primarily attributable to an increase in fully depreciated assets.

As a result of the above factors, Operating income in the second quarter of 2014 increased 37.6% to $25.3 million from $18.4 million in the second quarter of 2013.

Interest expense was $6.2 million in the second quarter of 2014 and was attributable to higher debt levels and costs related to the issuance of the term loan used to pay a $500 million dividend to a subsidiary of Sears Holdings Corporation immediately prior to the separation.

Income tax expense was $7.5 million for the second quarter of 2014 compared with $7.1 million in the second quarter of 2013. The effective tax rate was 38.6% in the second quarter of 2014 compared with 38.7% in the second quarter of 2013.

Net income increased 4.9% to $11.8 million, or $0.37 per diluted share, in the second quarter of 2014 compared with $11.3 million, or $0.35 per diluted share, in the second quarter of 2013.

Adjusted EBITDA1 increased 26.6% to $30.1 million in the second quarter of 2014 from $23.8 million in the second quarter of 2013.

Balance Sheet and Cash Flow Highlights

Cash was $132.8 million on August 1, 2014 compared to $28.3 million on August 2, 2013. Net cash provided by operations for the 26 weeks ended August 1, 2014 was $79.2 million more than the same period last year due to:

  • Improved inventory management
  • The net effect of changes in settlement methods with our former parent company and certain suppliers resulting from the separation
  • Increased Operating income
  • Offset by interest payments on debt

Inventory decreased 11.8% to $366.2 million on August 1, 2014 from $415.2 million on August 2, 2013.

The net effect of changes in settlement methods with our former parent company and certain suppliers included approximately $35 million in Accounts payable less $5 million in Accounts receivable as of August 1, 2014. These items would have been included in equity as part of Net parent company investment prior to our separation April 4, 2014 from Sears Holdings Corporation.

The Company had $163.7 million of availability under its asset-based senior secured credit facility and had long-term debt of $508.6 million as of August 1, 2014.

About Lands' End, Inc.

Lands' End, Inc. (Nasdaq:LE) is a leading multi-channel retailer of casual clothing, accessories, footwear and home products. We offer products through catalogs, online at www.landsend.com and affiliated specialty and international websites, and through retail locations, primarily at Lands' End Shops at Sears® and standalone Lands' End Inlet® Stores. We are a classic American lifestyle brand with a passion for quality, legendary service and real value, and seek to deliver timeless style for men, women, kids and the home.

Forward-Looking Statements

This press release contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, without limitation, information concerning our future financial performance, business strategy, plans, goals and objectives. Statements preceded or followed by, or that otherwise include, the words "believes," "expects," "anticipates," "intends," "project," "estimates," "plans," "forecast," "is likely to" and similar expressions or future or conditional verbs such as "will," "may," "would," "should" and "could" are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that customers want to purchase; changes in customer preference for our branded merchandise; customers' use of our digital platform; the success of our overall marketing strategies; our dependence on information technology and a failure of information technology systems, including with respect to our e-commerce operations, or an inability to upgrade or adapt our systems; fluctuations and increases in the costs of raw materials; impairment of our relationships with our vendors; our failure to maintain the security of customer, employee or company information; our failure to compete effectively in the apparel industry; the performance of our "store within a store" business model; if Sears, Roebuck and Co. sells or disposes of its retail stores or if its retail business does not attract customers or does not adequately promote the Lands' End Shops at Sears; legal, regulatory, economic and political risks associated with international trade and those markets in which we conduct business and source our merchandise; our failure to protect or preserve the image of our brands and our intellectual property rights; increases in postage, paper and printing costs; failure by third parties who provide us with services in connection with certain aspects of our business to perform their obligations; our failure to timely and effectively obtain shipments of products from our vendors and deliver merchandise to our customers; reliance on promotions and markdowns to encourage consumer purchases; our failure to efficiently manage inventory levels; unseasonal or severe weather conditions; the seasonal nature of our business; the adverse effect on our reputation if our independent vendors do not use ethical business practices or comply with applicable laws and regulations; assessments for additional state taxes; our exposure to periodic litigation and other regulatory proceedings, including with respect to product liability claims; incurrence of charges due to impairment of goodwill, other intangible assets and long-lived assets; our failure to retain our executive management team and to attract qualified new personnel; the impact on our business of adverse worldwide economic and market conditions, including economic factors that negatively impact consumer spending on discretionary items; the inability of our past performance generally, as reflected on our historical financial statements, to be indicative of our future performance; the impact of increased costs due to a decrease in our purchasing power following the separation from Sears Holdings and other losses of benefits associated with being a subsidiary of Sears Holdings; the failure of Sears Holdings or its subsidiaries to perform under various transaction agreements that have been executed in connection with the separation or our failure to have necessary systems and services in place when certain of the transaction agreements expire; potential indemnification liabilities to Sears Holdings pursuant to the separation and distribution agreement; our inability to engage in certain corporate transactions after the separation; our difficulty in operating as a separate entity following the separation; our failure to achieve some or all of the expected benefits of the separation, and adverse effects of the separation on our business; potential liabilities under fraudulent conveyance and transfer laws and legal capital requirements; increases in our expenses and administrative burden in relation to becoming a public company, in particular to bring us into compliance with certain provisions of the Sarbanes-Oxley Act of 2002; and other risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended January 31, 2014. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law.

