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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
-OR-
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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:
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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
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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 |
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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 November 30, 2023, the registrant had
Table of Contents
LANDS’ END, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 27, 2023
TABLE O F CONTENTS
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Page |
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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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5 |
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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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20 |
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Item 3. |
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35 |
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Item 4. |
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36 |
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37 |
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Item 1. |
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37 |
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Item 1A. |
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37 |
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Item 2. |
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
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38 |
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Item 5. |
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38 |
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Item 6. |
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39 |
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40 |
Table of Contents
PART I. FINANCI AL INFORMATION
ITEM 1. FINANCI AL STATEMENTS
LANDS’ END, INC.
Condensed Consolidated St atements of Operations
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
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(in thousands, except per share data) |
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October 27,
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October 28,
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October 27,
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October 28, 2022 |
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Net revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of sales (excluding depreciation and amortization) |
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Gross profit |
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Selling and administrative |
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Depreciation and amortization |
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Goodwill impairment |
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— |
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— |
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Other operating expense, net |
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Operating (loss) income |
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(
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(
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Interest expense |
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Other (income) expense, net |
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(
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(
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(
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Loss before income taxes |
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(
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(
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(
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(
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Income tax (benefit) expense |
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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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NET LOSS PER COMMON SHARE |
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Basic: |
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$ |
(
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$ |
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$ |
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$ |
(
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Diluted: |
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$ |
(
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$ |
(
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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
Table of Contents
LANDS’ END, INC.
Condensed Consolidated Statemen ts of Comprehensive Operations
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
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(in thousands) |
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October 27, 2023 |
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October 28, 2022 |
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October 27, 2023 |
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October 28, 2022 |
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NET LOSS |
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$ |
(
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$ |
(
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$ |
(
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$ |
(
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Other comprehensive loss, net of tax |
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Foreign currency translation adjustments |
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(
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(
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(
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(
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COMPREHENSIVE LOSS |
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$ |
(
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$ |
(
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$ |
(
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$ |
(
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
Table of Contents
LANDS’ END, INC.
Condensed Consolida ted Balance Sheets
(Unaudited)
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(in thousands, except per share data) |
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October 27, 2023 |
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October 28, 2022 |
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January 27,
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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 |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
TOTAL STOCKHOLDERS’ EQUITY |
|
|
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|
|
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|
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
LANDS’ END, INC.
Condensed Consolidated S tatements of Cash Flows
(Unaudited)
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39 Weeks Ended |
|
|||||
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(in thousands) |
|
October 27, 2023 |
|
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October 28, 2022 |
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
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|
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Net loss |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Amortization of debt issuance costs |
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Loss on disposal of property and equipment |
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Stock-based compensation |
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Deferred income taxes |
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Goodwill and long-lived asset impairment |
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Other |
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(
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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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(
|
) |
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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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(
|
) |
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Other operating liabilities |
|
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(
|
) |
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Net cash provided by (used in) operating activities |
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(
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) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Sales of property and equipment |
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— |
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Purchases of property and equipment |
|
|
(
|
) |
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(
|
) |
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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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Payments on term loan |
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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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|
(
|
) |
|
Purchases and retirement of common stock |
|
|
(
|
) |
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(
|
) |
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Net cash (used in) provided by financing activities |
|
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(
|
) |
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Effects of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
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NET DECREASE IN CASH, CASH EQUIVALENTS AND
|
|
|
(
|
) |
|
|
(
|
) |
|
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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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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Interest paid |
|
$ |
|
|
|
$ |
|
|
|
Operating lease right-of-use-assets (reversal) obtained in exchange for lease liabilities |
|
$ |
(
|
) |
|
$ |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
LANDS’ END, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
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Common Stock Issued |
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Additional
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(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 |
|
||||||
|
Balance at January 27, 2023 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
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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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— |
|
|
|
— |
|
|
Common stock withheld related to net share
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Purchases and retirement of common stock |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
(
|
) |
|
|
Balance at April 28, 2023 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
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 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Vesting of restricted shares |
|
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Common stock withheld related to net share
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchases and retirement of common stock |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
— |
|
|
|
|
|
|
(
|
) |
|
|
Balance at October 27, 2023 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
|
|
|
|
|
Common Stock Issued |
|
|
Additional
|
|
|
Retained |
|
|
Accumulated
|
|
|
Total
|
|
|||||||||
|
(in thousands) |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
(Loss) |
|
|
Equity |
|
||||||
|
Balance at January 28, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Vesting of restricted shares |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock withheld related to net share
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Balance at April 29, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Vesting of restricted shares |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchases and retirement of common stock |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Balance at July 29, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
|
(
|
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Vesting of restricted shares |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock withheld related to net share
|
|
|
(
|
) |
|
|
— |
|
|
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Purchases and retirement of common stock |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
|
|
|
(
|
) |
|
|
Balance at October 28, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
LANDS’ END, INC.
NOTES TO CONDENSED CONSOLID ATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business
Lands’ End, Inc. (“Lands’ End” or the “Company”) is a leading digital retailer of casual clothing, swimwear, outerwear, accessories, footwear, home products and uniform solutions. Lands’ End offers products online at www.landsend.com , through Company Operated stores and through third-party distribution channels. Lands’ End is a classic American lifestyle brand with a passion for quality, legendary service and real value and seeks to deliver timeless style for women, men, kids and the home. Lands’ End also offers products to businesses and schools, for their employees and students, through the Outfitters distribution channel. References to www.landsend.com do not constitute incorporation by reference of the information at www.landsend.com , and such information is not part of this Quarterly Report on Form 10-Q or any other filings with the SEC, unless otherwise explicitly stated.
Terms that are commonly used in the Company’s Notes to Condensed Consolidated Financial Statements are defined as follows:
6
Table of Contents
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands’ End Annual Report on Form 10-K filed with the SEC on April 10, 2023.
Macroeconomic Challenges
Macroeconomic issues, such as recent inflationary pressures and rising interest rates, have continued to have an impact on the Company’s business. Since apparel purchases are discretionary expenditures that historically have been influenced by domestic and global economic conditions, higher prices of consumer goods due to inflation may result in less discretionary spending for consumers which may negatively impact customer demand and require higher levels of promotion in order to attract and retain customers. Additionally, interest expense could be negatively affected by any continued rate increases due to the variable interest rates associated with the Company’s Debt Facilities. These macroeconomic challenges have led to increased cost of raw materials, packaging materials, labor, energy, fuel, debt and other inputs necessary for the production and distribution of the Company’s products.
Corporate Restructuring
The Company reduced corporate positions, primarily in the Company’s Hong Kong sourcing office, during Third Quarter 2023. The Company incurred total severance costs of approximately $
Lands’ End Japan Closure
During Second Quarter 2022, the Board of Directors approved a plan to wind down and cease operations of Lands’ End Japan KK. Lands’ End Japan KK represents the Japan eCommerce operating segment. For a discussion on this operating segment, see Note 13,
Segment Reporting
. The Company incurred closing costs of approximately $
7
Table of Contents
Goodwill and Indefinite-Lived Intangible Asset Impairment Analysis
Goodwill and the indefinite-lived trade name intangible asset are tested separately for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment assessments contain multiple uncertainties because the calculation requires management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting cash flows under different scenarios.
Goodwill impairment assessments
In connection with the preparation of the financial statements included in this Form 10-Q, the Company considered the decline in the Company’s stock price and market capitalization, as well as current market and macroeconomic conditions, to be a triggering event for the U.S. eCommerce and Outfitters reporting units and therefore completed an interim test for impairment of goodwill for these reporting units as of October 27, 2023. The Company tested goodwill for impairment using a one-step quantitative test. The quantitative test compares the reporting unit’s fair value to its carrying value. An impairment is recorded for any excess carrying value above the reporting unit’s fair value, not to exceed the amount of goodwill. The Company estimates fair value of its reporting units using a discounted cash flow model, commonly referred to as the income approach. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions appropriate to the Company’s reporting unit. The discounted cash flow model uses management’s best estimates of economic and market conditions over the projected period using the best information available, including growth rates in revenues, costs and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, weighted average cost of capital and changes in future working capital requirements.
