UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xQuarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended November 2, 20181, 2019
-OR-
¨Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to                     to                     .
Commission File Number: 001-09769
Lands’ End, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-2512786
(State or Other Jurisdiction of
Incorporation of Organization)		 (I.R.S. Employer
Identification No.)
   
1 Lands’ End Lane
Dodgeville, Wisconsin
 53595
(Address of Principal Executive Offices) (Zip Code)
(608) 935-9341
(Registrant’s Telephone Number Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareLEThe NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.  
Large accelerated filer ¨Accelerated filerx
     
Non-accelerated filer ¨Smaller reporting company¨
     
Emerging growth company ¨  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x
As of December 3, 20182, 2019 the registrant had 32,211,64132,372,693 shares of common stock, $0.01 par value, outstanding.

LANDS’ END, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED NOVEMBER 2, 20181, 2019
TABLE OF CONTENTS
 
    Page
    
  PART I FINANCIAL INFORMATION  
    
Item 1. Financial Statements (Unaudited) 
1
    
  Condensed Consolidated Statements of Operations 
1
    
  Condensed Consolidated Statements of Comprehensive Operations 
2
     
  Condensed Consolidated Balance Sheets 
3
    
  Condensed Consolidated Statements of Cash Flows 
4
     
  Condensed Consolidated Statements of Changes in Stockholders' Equity
5
Notes to Condensed Consolidated Financial Statements 
57
    
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 
2019
    
Item 3. Quantitative and Qualitative Disclosures about Market Risk 
3330
    
Item 4. Controls and Procedures 
3431
    
  PART II OTHER INFORMATION  
    
Item 1. 
Legal Proceedings
 
3532
    
Item 1A. Risk Factors 
3532
     
Item 6. Exhibits 
3633
     
  Signatures 
3835

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDS’ END, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 13 Weeks Ended 39 Weeks Ended 13 Weeks Ended 39 Weeks Ended
(in thousands, except per share data) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Net revenue $341,570

$325,489
 $949,340
 $896,044
 $340,023

$341,570
 $900,723
 $949,340
Cost of sales (excluding depreciation and amortization) 190,608
 183,515
 528,587
 497,262
 185,848
 190,608
 497,589
 528,587
Gross profit 150,962
 141,974
 420,753
 398,782
 154,175
 150,962
 403,134
 420,753
                
Selling and administrative 135,274
 129,122
 388,315
 377,804
 135,417
 135,274
 374,521
 388,315
Depreciation and amortization 7,361

6,347
 20,420
 19,031
 8,076

7,361
 23,101
 20,420
Other operating (income) expense, net (158) 564
 132
 2,552
 (225) (158) (99) 132
Operating income (loss) 8,485
 5,941
 11,886
 (605)
Operating income 10,907
 8,485
 5,611
 11,886
Interest expense 7,303
 6,350
 21,216
 18,642
 6,121
 7,303
 20,190
 21,216
Other expense (income), net 1,866
 (576) 5,317
 (1,812)
(Loss) income before income taxes (684) 167
 (14,647) (17,435)
Income tax (benefit) expense (3,978) 5
 (10,026) (5,878)
Other (income) expense, net (166) 1,866
 (1,640) 5,317
Income (loss) before income taxes 4,952
 (684) (12,939) (14,647)
Income tax expense (benefit) 1,346
 (3,978) (6,713) (10,026)
NET INCOME (LOSS) $3,294

$162
 $(4,621) $(11,557) $3,606

$3,294
 $(6,226) $(4,621)
NET INCOME (LOSS) PER COMMON SHARE                
Basic: $0.10

$0.01
 $(0.14) $(0.36) $0.11

$0.10
 $(0.19) $(0.14)
Diluted: $0.10
 $0.01
 $(0.14) $(0.36) $0.11
 $0.10
 $(0.19) $(0.14)
                