-Financial Tables Follow-

LANDS' END, INC.
Condensed Consolidated and Combined Balance Sheets
(Unaudited)
(in thousands, except share data) August 1,
2014
August 2,
2013
January 31,
2014
ASSETS
Current assets
Cash $ 132,837 $ 28,299 $ 22,411
Restricted cash 3,300 3,300 3,300
Accounts receivable, net 24,818 18,046 33,617
Inventories, net 366,192 415,208 369,928
Prepaid expenses and other current assets 28,060 27,382 21,993
Total current assets 555,207 492,235 451,249
Property and equipment 98,574 101,276 101,096
Goodwill 110,000 110,000 110,000
Intangible assets, net 530,027 532,656 531,342
Other assets 23,286 670 588
TOTAL ASSETS $ 1,317,094 $ 1,236,837 $ 1,194,275
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 163,249 $ 139,614 $ 115,387
Deferred tax liabilities 3,681 6,493 4,019
Other current liabilities 97,845 75,558 83,955
Total current liabilities 264,775 221,665 203,361
Long-term debt 508,563
Long-term deferred tax liabilities 170,461 195,303 195,534
Other liabilities 15,839 3,197 3,066
TOTAL LIABILITIES 959,638 420,165 401,961
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $0.01- authorized: 480,000,000 shares; issued and outstanding: 31,956,521 320
Additional paid-in capital 340,958
Retained earnings 17,791
Net parent company investment 821,002 794,309
Accumulated other comprehensive loss (1,613) (4,330) (1,995)
Total stockholders' equity 357,456 816,672 792,314
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,317,094 $ 1,236,837 $ 1,194,275

LANDS' END, INC.
Condensed Consolidated and Combined Statements of Comprehensive Operations
(Unaudited)
13 Weeks Ended 26 Weeks Ended
(in thousands except per share data) August 1, 2014 August 2, 2013 August 1, 2014 August 2, 2013
REVENUES
Merchandise sales and services, net $ 347,222 $ 329,561 $ 677,705 $ 648,596
COSTS AND EXPENSES
Cost of sales (excluding depreciation and amortization) 178,816 179,887 347,277 344,334
Selling and administrative 138,283 125,889 276,489 262,865
Depreciation and amortization 4,825 5,346 9,827 10,998
Other operating expense, net 52 20 52
Total costs and expenses 321,924 311,174 633,613 618,249
Operating income 25,298 18,387 44,092 30,347
Interest expense 6,205 8,130
Other income, net 203 22 340 23
Income before income taxes 19,296 18,409 36,302 30,370
Income tax expense 7,451 7,120 13,589 11,745
NET INCOME $ 11,845 $ 11,289 $ 22,713 $ 18,625
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments (497) (364) 382 (1,169)
COMPREHENSIVE INCOME $ 11,348 $ 10,925 $ 23,095 $ 17,456
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS
Basic: $ 0.37 $ 0.35 $ 0.71 $ 0.58
Diluted: $ 0.37 $ 0.35 $ 0.71 $ 0.58
Basic weighted average common shares outstanding 31,957 31,957 31,957 31,957
Diluted weighted average common shares outstanding 31,962 31,957 31,959 31,957

Use and Definition of Non-GAAP Financial Measures

1Adjusted EBITDA-In addition to our Net income determined in accordance with accounting principles generally accepted in the United States ("GAAP"), for purposes of evaluating operating performance, we use an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), which is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our business, as well as for executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance, and useful to investors, because:

  • EBITDA excludes the effects of certain on-going financing and investing activities from earnings by eliminating the effects of interest and depreciation costs.
  • Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations. For the 13 and 26 weeks ended August 1, 2014 and August 2, 2013, we excluded the loss on disposal of property and equipment as management considers the gains or losses on disposal of assets to result from investing decisions rather than ongoing operations.