The testing resulted in full impairment of $
Indefinite-lived intangible asset impairment assessments
The Company’s indefinite-lived intangible asset is the Lands’ End trade name. The Company reviews the trade name for impairment on an annual basis during the fourth fiscal quarter, or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The fair value of the trade name indefinite-lived intangible asset is estimated using the relief from royalty method. The relief from royalty method is based on the assumption that, in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class. The relief from royalty method involves two steps: (1) estimation of reasonable royalty rates for the assets and (2) the application of these royalty rates to a forecasted net revenue stream and discounting the resulting cash flows to determine a present value. The Company multiplies the selected royalty rate by the forecasted net revenue stream to calculate the cost savings (relief from royalty payment) associated with the asset. The cash flows are then discounted to present value using the selected discount rate and compared to the carrying value of the asset.
In connection with the preparation of the financial statements included in this Form 10-Q, the Company considered the decline in the Company’s stock price and market capitalization, as well as current market and macroeconomic conditions, to be a triggering event for the Lands’ End trade name. The fair value of the trade name indefinite-lived intangible asset was estimated using the relief from royalty method and the testing resulted in
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 October 27, 2023.
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 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 recognized long-lived asset impairment for Operating lease right-of-use assets and property and equipment, net for individual identified Company Operated stores in the amount of
8
Table of Contents
27, 2023 and October 28, 2022, respectively, recorded in Other operating expense, net in the Condensed Consolidated Statement of Operations.
The Company reviewed the remaining long-lived asset groups for impairment as of October 27, 2023. 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 amount resulting in
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedge relationships and sale or transfer of debt securities classified as held-to-maturity. This ASU, which was effective upon issuance and modified by ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of Sunset Date of Topic 848 , may be applied through December 31, 2024, is applicable to all contracts and hedging relationships that reference the LIBOR or any other reference rate expected to be discontinued. The guidance in ASU 2020-04 may be implemented over time as reference rate reform activities occur.
As part of the response to the reference rate reform, during Second Quarter 2023, the Company amended the Debt Facilities to replace the interest rate based upon the LIBOR benchmark to the SOFR benchmark. See Note 5, Debt for additional details regarding these changes. Concurrent with the amendments, the Company adopted ASU 2020-04. The Company utilized optional practical expedients for contract modifications under ASC 848-20-358 Contracts within the Scope of Topic 470 and the adoption of ASU 2020-04 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
NOTE 3. LOSS PER SHARE
The numerator for both basic and diluted EPS is net loss. The denominator for basic EPS is based upon the number of weighted average shares of Lands’ End common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of Lands’ End common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with GAAP. Potentially dilutive securities for the diluted EPS calculations consist of non-vested equity shares of common stock and in-the-money outstanding options where the current stock price exceeds the option strike price.
The following table summarizes the components of basic and diluted EPS:
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands, except per share amounts) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||
|
Net loss |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock awards |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic loss per share |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
Diluted loss per share |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
Stock awards are considered anti-dilutive based on the application of the treasury stock method or in the event of a net loss. Anti-dilutive shares excluded from the diluted weighted average shares outstanding were
9
Table of Contents
NOTE 4. OTHER COMPREHENSIVE LOSS
Other comprehensive loss encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments.
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||
|
Beginning balance: Accumulated other comprehensive loss
|
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Foreign currency translation adjustments (net of tax of $
|
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Ending balance: Accumulated other comprehensive loss
|
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
$ |
(
|
) |
NOTE 5. DEBT
ABL Facility
The Company’s $
The following table summarizes the Company’s ABL Facility borrowing availability:
|
|
|
October 27, 2023 |
|
October 28, 2022 |
|
January 27, 2023 |
||||||||||||
|
(in thousands) |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|||
|
ABL Facility Limit |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
Borrowing Base |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Outstanding borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding letters of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABL Facility utilization at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
ABL Facility borrowing availability |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
Long-Term Debt
The Company’s September 9, 2020 Term Loan Facility provided borrowings of $
10
Table of Contents
The Company’s long-term debt consisted of the following:
|
|
|
October 27, 2023 |
|
October 28, 2022 |
|
January 27, 2023 |
||||||||||||
|
(in thousands) |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|
Amount |
|
|
Interest Rate |
|||
|
Term Loan Facility |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
Less: Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Unamortized debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
Interest; Fees
Effective May 12, 2023, the Company executed the Fourth Amendment (the “Fourth Amendment”) to the ABL Facility which replaced the interest rate benchmark based on LIBOR with an interest rate benchmark based on SOFR plus an adjustment of
Effective with the Fourth Amendment, the ABL Facility interest rate, selected at the borrower’s election, is either (1) ABL Adjusted SOFR, or (2) a base rate which is the greater of (a) the federal funds rate plus
Prior to the Fourth Amendment to the ABL Facility, the interest rate, selected at the borrower’s election, was either (1) LIBOR (plus the Applicable Borrowing Margin), or (2) a base rate (plus the Applicable Borrowing Margin) which was the greater of (a) the federal funds rate plus
Effective June 22, 2023, the Company entered into Amendment No. 1 (the “First Amendment”) to the Term Loan Facility which (subject to a
Effective with the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility is based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Adjusted Loan SOFR rate plus
Prior to the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a LIBOR rate (with a minimum rate of
During Second Quarter 2023, the Company adopted ASU 2020-04, the optional practical expedient for Reference Rate Reform related to its Debt Facilities and as such, these amendments are treated as a continuation of the existing debt agreement and no gain or loss on these modifications were recorded in the Condensed Consolidated Statement of Operations.
Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees include (i) commitment fees of
11
Table of Contents
Maturity; Amortization and Prepayments
The ABL Facility maturity date is the earlier of (a)
The Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to
Guarantees; Security
All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is secured by a second priority interest in the same collateral, with certain exceptions.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business.
The Term Loan Facility contains certain financial covenants, including a quarterly maximum total leverage ratio test, a weekly minimum liquidity test and an annual maximum capital expenditure amount.
Under the ABL Facility, if excess availability falls below the greater of
The Debt Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.
As of October 27, 2023, the Company was in compliance with its financial covenants in the Debt Facilities.
Events of Default
The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
NOTE 6. STOCK-BASED COMPENSATION
The Company expenses the fair value of all stock awards over their requisite service period, ensuring that the amount of cumulative stock-based compensation expense recognized at any date is at least equal to the portion of the grant-date fair value of the award that is vested at that date. The Company has elected to adjust stock-based compensation expense for an estimated forfeiture rate for those shares not expected to vest and to recognize stock-based compensation expense on a straight-line basis for awards that only have a service requirement with multiple vest dates.
12
Table of Contents
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):
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 |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||
|
Deferred awards |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Performance awards (1) |
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Option awards |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Total stock-based compensation expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
13
Table of Contents
Deferred Awards
The following table provides a summary of the Deferred Awards activity for the 39 weeks ended October 27, 2023:
|
|
|
Deferred Awards |
|
|||||
|
(in thousands, except per share amounts) |
|
Number of
|
|
|
Weighted Average
|
|
||
|
Unvested deferred awards as of January 27, 2023 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(
|
) |
|
|
|
|
|
Forfeited or expired |
|
|
(
|
) |
|
|
|
|
|
Unvested deferred awards as of October 27, 2023 |
|
|
|
|
|
$ |
|
|
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $
Performance Awards
The following table provides a summary of the Performance Awards activity for the 39 weeks ended October 27, 2023:
|
|
|
Performance Awards |
|
|||||
|
(in thousands, except per share amounts) |
|
Number of
|
|
|
Weighted Average
|
|
||
|
Unvested performance awards as of January 27, 2023 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Vested |
|
|
— |
|
|
|
— |
|
|
Forfeited or expired |
|
|
(
|
) |
|
|
|
|
|
Unvested performance awards as of October 27, 2023 |
|
|
|
|
|
$ |
|
|
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $
|
Monte Carlo Simulation Assumptions |
|
|
|
|
|
Risk-free interest rate (1) |
|
|
|
% |
|
Expected dividend yield |
|
|
|
% |
|
Expected volatility (2) |
|
|
|
% |
|
Expected term (in years) (3) |
|
|
|
|
|
Grant date fair value per share |
|
$ |
|
|
14
Table of Contents
Option Awards
During the 39 weeks ended October 27, 2023
there was
|
(in thousands, except contractual life and exercise price amounts) |
|
Option Awards |
|
|
Weighted
|
|
|
Weighted
|
|
|
Aggregate Intrinsic Value |
|
||||
|
Option Awards vested and expected to vest |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
— |
|
|
Option Awards exercisable |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
— |
|
Total unrecognized stock-based compensation expense related to Option Awards was approximately $
NOTE 7. STOCKHOLDERS’ EQUITY
Share Repurchase Program
On June 28, 2022, the Company announced that its Board of Directors authorized the Company to repurchase up to $
The following table summarizes the Company’s share repurchases through October 27, 2023:
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(Shares and $ in thousands except average per share cost) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||
|
Number of shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Average per share cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company retired all shares that were repurchased through the 2022 Share Repurchase Program during the 39 weeks ended October 27, 2023
. In accordance with the FASB ASC 505—Equity, the par value of the shares retired was charged against Common stock and the remaining purchase price was allocated between Additional paid-in capital and (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. In addition, the total cost of the broker commissions is charged directly to (Accumulated deficit) Retained earnings.