Basic weighted average common shares outstanding 32,211

32,095
 32,182
 32,068
 32,371

32,211
 32,333
 32,182
Diluted weighted average common shares outstanding 32,314

32,117
 32,182
 32,068
 32,398

32,314
 32,333
 32,182
 


LANDS’ END, INC.
Condensed Consolidated Statements of Comprehensive Operations
(Unaudited)
 13 Weeks Ended 39 Weeks Ended 13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
NET INCOME (LOSS) $3,294
 $162
 $(4,621) $(11,557) $3,606
 $3,294
 $(6,226) $(4,621)
Other comprehensive (loss) income, net of tax        
Other comprehensive income (loss), net of tax        
Foreign currency translation adjustments (39)
(79) (3,215) 1,060
 2,290

(39) (178) (3,215)
COMPREHENSIVE INCOME (LOSS) $3,255
 $83
 $(7,836) $(10,497) $5,896

$3,255
 $(6,404) $(7,836)


LANDS’ END, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data) November 2, 2018 October 27, 2017 February 2, 2018 November 1, 2019 November 2, 2018 February 1, 2019
ASSETS            
Current assets            
Cash and cash equivalents $105,933

$92,913
 $195,581
 $15,859

$105,933
 $193,405
Restricted cash 2,069

1,640

2,356
 1,830

2,069

1,948
Accounts receivable, net 41,496
 39,044
 49,860
 38,125
 41,496
 34,549
Inventories, net 431,950
 423,540
 332,297
 499,855
 431,950
 321,905
Prepaid expenses and other current assets 49,001
 48,934
 26,659
 47,538
 49,001
 36,574
Total current assets 630,449
 606,071
 606,753
 603,207
 630,449
 588,381
Property and equipment, net 145,808
 129,955
 136,501
 155,051
 145,808
 149,894
Operating lease right-of-use asset 31,380
 —
 —
Goodwill 110,000

110,000

110,000
 110,000

110,000

110,000
Intangible asset, net 257,000

257,000

257,000
 257,000

257,000

257,000
Other assets 5,461
 17,454
 13,881
 5,204
 5,461
 5,636
TOTAL ASSETS $1,148,718

$1,120,480

$1,124,135
 $1,161,842

$1,148,718

$1,110,911
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current liabilities            
Current borrowings and short-term debt $85,150
 $5,150
 $5,150
Accounts payable $179,036
 $160,340
 $155,874
 174,312
 179,036
 123,827
Lease liability - current 6,344
 —
 —
Other current liabilities 116,367
 103,886
 100,257
 103,396
 111,217
 112,274
Total current liabilities 295,403
 264,226
 256,131
 369,202
 295,403
 241,251
Long-term debt, net 483,401

487,197

486,248
 379,606

483,401

482,453
Lease liability - long-term 30,971
 —
 —
Long-term deferred tax liabilities 58,462
 91,392
 59,137
 56,109
 58,462
 58,670
Other liabilities 7,246
 14,568
 15,526
 5,469
 7,246
 5,826
TOTAL LIABILITIES 844,512
 857,383
 817,042
 841,357
 844,512
 788,200
Commitments and contingencies 
 
 
Commitments and contingencies (Note 9) 
 
 
STOCKHOLDERS’ EQUITY            
Common stock, par value $0.01 authorized: 480,000,000 shares; issued and outstanding: 32,211,641, 32,095,021 and 32,101,793, respectively 320
 320
 320
Common stock, par value $0.01 authorized: 480,000,000 shares; issued and outstanding: 32,372,693, 32,211,641 and 32,220,080, respectively 324
 320
 320
Additional paid-in capital 351,064
 346,153
 347,175
 358,648
 351,064
 352,733
Accumulated deficit (33,371) (72,010) (29,810) (25,126) (33,371) (17,159)
Accumulated other comprehensive loss (13,807)
(11,366)
(10,592) (13,361)
(13,807)
(13,183)
Total stockholders’ equity 304,206
 263,097
 307,093
 320,485
 304,206
 322,711
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
 $1,148,718
 $1,120,480
 $1,124,135
 $1,161,842
 $1,148,718
 $1,110,911