LANDS' END, INC.
Adjusted EBITDA Reconciliation
(Unaudited)
13 Weeks Ended
August 1, 2014 August 2, 2013
(in thousands)
$'s
% of
Net Sales

$'s
% of
Net Sales
Net income $ 11,845 3.4% $ 11,289 3.4%
Income tax expense 7,451 2.1% 7,120 2.2%
Other income, net (203) (0.1) (22) —%
Interest expense 6,205 1.8% —%
Operating income 25,298 7.3% 18,387 5.6%
Depreciation and amortization 4,825 1.4% 5,346 1.6%
Loss on disposal of property and equipment —% 52 —%
Adjusted EBITDA $ 30,123 8.7% $ 23,785 7.2%
26 Weeks Ended
August 1, 2014 August 2, 2013
(in thousands)
$'s
% of
Net Sales

$'s
% of
Net Sales
Net income $ 22,713 3.4% $ 18,625 2.9%
Income tax expense 13,589 2.0% 11,745 1.8%
Other income, net (340) (0.1) (23) —%
Interest expense 8,130 1.2% —%
Operating income 44,092 6.5% 30,347 4.7%
Depreciation and amortization 9,827 1.5% 10,998 1.7%
Loss on disposal of property and equipment 20 —% 52 —%
Adjusted EBITDA $ 53,939 8.0% $ 41,397 6.4%

LANDS' END, INC.
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)
26 Weeks Ended
(in thousands) August 1, 2014 August 2, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,713 $ 18,625
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,827 10,998
Amortization of debt issuance costs 621
Loss on disposal of property and equipment 20 52
Stock-based compensation 782
Deferred income taxes 4,250 3,063
Change in operating assets and liabilities:
Inventories 4,801 (38,486)
Accounts payable 50,319 28,765
Other operating assets 9,012 7,443
Other operating liabilities 2,842 (4,499)
Net cash provided by operating activities 105,187 25,961
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 9
Purchases of property and equipment (5,716) (1,762)
Net cash used in investing activities (5,716) (1,753)
CASH FLOWS FROM FINANCING ACTIVITIES
Contributions from / (distributions to) parent company, net 8,784 (24,021)
Proceeds from issuance of long-term debt 515,000
Payments on term loan facility (1,287)
Debt issuance costs (11,396)
Dividend paid to a subsidiary of Sears Holdings Corporation (500,000)
Net cash provided by (used in) financing activities 11,101 (24,021)
Effects of exchange rate changes on cash (146) (145)
NET INCREASE IN CASH 110,426 42
CASH, BEGINNING OF PERIOD 22,411 28,257
CASH, END OF PERIOD $ 132,837 $ 28,299
SUPPLEMENTAL INFORMATION:
Supplemental Cash Flow Data:
Unpaid liability to acquire property and equipment $ 1,646 $ 1,527
Income taxes paid $ 7,853 $ 3,294
Interest paid $ 7,959 $ —

Financial information by segment is presented in the following tables for the 13 and 26 weeks ended August 1, 2014 and August 2, 2013, respectively.

LANDS' END, INC.
Segment Financial Information
(Unaudited)
(in thousands)
Direct

Retail
Corporate/
Other

Total
13 Weeks Ended August 1, 2014
Merchandise sales and services, net $ 292,562 $ 54,625 $ 35 $ 347,222
Costs and expenses:
Cost of sales (excluding depreciation and amortization) 148,600 30,216 178,816
Selling and administrative 105,442 23,449 9,392 138,283
Depreciation and amortization 3,845 651 329 4,825
Total costs and expenses 257,887 54,316 9,721 321,924
Operating income (loss) 34,675 309 (9,686) 25,298
Interest expense 6,205 6,205
Other income, net 203 203
Income (loss) before income taxes 34,675 309 (15,688) 19,296
Interest expense 6,205 6,205
Other income, net 203 203
Depreciation and amortization 3,845 651 329 4,825
Adjusted EBITDA $ 38,520 $ 960 $ (9,357) $ 30,123
Total assets $ 1,060,419 $ 82,433 $ 174,242 $ 1,317,094
Capital expenditures $ 3,964 $ 142 $ 62 $ 4,168