15
Table of Contents
NOTE 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
January 27, 2023 |
|
|||
|
Deferred gift card revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Reserve for sales returns and allowances |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued employee compensation and benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued property, sales and other taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued closing costs |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accrued expenses and other current liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 9. LANDS’ END JAPAN CLOSURE
In July 2022, the Board of Directors approved a plan to cease operations of Lands’ End Japan KK, a subsidiary of Lands’ End, Inc. (“Lands’ End Japan”) by the end of Fiscal 2022. The dissolution of Lands’ End Japan was authorized and approved on January 31, 2023. Lands’ End Japan operations were reported in the Japan eCommerce operating segment in Fiscal 2022 and prior. For a discussion of this operating segment, see Note 13, Segment Reporting . The closing and subsequent disposal of the assets did not represent a strategic shift with a major effect on the consolidated financial condition. Accordingly, the closing of Lands’ End Japan was not presented in the Condensed Consolidated Financial Statements as discontinued operations.
In Third Quarter 2022, the Company commenced recording approximately $
NOTE 10. FAIR VALUE MEASUREMENTS OF FINANCIAL ASSETS AND LIABILITIES
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:
|
|
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
January 27, 2023 |
|
|||||||||||||||
|
(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-Terman-Toy (BDT) model as well as market inputs from management. The BDT modeling approach is particularly relevant given the Term Loan Facility’s features, including the optional redemption provision. There were
16
Table of Contents
NOTE 11. INCOME TAXES
Provision for Income Taxes
At the end of each quarter, the Company estimates its effective income tax rate pursuant to ASC 740. The rate for the period consists of the tax rate expected to be applied for the full year to ordinary income adjusted for any discrete items recorded in the period.
The Company recorded a tax benefit at an overall effective tax rate of
NOTE 12. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
NOTE 13. SEGMENT REPORTING
For the 39 weeks ended October 27, 2023, the Company’s operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Retail. During the 39 weeks ended October 28, 2022, the Company’s operating segments included Japan eCommerce. See Note 9, Lands’ End Japan Closure .
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
17
Table of Contents
Net revenue is presented by distribution channel in the following tables:
|
|
|
13 Weeks Ended |
|
% of Net |
|
|
13 Weeks Ended |
|
% of Net |
|
||||
|
(in thousands) |
|
October 27, 2023 |
|
Revenue |
|
|
October 28, 2022 |
|
Revenue |
|
||||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
||||
|
U.S. eCommerce |
|
$ |
|
|
|
|
% |
|
$ |
|
|
|
|
% |
|
International (1) |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Outfitters |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Third Party |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Retail |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Total Net revenue |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
||
|
|
|
39 Weeks Ended |
|
% of Net |
|
|
39 Weeks Ended |
|
% of Net |
|
||||
|
(in thousands) |
|
October 27, 2023 |
|
Revenue |
|
|
October 28, 2022 |
|
Revenue |
|
||||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
||||
|
U.S. eCommerce |
|
$ |
|
|
|
|
% |
|
$ |
|
|
|
|
% |
|
International (1) |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Outfitters |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Third Party |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Retail |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Total Net revenue |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
||
NOTE 14. REVENUE
Revenue includes sales of merchandise and delivery revenue related to merchandise sold. Substantially all of the Company’s revenue is recognized when control of product passes to customers, which for the U.S. eCommerce, International, Outfitters and Third Party distribution channels is when the merchandise is received by the customer and for the Retail distribution channel is at the time of sale in the store. The Company recognizes revenue, including shipping and handling fees billed to customers, in the amount expected to be received when control of the Company’s products transfers to customers, and is presented net of various forms of promotions, which range from contractually fixed percentage price reductions to sales returns, discounts, and other incentives that may vary in amount. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available.
The Company’s revenue is disaggregated by distribution channel and geographic location. Revenue by distribution channel is presented in Note 13, Segment Reporting . Revenue by geographic location was:
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
18
Table of Contents
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 |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||
|
Deferred revenue beginning of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Deferred revenue recognized in period |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Revenue deferred in period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue end of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Revenue from gift cards is recognized (i) when the gift card is redeemed by the customer for merchandise, or (ii) as gift card breakage, an estimate of gift cards which will not be redeemed where the Company does not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions. Gift card breakage is recorded within Net revenue in the Condensed Consolidated Statements of Operations. Prior to their redemption, gift cards are recorded as a liability and included within Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. The liability is estimated based on expected breakage that considers historical patterns of redemption.
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
||||||||||
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||
|
Balance as of beginning of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Gift cards sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gift cards redeemed |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Gift card breakage |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Balance as of end of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Refund Liabilities
Refund liabilities, primarily associated with product sales returns and retrospective volume rebates, represent variable consideration and are estimated and recorded as a reduction to Net revenue based on historical experience. As of October 27, 2023, October 28, 2022 and January 27, 2023
, $
19
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. See “Cautionary Statement concerning Forward-Looking Statements” below, “Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended January 27, 2023 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q, for a discussion of the uncertainties, risks and assumptions associated with these statements.
As used in this Quarterly Report on Form 10-Q, references to the “Company”, “Lands’ End”, “we”, “us”, “our” and similar terms refer to Lands’ End, Inc. and its subsidiaries. Our fiscal year ends on the Friday preceding the Saturday closest to January 31. Other terms that are commonly used in this Quarterly Report on Form 10-Q are defined as follows:
20
Table of Contents
Executive Overview
Description of the Company
Lands’ End is a leading digital retailer of casual clothing, swimwear, outerwear, accessories, footwear, home products and uniform solutions. Operating out of America’s heartland, we believe our vision and values make a strong connection with our core customers. We offer products online at www.landsend.com , through our own Company Operated stores and through third-party distribution channels. We are a classic American lifestyle brand with a passion for quality, legendary service and real value. We seek to deliver timeless style for women, men, kids and the home. We also offer products to businesses and schools, for their employees and students, through the Outfitters distribution channel.
Lands’ End was founded in 1963 by Gary Comer and his partners to sell sailboat hardware and equipment by catalog. While our product focus has shifted significantly over the years, we have continued to adhere to our founder’s motto as one of our guiding principles: “Take care of the customer, take care of the employee and the rest will take care of itself.”
We have one external reportable segment and identify our operating segments according to how our business activities are managed and evaluated. During Third Quarter 2023, our operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Retail. Our operating segments included Japan eCommerce during the Third Quarter 2022 and Year-to-Date 2022. See Note 9, Lands’ End Japan Closure .
We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into one external reportable segment.
Distribution Channels
We identify five separate distribution channels for revenue reporting purposes:
Macroeconomic Challenges
Macroeconomic issues, such as recent inflationary pressures and rising interest rates, have continued to have an impact on our business. Since apparel purchases are discretionary expenditures that historically have been influenced by domestic and global economic conditions, higher prices of consumer goods due to inflation may result in less discretionary spending for consumers which may negatively impact customer demand and require higher levels of promotion in order to attract and retain customers. Additionally, interest expense could be negatively affected by any continued rate increases due to the variable interest rates associated with our Debt Facilities. These macroeconomic challenges have led to increased cost of raw materials, packaging materials, labor, energy, fuel, debt and other inputs necessary for the production and distribution of our products.