LANDS' END, INC.
Segment Financial Information
(Unaudited)
(in thousands)
Direct

Retail
Corporate/
Other

Total
13 Weeks Ended August 2, 2013
Merchandise sales and services, net $ 273,273 $ 56,257 $ 31 $ 329,561
Costs and expenses:
Cost of sales (excluding depreciation and amortization) 147,667 32,220 179,887
Selling and administrative 97,637 24,872 3,380 125,889
Depreciation and amortization 4,127 886 333 5,346
Other operating expense, net 52 52
Total costs and expenses 249,431 57,978 3,765 311,174
Operating income (loss) 23,842 (1,721) (3,734) 18,387
Other income, net 22 22
Income (loss) before income taxes 23,842 (1,721) (3,712) 18,409
Other income, net 22 22
Depreciation and amortization 4,127 886 333 5,346
Loss on property and equipment 52 52
Adjusted EBITDA $ 27,969 $ (835) $ (3,349) $ 23,785
Total assets $ 1,093,478 $ 93,351 $ 50,008 $ 1,236,837
Capital expenditures $ 924 $ — $ 20 $ 944
LANDS' END, INC.
Segment Financial Information
(Unaudited)
(in thousands)
Direct

Retail
Corporate/
Other

Total
26 Weeks Ended August 1, 2014
Merchandise sales and services, net $ 568,603 $ 109,055 $ 47 $ 677,705
Costs and expenses:
Cost of sales (excluding depreciation and amortization) 287,712 59,565 347,277
Selling and administrative 213,108 46,204 17,177 276,489
Depreciation and amortization 7,860 1,295 672 9,827
Other operating expense, net 20 20
Total costs and expenses 508,680 107,064 17,869 633,613
Operating income (loss) 59,923 1,991 (17,822) 44,092
Interest expense 8,130 8,130
Other income, net 340 340
Income (loss) before income taxes 59,923 1,991 (25,612) 36,302
Interest expense 8,130 8,130
Other income, net 340 340
Depreciation and amortization 7,860 1,295 672 9,827
Loss on disposal of property and equipment 20 20
Adjusted EBITDA $ 67,783 $ 3,286 $ (17,130) $ 53,939
Total assets $ 1,060,419 $ 82,433 $ 174,242 $ 1,317,094
Capital expenditures $ 5,431 $ 142 $ 143 $ 5,716

LANDS' END, INC.
Segment Financial Information
(Unaudited)
(in thousands)
Direct

Retail
Corporate/
Other

Total
26 Weeks Ended August 2, 2013
Merchandise sales and services, net $ 536,595 $ 111,957 $ 44 $ 648,596
Costs and expenses:
Cost of sales (excluding depreciation and amortization) 284,568 59,766 344,334
Selling and administrative 202,771 49,840 10,254 262,865
Depreciation and amortization 8,555 1,773 670 10,998
Other operating expense, net 52 52
Total costs and expenses 495,894 111,379 10,976 618,249
Operating income (loss) 40,701 578 (10,932) 30,347
Other income, net 23 23
Income (loss) before income taxes 40,701 578 (10,909) 30,370
Other income, net 23 23
Depreciation and amortization 8,555 1,773 670 10,998
Loss on sale of property and equipment 52 52
Adjusted EBITDA $ 49,256 $ 2,351 $ (10,210) $ 41,397
Total assets $ 1,093,478 $ 93,351 $ 50,008 $ 1,236,837
Capital expenditures $ 1,737 $ 1 $ 24 $ 1,762

CONTACT: ICR John Rouleau / Rachel Schacter 203-682-8200 John.Rouleau@icrinc.com Rachel.Schacter@icrinc.com Lands' End, Inc. Michele Casper Director of Public Relations (608) 935-4633 Michele.Casper@landsend.com Lands' End, Inc. Mike Rosera Chief Operating Officer and Chief Financial Officer (608) 935-9341

Source:Lands' End