Corporate Restructuring
We reduced corporate positions, primarily in our Hong Kong sourcing office, during the Third Quarter 2023. We incurred total severance costs of approximately $2.3 million related to the reduction in corporate positions which was recorded in Other operating expense, net in the Consolidated Statements of Operations. As of October 27, 2023, approximately $0.4 million of the severance costs had yet to be paid.
21
Table of Contents
Lands’ End Japan Closure
During Second Quarter 2022, the Board of Directors approved a plan to wind down and cease operations of Lands’ End Japan KK. Lands’ End Japan KK represents the Japan eCommerce operating segment. For a discussion on this operating segment, see Note 13, Segment Reporting . We incurred closing costs of approximately $0.1 million and $3.0 million during the 13 weeks ended October 27, 2023 and October 28, 2022, respectively. For the 39 weeks ended October 27, 2023 and October 28, 2022 we incurred closing costs of approximately $0.2 million and $3.0 million, respectively, recorded in Other operating expense, net in the Consolidated Statements of Operations. See Note 9, Lands’ End Japan Closure .
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
Seasonality
We experience seasonal fluctuations in our Net revenue and operating results and historically have realized a significant portion of our net revenue and earnings for the year during our fourth fiscal quarter. We generated 34.0% and 33.9% of our net revenue in the fourth quarter of Fiscal 2022 and Fiscal 2021, respectively.
Working capital requirements typically increase during the second and third quarters of the fiscal year as inventory builds to support peak selling periods and, accordingly, typically decrease during the fourth quarter of the fiscal year as inventory is sold. Cash provided by operating activities is typically higher in the fourth quarter of the fiscal year due to reduced working capital requirements during that period.
Results of Operations
The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue:
|
|
|
13 Weeks Ended |
|
|||||||||||||
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||||||||
|
Net revenue |
|
$ |
324,735 |
|
|
|
100.0 |
% |
|
$ |
370,983 |
|
|
|
100.0 |
% |
|
Cost of sales (excluding depreciation and amortization) |
|
|
172,142 |
|
|
|
53.0 |
% |
|
|
222,573 |
|
|
|
60.0 |
% |
|
Gross profit |
|
|
152,593 |
|
|
|
47.0 |
% |
|
|
148,410 |
|
|
|
40.0 |
% |
|
Selling and administrative |
|
|
135,282 |
|
|
|
41.7 |
% |
|
|
132,807 |
|
|
|
35.8 |
% |
|
Depreciation and amortization |
|
|
9,595 |
|
|
|
3.0 |
% |
|
|
9,761 |
|
|
|
2.6 |
% |
|
Goodwill impairment |
|
|
106,700 |
|
|
|
32.9 |
% |
|
|
— |
|
|
|
— |
% |
|
Other operating expense, net |
|
|
2,324 |
|
|
|
0.7 |
% |
|
|
3,096 |
|
|
|
0.8 |
% |
|
Operating (loss) income |
|
|
(101,308 |
) |
|
|
(31.2 |
)% |
|
|
2,746 |
|
|
|
0.7 |
% |
|
Interest expense |
|
|
11,677 |
|
|
|
3.6 |
% |
|
|
10,825 |
|
|
|
2.9 |
% |
|
Other (income) expense, net |
|
|
(132 |
) |
|
|
(0.0 |
)% |
|
|
230 |
|
|
|
0.1 |
% |
|
Loss before income taxes |
|
|
(112,853 |
) |
|
|
(34.8 |
)% |
|
|
(8,309 |
) |
|
|
(2.2 |
)% |
|
Income tax (benefit) |
|
|
(459 |
) |
|
|
(0.1 |
)% |
|
|
(3,627 |
) |
|
|
(1.0 |
)% |
|
NET LOSS |
|
$ |
(112,394 |
) |
|
|
(34.6 |
)% |
|
$ |
(4,682 |
) |
|
|
(1.3 |
)% |
22
Table of Contents
|
|
|
39 Weeks Ended |
|
|||||||||||||
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||||||||
|
Net revenue |
|
$ |
957,656 |
|
|
|
100.0 |
% |
|
$ |
1,025,826 |
|
|
|
100.0 |
% |
|
Cost of sales (excluding depreciation and amortization) |
|
|
527,529 |
|
|
|
55.1 |
% |
|
|
604,204 |
|
|
|
58.9 |
% |
|
Gross profit |
|
|
430,127 |
|
|
|
44.9 |
% |
|
|
421,622 |
|
|
|
41.1 |
% |
|
Selling and administrative |
|
|
377,662 |
|
|
|
39.4 |
% |
|
|
377,074 |
|
|
|
36.8 |
% |
|
Depreciation and amortization |
|
|
28,439 |
|
|
|
3.0 |
% |
|
|
29,228 |
|
|
|
2.8 |
% |
|
Goodwill impairment |
|
|
106,700 |
|
|
|
11.1 |
% |
|
|
— |
|
|
|
— |
% |
|
Other operating expense, net |
|
|
2,916 |
|
|
|
0.3 |
% |
|
|
3,135 |
|
|
|
0.3 |
% |
|
Operating (loss) income |
|
|
(85,590 |
) |
|
|
(8.9 |
)% |
|
|
12,185 |
|
|
|
1.2 |
% |
|
Interest expense |
|
|
35,984 |
|
|
|
3.8 |
% |
|
|
27,807 |
|
|
|
2.7 |
% |
|
Other (income), net |
|
|
(488 |
) |
|
|
(0.1 |
)% |
|
|
(97 |
) |
|
|
(0.0 |
)% |
|
Loss before income taxes |
|
|
(121,086 |
) |
|
|
(12.6 |
)% |
|
|
(15,525 |
) |
|
|
(1.5 |
)% |
|
Income tax expense (benefit) |
|
|
978 |
|
|
|
0.1 |
% |
|
|
(6,293 |
) |
|
|
(0.6 |
)% |
|
NET LOSS |
|
$ |
(122,064 |
) |
|
|
(12.7 |
)% |
|
$ |
(9,232 |
) |
|
|
(0.9 |
)% |
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 non-recurring and 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 certain significant 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. 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 and are described below:
23
Table of Contents
The following tables set forth, for the periods indicated, a reconciliation of Net loss to Adjusted net loss and Adjusted net loss per share:
|
Unaudited |
|
13 Weeks Ended |
|
|||||
|
(in thousands, except per share amounts) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||
|
Net loss |
|
$ |
(112,394 |
) |
|
$ |
(4,682 |
) |
|
Goodwill and long-lived asset impairment |
|
|
106,700 |
|
|
|
120 |
|
|
Corporate restructuring |
|
|
2,266 |
|
|
|
— |
|
|
Lands' End Japan closure |
|
|
23 |
|
|
|
3,858 |
|
|
Tax effects on adjustments |
|
|
(159 |
) |
|
|
(977 |
) |
|
ADJUSTED NET LOSS |
|
$ |
(3,564 |
) |
|
$ |
(1,681 |
) |
|
ADJUSTED DILUTED NET LOSS PER SHARE |
|
$ |
(0.11 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
||
|
Diluted weighted average common shares outstanding |
|
|
31,887 |
|
|
|
33,064 |
|
|
Unaudited |
|
39 Weeks Ended |
|
|||||
|
(in thousands, except per share amounts) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||
|
Net loss |
|
|
(122,064 |
) |
|
|
(9,232 |
) |
|
Goodwill and long-lived asset impairment |
|
|
106,700 |
|
|
|
120 |
|
|
Corporate restructuring |
|
|
2,656 |
|
|
|
— |
|
|
Lands' End Japan closure |
|
|
122 |
|
|
|
3,858 |
|
|
Tax effects on adjustments |
|
|
(200 |
) |
|
|
(977 |
) |
|
ADJUSTED NET LOSS |
|
$ |
(12,786 |
) |
|
$ |
(6,231 |
) |
|
ADJUSTED DILUTED NET LOSS PER SHARE |
|
$ |
(0.40 |
) |
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
||
|
Diluted weighted average common shares outstanding |
|
|
32,140 |
|
|
|
33,196 |
|
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:
24
Table of Contents
The following tables set 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) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||||||||
|
Net loss |
|
$ |
(112,394 |
) |
|
|
(34.6 |
)% |
|
$ |
(4,682 |
) |
|
|
(1.3 |
)% |
|
Income tax (benefit) |
|
|
(459 |
) |
|
|
(0.1 |
)% |
|
|
(3,627 |
) |
|
|
(1.0 |
)% |
|
Other (income) expense, net |
|
|
(132 |
) |
|
|
(0.0 |
)% |
|
|
230 |
|
|
|
0.1 |
% |
|
Interest expense |
|
|
11,677 |
|
|
|
3.6 |
% |
|
|
10,825 |
|
|
|
2.9 |
% |
|
Operating (loss) income |
|
|
(101,308 |
) |
|
|
(31.2 |
)% |
|
|
2,746 |
|
|
|
0.7 |
% |
|
Depreciation and amortization |
|
|
9,595 |
|
|
|
3.0 |
% |
|
|
9,761 |
|
|
|
2.6 |
% |
|
Goodwill and long-lived asset impairment |
|
|
106,700 |
|
|
|
32.9 |
% |
|
|
120 |
|
|
|
0.0 |
% |
|
Corporate restructuring |
|
|
2,266 |
|
|
|
0.7 |
% |
|
|
— |
|
|
|
— |
% |
|
Lands' End Japan closure |
|
|
23 |
|
|
|
0.0 |
% |
|
|
3,858 |
|
|
|
1.0 |
% |
|
Other |
|
|
— |
|
|
|
— |
% |
|
|
178 |
|
|
|
0.0 |
% |
|
Adjusted EBITDA |
|
$ |
17,276 |
|
|
|
5.3 |
% |
|
$ |
16,663 |
|
|
|
4.5 |
% |
|
Unaudited |
|
39 Weeks Ended |
|
|||||||||||||
|
(in thousands) |
|
October 27, 2023 |
|
|
October 28, 2022 |
|
||||||||||
|
Net loss |
|
$ |
(122,064 |
) |
|
|
(12.7 |
)% |
|
$ |
(9,232 |
) |
|
|
(0.9 |
)% |
|
Income tax expense (benefit) |
|
|
978 |
|
|
|
0.1 |
% |
|
|
(6,293 |
) |
|
|
(0.6 |
)% |
|
Other income, net |
|
|
(488 |
) |
|
|
(0.1 |
)% |
|
|
(97 |
) |
|
|
(0.0 |
)% |
|
Interest expense |
|
|
35,984 |
|
|
|
3.8 |
% |
|
|
27,807 |
|
|
|
2.7 |
% |
|
Operating (loss) income |
|
|
(85,590 |
) |
|
|
(8.9 |
)% |
|
|
12,185 |
|
|
|
1.2 |
% |
|
Depreciation and amortization |
|
|
28,439 |
|
|
|
3.0 |
% |
|
|
29,228 |
|
|
|
2.8 |
% |
|
Goodwill and long-lived asset impairment |
|
|
106,700 |
|
|
|
11.1 |
% |
|
|
120 |
|
|
|
0.0 |
% |
|
Corporate restructuring |
|
|
2,656 |
|
|
|
0.3 |
% |
|
|
— |
|
|
|
— |
% |
|
Lands' End Japan closure |
|
|
122 |
|
|
|
0.0 |
% |
|
|
3,858 |
|
|
|
0.4 |
% |
|
Loss on disposal of property and equipment |
|
|
100 |
|
|
|
0.0 |
% |
|
|
39 |
|
|
|
0.0 |
% |
|
Other |
|
|
189 |
|
|
|
0.0 |
% |
|
|
866 |
|
|
|
0.1 |
% |
|
Adjusted EBITDA |
|
$ |
52,616 |
|
|
|
5.5 |
% |
|
$ |
46,296 |
|
|
|
4.5 |
% |
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in five separate distribution channels for revenue reporting purposes: U.S. eCommerce, International, Outfitters, Third Party and Retail. A key measure in the evaluation of our business is revenue performance by distribution channel. We also consider Gross margin and Selling and administrative expenses in evaluating the performance of our business.
We use Net revenue to evaluate revenue performance for the U.S. eCommerce, International, Outfitters and Third Party distribution channels. For our Retail distribution channel, we use Same Store Sales as a key measure in evaluating performance. A Company Operated store is included in U.S. Same Store Sales calculations when it has been open for at least 14 months. Online sales and sales generated through our in-store web portal are considered revenue in our U.S. eCommerce and are excluded from U.S. Same Store Sales.
Discussion and Analysis
Third Quarter 2023 compared with Third Quarter 2022
Net Revenue
Net revenue was $324.7 million for Third Quarter 2023, a decrease of $46.3 million or 12.5%, from $371.0 million during the Third Quarter 2022.
U.S. eCommerce Net revenue was $190.2 million for Third Quarter 2023, a decrease of $21.0 million or 10.0%, from $211.2 million during the Third Quarter 2022. The decrease in U.S. eCommerce was primarily driven by a concerted effort to reduce promotional activity and improved inventory management compared to the prior year resulting in higher margins with lower clearance inventory sales.
25
Table of Contents
International eCommerce Net revenue was $26.2 million for Third Quarter 2023, a decrease of $11.8 million or 30.9%, from $38.0 million during the Third Quarter 2022. The decrease in International eCommerce was due to continued assortment editing with a focus on key categories and reduced clearance inventories in Europe and the closing of Lands’ End Japan at the end of Fiscal 2022. Excluding the $9.5 million of Lands’ End Japan, Net revenue for International eCommerce decreased 9.7%.
Outfitters Net revenue was $74.3 million for Third Quarter 2023, a decrease of $6.5 million or 8.0%, from $80.8 million during the Third Quarter 2022. The decrease was primarily driven by the conclusion of the Delta Air Lines contract in the First Quarter 2023 and timing of school uniform shipments compared to prior year partially offset by mid-single digit growth year-over-year in our business to business customers. Excluding the $4.2 million decrease in year over year revenue from the Delta Air Lines business, Net revenue for the Outfitters business decreased 3.0%.
Third Party Net revenue was $24.0 million for Third Quarter 2023, a decrease of $6.9 million or 22.4%, from $30.9 million during the Third Quarter 2022. The decrease was primarily attributed to weaker performance at Kohl’s partially offset by continued growth of marketplace sales through other existing marketplaces.
Retail Net revenue was $10.0 million for Third Quarter 2023, a decrease of $0.1 million or 1.0%, from $10.1 million during the Third Quarter 2022. Our U.S. Company Operated stores experienced an increase of 2.3% in Same Store Sales as compared to the Third Quarter 2022. On October 27, 2023 there were 26 U.S. Company Operated stores, compared to 29 U.S. Company Operated stores on October 28, 2022.
Gross Profit
Gross profit was $152.6 million for Third Quarter 2023, an increase of $4.2 million or 2.8% from $148.4 million during the Third Quarter of 2022. Gross margin increased approximately 700 basis points to 47.0% in Third Quarter 2023, compared with 40.0% in Third Quarter 2022. The Gross margin improvement was primarily driven by new products across the brand, strength in transitional outerwear and adjacent product categories, reduction in sales of clearance inventory and improvements in supply chain costs in the third quarter of fiscal 2023 compared to the prior year.
Selling and Administrative Expenses
Selling and administrative expenses increased $2.5 million to $135.3 million or 41.7% of total Net revenue in Third Quarter 2023 compared with $132.8 million or 35.8% of Net revenue in Third Quarter 2022. The approximately 590 basis points increase was driven by deleveraging from lower revenues and higher incentive related personnel costs, partially offset by lower marketing spend and continued cost controls.
Depreciation and Amortization
Depreciation and amortization expense decreased $0.2 million to $9.6 million in Third Quarter 2023 compared with $9.8 million in the Third Quarter 2022.
Goodwill Impairment
Goodwill impairment was $106.7 million in Third Quarter 2023 compared to none in Third Quarter 2022. We recorded full impairment of the $70.4 million and $36.3 million of goodwill allocated to our U.S. eCommerce and Outfitters reporting units, respectively, in Third Quarter 2023 due to the decline in stock price and market capitalization, as well as current market conditions and macroeconomic conditions. See Note 1, Background and Basis Presentation .
Other Operating Expense
Other operating expense, net was $2.3 million in Third Quarter 2023 compared to $3.1 million in Third Quarter 2022. The $0.8 million decrease was due to $3.0 million of Lands’ End Japan closing costs recorded in Third Quarter 2022 compared to $2.3 million of corporate restructuring costs, primarily severance costs in our Hong Kong sourcing office, recorded in Third Quarter 2023.
Operating Income (Loss)
Operating loss was $101.3 million in Third Quarter 2023 compared to Operating income of $2.7 million in Third Quarter 2022. The $104.0 million increase in Operating loss was primarily a result of the $106.7 million non-cash goodwill impairment charge recorded in Third Quarter 2023.
26
Table of Contents
Interest Expense
Interest expense was $11.7 million in Third Quarter 2023 compared to $10.8 million in Third Quarter 2022. The $0.9 million increase was driven by higher applicable interest rates under the Term Loan Facility offset by lower ABL Facility interest related to lower average outstanding balances.
Other Expense (Income)
Other income was $0.1 million in Third Quarter 2023 compared to Other expense of $0.2 million in Third Quarter 2022.
Income Tax (Benefit) Expense
We recorded an income tax benefit at an overall effective tax rate of 0.4% and 43.7% for Third Quarter 2023 and Third Quarter 2022, respectively. The overall effective tax rate for the 13 weeks ended October 27, 2023, reflects the impacts resulting from the impairment of non-tax deductible goodwill recorded in the Third Quarter 2023. The overall effective tax rate for the 13 weeks ended October 28, 2022, reflect tax benefits recorded as a result of Lands’ End Japan closing costs recorded in the Third Quarter 2022.
Net Income (Loss)
Net loss was $112.4 million and diluted loss per share was $3.52 in Third Quarter 2023 compared with Net loss of $4.7 million and diluted loss per share of $0.14 in Third Quarter 2022. The increase in Net loss was primarily due to the $106.7 million non-cash goodwill impairment charge recorded in Third Quarter 2023.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $17.3 million in Third Quarter 2023 and $16.7 million in Third Quarter 2022, respectively.
Adjusted Net Income (Loss)
Adjusted net loss was $3.6 million and Adjusted diluted net loss per share was $0.11 in Third Quarter 2023 compared with Adjusted net loss of $1.7 million and Adjusted diluted net loss per share of $0.05 in Third Quarter 2022.
Year-to-Date 2023 compared with Year-to-Date 2022
Net Revenue
Net revenue was $957.7 million for Year-to-Date 2023 a decrease of $68.2 million or 6.6% from $1.0 billion during Year-to-Date 2022.
U.S. eCommerce Net revenue was $563.8 million for Year-to-Date 2023, a decrease of $25.6 million or 4.3%, from $589.4 million during the Year-to-Date 2022. The decrease in U.S. eCommerce was primarily driven by 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.
International eCommerce Net revenue was $74.4 million for Year-to-Date 2023, a decrease of $44.1 million or 37.2%, from $118.5 million during the Year-to-Date 2022. The decrease in International eCommerce was due to continued assortment editing with a focus on key categories and reduced clearance inventories in Europe and the closing of Lands’ End Japan at the end of Fiscal 2022. Excluding the $25.5 million of Lands’ End Japan, Net revenue for International eCommerce decreased 19.9% .
Outfitters Net revenue was $216.3 million for Year-to-Date 2023, an increase of $10.9 million or 5.3%, from $205.4 million during the Year-to-Date 2022. Compared to the Year-to-Date 2022, the increase was primarily driven by inventory sales to Delta Air Lines at the conclusion of their five-year contract in the First Quarter 2023. Excluding the $9.2 million increase in year over year revenue from the Delta Air Lines business, Net revenue for the Outfitters business increased by 0.9%.
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Third Party Net revenue was $71.4 million for Year-to-Date 2023, a decrease of $8.4 million or 10.6% from $79.8 million during the Year-to-Date 2022. The decrease was primarily driven by a decline in Kohl’s partially offset by growth in marketplace sales through other existing marketplaces.
Retail Net revenue was $31.8 million for Year-to-Date 2023, a decrease of $0.9 million or 2.8%, from $32.7 million during the Year-to-Date 2022. Our U.S. Company Operated stores experienced an increase of 0.3% in Same Store Sales as compared to the Year-to-Date 2022. On October 27, 2023 there were 26 U.S. Company Operated stores compared to 29 U.S. Company Operated stores on October 28, 2022.
Gross Profit
Gross profit was $430.1 million for Year-to-Date 2023, an increase of $8.5 million or 2.0% from $421.6 million during Year-to-Date 2022. Gross margin increased to 44.9% in Year-to-Date 2023, compared with 41.1% in Year-to-Date 2022. The 380 basis point improvement in gross margin was primarily driven by leveraging the strength in the swim, outerwear and newness in adjacent product categories across the channels, reduction in clearance inventory and improvements in supply chain costs for Year-to-Date 2023 compared to the prior year.
Selling and Administrative Expenses
Selling and administrative expenses increased $0.6 million to $377.7 million or 39.4% of total Net revenue in Year-to-Date 2023 compared with $377.1 million or 36.8% of Net revenue in Year-to-Date 2022. The approximately 270 basis point increase was driven by deleveraging from lower revenues and higher incentive related personnel costs, partially offset by lower digital marketing spend and continued cost controls.
Depreciation and Amortization
Depreciation and amortization expense was $28.4 million in Year-to-Date 2023, a decrease of $0.8 million or 2.7%, compared with $29.2 million in Year-to-Date 2022.
Goodwill Impairment
Goodwill impairment was $106.7 million in Year-to-Date 2023 compared to none in Year-to-Date 2022. We recorded full impairment of the $70.4 million and $36.3 million of goodwill allocated to our U.S. eCommerce and Outfitters reporting units, respectively, in Year-to-Date 2023 due to the decline in stock price and market capitalization, as well as current market conditions and macroeconomic conditions. See Note 1, Background and Basis Presentation .
Other Operating Expense
Other operating expense, net was $2.9 million in Year-to-Date 2023, a decrease of $0.2 million or 6.5% compared with $3.1 million in Year-to-Date 2022. Year-to-Date 2023 includes $2.7 million of corporate restructuring costs, primarily severance costs in our Hong Kong sourcing office, compared to $3.0 million of Lands’ End Japan closing costs recorded in Year-to-Date 2022.
Operating Income (Loss )
Operating loss was $85.6 million in Year-to-Date 2023 compared to Operating income of $12.2 million in Year-to-Date 2022. The $97.8 million increase in Operating loss was a result of the $106.7 million non-cash goodwill impairment charge recorded in Third Quarter 2023.
Interest Expense
Interest expense was $36.0 million in Year-to-Date 2023 compared to $27.8 million in Year-to-Date 2022. The $8.2 million increase was primarily attributed to higher applicable interest rates on the Debt Facilities.
Other Expense (Income)
Other income was $0.5 million in Year-to-Date 2023 compared to Other income $0.1 million in Year-to-Date 2022.
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Income Tax (Benefit) Expense
We recorded an income tax expense at an overall effective tax rate of (0.8)% for Year-to-Date 2023 and an income tax benefit of 40.5% for Year-to-Date 2022. The overall effective tax rate for the 39 weeks ended October 27, 2023, reflects the impacts resulting from the impairment of non-tax deductible goodwill recorded in the Third Quarter 2023. The overall effective tax rate for the 39 weeks ended October 28, 2022, reflect tax benefits recorded as a result of Lands’ End Japan closing costs recorded in the Third Quarter 2022.
Net Income (Loss)
As a result of the above factors, Net loss was $122.1 million and diluted loss per share was $3.80 in Year-to-Date 2023 compared with Net loss of $9.2 million and diluted loss per share of $0.28 in Year-to-Date 2022. The increase in Net loss was primarily due to the $106.7 million non-cash goodwill impairment charge recorded in Third Quarter 2023.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was $52.6 million in Year-to-Date 2023 compared to $46.3 million in Year-to-Date 2022.
Adjusted Net Income (Loss)
Adjusted net loss was $12.8 million and Adjusted diluted net loss per share was $0.40 in Year-to-Date 2023 compared with Adjusted net loss of $6.2 million and Adjusted diluted net loss per share of $0.19 in Year-to-Date 2022.
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. The ABL Facility had a balance outstanding of $110.0 million on October 27, 2023, other than letters of credit. Cash generated from our net revenue and profitability, and to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a significant amount of net revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year. We expect that our cash on hand and cash flows from operations, along with revolving on the ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months.
Description of Material Indebtedness
Debt Arrangements
Our $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs. The amount available to borrow is the lesser of (1) the Aggregate Commitments of $275.0 million (“ABL Facility Limit”) or (2) the Borrowing Base which is calculated from Eligible Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility. The balance outstanding on October 27, 2023 and October 28, 2022 was $110.0 million and $160.0 million, respectively. The balance of outstanding letters of credit was $8.9 million and $11.8 million on October 27, 2023 and October 28, 2022, respectively.
On September 9, 2020, we entered into the Term Loan Facility which provided borrowings of $275.0 million. Origination costs, including an Original Issue Discount (“OID”) of 3% and $5.1 million in debt origination fees, were paid in connection with entering into the Term Loan Facility.
Interest; Fees
Effective May 12, 2023, we executed the Fourth Amendment (the “Fourth Amendment”) to the ABL Facility which replaced the interest rate benchmark based on LIBOR with an interest rate benchmark based on SOFR plus an adjustment of 0.10% for all loans (“ABL Adjusted SOFR”). This transition resulted in no material interest rate impact. The ABL Adjusted SOFR rate is now available for all new loans after the effective date of the Fourth Amendment.
Effective with the Fourth Amendment, the ABL Facility interest rate, selected at the borrower’s election, is either (1) ABL Adjusted SOFR, or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month ABL Adjusted SOFR rate plus 1.00%, or (c) the Wells Fargo “prime rate”. The borrowing margin for ABL Adjusted SOFR loans is (i) less than $95.0 million,
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1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For base rate loans, the borrowing margin is (i) less than $95.0 million, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00% (“Applicable Borrowing Margin”). The Applicable Borrowing Margin for all loans is based upon the average daily total loans outstanding for the previous quarter.
Prior to the Fourth Amendment to the ABL Facility, the interest rate, selected at the borrower’s election, was either (1) LIBOR (plus the Applicable Borrowing Margin), or (2) a base rate (plus the Applicable Borrowing Margin) which was the greater of (a) the federal funds rate plus 0.50%, (b) the one-month LIBOR rate plus 1.00%, or (c) the Wells Fargo “prime rate”.
Effective June 22, 2023, we entered into Amendment No. 1 (the “First Amendment”) to the Term Loan Facility which (subject to a 1% floor) replaced the interest rate benchmark based upon LIBOR with an interest rate benchmark based upon SOFR plus adjustments of either (a) 0.11448% for a one-month interest period, (b) 0.26161% for a three-month interest period, or (c) 0.42826% for a six-month interest period (“Term Loan Adjusted SOFR”). This transition resulted in no material interest rate impact.
Effective with the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility is based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Adjusted Loan SOFR rate plus 9.75% or (2) an alternative base rate (which is the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which shall be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month Term Loan Adjusted SOFR rate plus 1.00% per annum) plus 8.75%.
Prior to the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a LIBOR rate (with a minimum rate of 1.00%) plus 9.75% or (2) an alternative base rate (which was the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which was to be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month LIBOR rate plus 1.00% per annum) plus 8.75%.
During Second Quarter 2023, we adopted ASU 2020-04, the optional practical expedient for Reference Rate Reform related to its Debt Facilities and as such, these amendments are treated as a continuation of the existing debt agreement and no gain or loss on these modifications were recorded in the Condensed Consolidated Statement of Operations.
Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees include (i) commitment fees of 0.25% based upon the average daily unused commitment (aggregate commitment less loans and letter of credit outstanding) under the ABL Facility for the preceding fiscal quarter and (ii) customary letter of credit fees. As of October 27, 2023, we had borrowings of $110.0 million under the ABL Facility.
Maturity; Amortization and Prepayments
The ABL Facility maturity date is the earlier of (a) July 29, 2026 and (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness.
The Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to 1.25% per quarter. It is subject to mandatory prepayments in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 75% depending on our total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan could not be voluntarily prepaid during the first two years of its term without significant penalties. A prepayment premium of 1% applies to voluntary prepayments and certain mandatory prepayments made between September 9, 2023 and September 9, 2024 and no premium applies to such prepayments thereafter.
Guarantees; Security
All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is secured by a second priority interest in the same collateral, with certain exceptions.
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Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business.
The Term Loan Facility contains certain financial covenants, including a quarterly maximum total leverage ratio test, a weekly minimum liquidity test and an annual maximum capital expenditure amount.
Under the ABL Facility, if excess availability falls below the greater of 10% of the Loan Cap amount or $15.0 million, we will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0.
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 October 27, 2023, we were in compliance with our financial covenants in the Debt Facilities.
Events of Default
The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
Cash Flows from Operating Activities
Net cash provided by operating activities was $36.7 million during Year-to-Date 2023 compared to net cash used in operating activities of $126.0 million during Year-To-Date 2022. The $162.7 million improvement in cash provided by operating activities was primarily due to the year-over-year improvement in inventory flow and productivity.
Cash Flows from Investing Activities
Net cash used in investing activities was $28.5 million and $20.5 million during Year-To-Date 2023 and Year-To-Date 2022, respectively. Cash used in investing activities for both periods was primarily used for investments to update our digital information technology infrastructure.
For Fiscal 2023, we plan to invest approximately $35.0 million in capital expenditures for strategic investments and infrastructure, primarily in technology and general corporate needs.
Cash Flows from Financing Activities
Net cash used in financing activities was $11.4 million during Year-To-Date 2023, compared with net cash provided by financing activities of $140.1 million during Year-To-Date 2022. The decrease in net cash provided by financing activities is primarily due to lower inventory levels.
Contractual Obligations and Off-Balance-Sheet Arrangements
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended January 27, 2023.
Financial Instruments with Off-Balance-Sheet Risk
The $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and has a maturity date of the earlier of (a) July 29, 2026 and (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness. The ABL Facility is available for working capital and other general corporate liquidity needs. The balance outstanding on October 27, 2023 and October 28, 2022 was
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$110.0 million and $160.0 million, respectively. The balance of outstanding letters of credit was $8.9 million and $11.8 million on October 27, 2023 and October 28, 2022, respectively.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Goodwill and Trade Name Impairment Analysis
Goodwill and the indefinite-lived trade name intangible asset are tested separately for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment assessments contain multiple uncertainties because the calculation requires management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting cash flows under different scenarios.
Goodwill impairment assessments
In connection with the preparation of the financial statements included in this Form 10-Q, we considered the decline in our stock price and market capitalization, as well as current market and macroeconomic conditions, to be a triggering event for the U.S. eCommerce and Outfitters reporting units and therefore completed an interim test for impairment of goodwill for these reporting units as of October 27, 2023. We tested goodwill for impairment using a one-step quantitative test. The quantitative test compares the reporting unit’s fair value to its carrying value. An impairment is recorded for any excess carrying value above the reporting unit’s fair value, not to exceed the amount of goodwill. We estimate the fair value of our reporting units using a discounted cash flow model, commonly referred to as the income approach. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions appropriate to our reporting unit. The discounted cash flow model uses management’s best estimates of economic and market conditions over the projected period using the best information available, including growth rates in revenues, costs and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, weighted average cost of capital and changes in future working capital requirements.
The testing resulted in full impairment of $70.4 million and $36.3 million of goodwill allocated to our U.S. eCommerce and Outfitters reporting units, respectively.
Indefinite-lived intangible asset impairment assessments
Our indefinite-lived intangible asset is the Lands’ End trade name. We review the trade name for impairment on an annual basis during the fourth fiscal quarter, or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The fair value of the trade name indefinite-lived intangible asset is estimated using the relief from royalty method. The relief from royalty method is based on the assumption that, in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class. The relief from royalty method involves two steps: (1) estimation of reasonable royalty rates for the assets and (2) the application of these royalty rates to a forecasted net revenue stream and discounting the resulting cash flows to determine a present value. We multiply the selected royalty rate by the forecasted net revenue stream to calculate the cost savings (relief from royalty payment) associated with the asset. The cash flows are then discounted to present value using the selected discount rate and compared to the carrying value of the asset.
In connection with the preparation of the financial statements included in this Form 10-Q, we considered the decline in our stock price and market capitalization, as well as current market and macroeconomic conditions to be a triggering event for the Lands’ End trade name. The fair value of the trade name indefinite-lived intangible asset was estimated using the relief from royalty method and the testing resulted in no impairment to the Lands’ End trade name. Our impairment testing indicates the fair value of the trade name exceeds the carrying value by 6.1%.
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”) we reviewed the long-lived asset groups for impairment as of October 27, 2023.
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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 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. We recognized long-lived asset impairment for Operating lease right-of-use assets and property and equipment, net for identified individual Company Operated stores in the amount of no impairment and $0.1 million as of October 27, 2023 and October 28, 2022, respectively, recorded in Other operating expense, net in the Condensed Consolidated Statement of Operations.
We reviewed the remaining long-lived asset groups for impairment as of October 27, 2023. We 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 amount resulting in no impairment.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended January 27, 2023. There have been no significant changes in our critical accounting policies or their application since January 27, 2023.
Recent Accounting Pronouncements
See Part I, Item 1, Note 2, Recent Accounting Pronouncements , of the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross margin, operating expenses, operating income, net income, adjusted EBITDA, cash flow, financial condition, financings, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, market opportunities and general market and industry conditions. We generally identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely,” “targeting” or the negative version of these words or comparable words. Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 27, 2023 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.
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ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
The Company’s international subsidiaries operate with functional currencies other than the U.S. dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. dollars, the Company must translate all components of these financial statements from the functional currencies into U.S. dollars at exchange rates in effect during or at the end of the reporting period. Net revenue generated from the International distribution channel represented approximately 8% of our total net revenue Year-to-Date 2023. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of net revenue, expenses, assets and liabilities. Assuming a 10% change in foreign currency exchange rates, net revenue for Year-to-Date 2023 would have increased or decreased by approximately $7.4 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 2023 totaled approximately $0.4 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 October 27, 2023, the Company had $9.0 million of cash and cash equivalents denominated in foreign currency in British pound sterling, Hong Kong dollar, euro and Japanese yen.
Interest Rate Risk
We are subject to interest rate risk with the Term Loan Facility and the ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates (above the 1.00% SOFR floor) associated with the Term Loan Facility would result in a $2.3 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn to a principal amount equal to $275.0 million, each one percentage point change in interest rates would result in a $2.8 million change in our annual cash interest expense.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our 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 October 27, 2023, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the most recently completed fiscal quarter ended October 27, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
As disclosed in the Company’s Annual Report on Form 10-K for the year ended January 27, 2023, the Company is the defendant in three separate lawsuits, each of which allege adverse health events and personal property damage as a result of wearing uniforms manufactured by Lands’ End: (1) Gilbert et al. v. Lands’ End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-00823-JDP, complaint filed October 3, 2019; (2) Andrews et al. v. Lands’ End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-01066-JDP, complaint filed on December 31, 2019, on behalf of 521 named plaintiffs, later amended to include 1,089 named plaintiffs; and (3) Davis et al. v. Lands’ End, Inc. and Lands’ End Business Outfitters, Inc., United States District Court for the Western District of Wisconsin, Case No. 3:20-cv-00195, complaint filed on March 4, 2020. Plaintiffs in Gilbert, Andrews, and Davis seek nationwide class certification on behalf of similarly situated Delta employees.
By order dated April 20, 2020, the Court consolidated the Gilbert and Andrews cases (the “Consolidated Wisconsin Action”) and stayed the Davis case. Plaintiffs in the Consolidated Wisconsin Action and Davis each assert that the damages sustained by the members of the proposed class exceed $5,000,000. Plaintiffs in each case seek damages for personal injuries, pain and suffering, severe emotional distress, financial or economic loss, including medical services and expenses, lost income and other compensable injuries. Plaintiffs in the Consolidated Wisconsin Action seek class certification with respect to performance of the uniforms and warranty claims and maintain individual claims for personal injury by numerous named plaintiffs.
On August 18, 2021, the Court ruled on several pending motions in the Consolidated Wisconsin Action. The Court denied Plaintiffs’ motion for class certification with respect to performance of the uniforms and warranty claims. The Court denied Plaintiffs’ motion for partial summary judgment regarding crocking claims and granted Lands’ End’s motion for partial summary judgment related to certain warranty claims. In addition, giving effect to both the addition and voluntary dismissal of individual plaintiffs over the course of the litigation, the number of individual plaintiffs had been reduced from 1,089 to 603 as of August 18, 2021. On September 1, 2021, Plaintiffs filed a Rule 23(f) petition, seeking interlocutory review of the Court’s decision denying class certification. On September 22, 2021, the U.S. Court of Appeals for the Seventh Circuit denied plaintiffs’ petition.
On July 8, 2022, the Court issued an Opinion and Order in the Consolidated Wisconsin Action (the “July 8 Opinion”), ruling in the Company’s favor on several additional pending motions. The Court granted the Company’s motion to exclude Plaintiffs’ expert opinions because the opinions were not based on reliably applied and scientifically valid methods. Accordingly, because Plaintiffs failed to submit evidence sufficient to show that the uniforms were defective or that a defect in the uniforms caused Plaintiffs’ alleged health problems, the Court granted the Company’s motion for summary judgement on Plaintiffs’ personal injury claims.
After giving effect to the July 8 Opinion, the remaining claims under the Consolidated Wisconsin Action related to claims for property damage and breach of warranty. Following these rulings and an order of the court dated December 1, 2022, 277 named Plaintiffs remained in the case who claim they have suffered personal property damage as a result of dye transferring to personal items, with aggregate claims of approximately $110,000 in damages. The Court set a deadline for the parties to voluntarily resolve these remaining outstanding claims, and on July 19, 2023 the parties reported to the Court that they had reached a settlement in principle of the matter, 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. Lands’ End continues its vigorous defense of this case and maintains that the claims are without merit.
ITEM 1A. RI SK FACTORS
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 27, 2023, filed with the SEC on April 10, 2023.
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ITEM 2. UNREGISTE RED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Issuer Purchases of Equity Securities
The following table presents a month-to-month summary of information with respect to purchases of common stock made during the Third Quarter 2023 pursuant to the 2022 Share Repurchase Program announced on June 28, 2022:
|
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share (2) |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3) |
|
|
Approximate Dollar Value (in thousands) of Shares that May Yet Be Purchased Under the Plans or Programs |
|
||||
|
July 29 - August 25 |
|
|
124,846 |
|
|
$ |
9.81 |
|
|
|
124,846 |
|
|
$ |
33,556 |
|
|
August 26 - September 29 |
|
|
215,758 |
|
|
$ |
8.01 |
|
|
|
215,758 |
|
|
$ |
31,829 |
|
|
September 30 - October 27 |
|
|
5,342 |
|
|
$ |
7.47 |
|
|
|
5,342 |
|
|
$ |
31,789 |
|
|
Total |
|
|
345,946 |
|
|
$ |
8.65 |
|
|
|
345,946 |
|
|
|
|
|
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the fiscal quarter ended October 27, 2023
, none of the Company’s
38
Table of Contents
ITEM 6. E XHIBITS
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)). |
|
|
|
|
|
|
|
Letter from Lands’ End, Inc. to Bernard McCracken relating to employment, dated September 14, 2023.* |
|
|
|
|
|
|
|
Executive Severance Agreement by and between Lands’ End, Inc. and Bernard McCracken, dated September 14, 2023.* |
|
|
|
|
|
|
|
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.
39
Table of Contents
SIGNA TURES
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: December 5, 2023
40