LANDS’ END, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 39 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss $(4,621) $(11,557) $(6,226) $(4,621)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization 20,420
 19,031
 23,101
 20,420
Loss on property and equipment 121
 151
(Gain) loss on property and equipment (99) 121
Amortization of debt issuance costs 1,394
 1,284
 1,293
 1,394
Stock-based compensation 4,432
 2,855
 6,632
 4,432
Noncash lease impacts 1,837
 —
Deferred income taxes 180
 355
 (1,899) 180
Change in operating assets and liabilities:        
Inventories (103,177) (96,522) (178,016) (103,177)
Accounts payable 26,742
 944
 50,173
 26,742
Other operating assets (2,864) (21,890) (14,755) (2,864)
Other operating liabilities 5,125
 17,542
 (6,992) 5,125
Net cash used in operating activities (52,248) (87,807) (124,951) (52,248)
CASH FLOWS FROM INVESTING ACTIVITIES        
Sales of property and equipment 127
 —
 —
 127
Purchases of property and equipment (33,160) (29,143) (28,487) (33,160)
Net cash used in investing activities (33,033)
(29,143) (28,487)
(33,033)
CASH FLOWS FROM FINANCING ACTIVITIES        
Payments on term loan facility (3,865) (3,863)
Proceeds from borrowing under ABL Facility 95,000
 —
Payments of borrowings under ABL Facility (15,000) —
Payments of term-loan (103,863) (3,865)
Payments of employee withholding taxes on share-based compensation (543) (674) (713) (543)
Net cash used in financing activities (4,408) (4,537) (24,576) (4,408)
Effects of exchange rate changes on cash, cash equivalents and restricted cash (246) (368) 350
 (246)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (89,935) (121,855) (177,664) (89,935)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD 197,937
 216,408
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 195,353
 197,937
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD $108,002
 $94,553
 $17,689
 $108,002
SUPPLEMENTAL CASH FLOW DATA        
Unpaid liability to acquire property and equipment $4,707
 $4,796
 $5,494
 $4,707
Income taxes paid, net of refunds $1,420
 $3,220
 $3,225
 $1,420
Interest paid $19,792
 $17,106
 $18,455
 $19,792

LANDS' END, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
 Common Stock Issued 
Additional Paid-in
Capital
 Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Equity
(in thousands except share data)Shares Amount 
Balance at February 1, 201932,220,080
 $320
 $352,733
 $(17,159) $(13,183) $322,711
Net loss—
 —
 —
 (6,818) —
 (6,818)
Cumulative translation adjustment, net of tax—
 —
 —
 —
 (234) (234)
Change in accounting principle related to lease accounting—
 —
 —
 (1,741) —
 (1,741)
Stock-based compensation expense—
 —
 1,974
 —
 —
 1,974
Vesting of restricted shares185,052
 4
 (4) —
 —
 —
Restricted stock shares surrendered for taxes(41,912) —
 (687) —
 —
 (687)
Balance at May 3, 201932,363,220
 $324
 $354,016
 $(25,718) $(13,417) $315,205
Net loss—
 —
 —
 (3,014) —
 (3,014)
Cumulative translation adjustment, net of tax—
 —
 —
 —
 (2,234) (2,234)
Stock-based compensation expense—
 —
 2,329
 —
 —
 2,329
Vesting of restricted shares9,096
 —
 —
 —
 —
 —
Restricted stock shares surrendered for taxes(2,338) —
 (21) —
 —
 (21)
Balance at August 2, 201932,369,978
 $324
 $356,324
 $(28,732) $(15,651) $312,265
Net income—
 —
 —
 3,606
 —
 3,606
Cumulative translation adjustment, net of tax—
   —
 —
 2,290
 2,290
Stock-based compensation expense—
 —
 2,329
 —
 —
 2,329
Vesting of restricted shares3,242
 —
 —
 —
 —
 —
Restricted stock shares surrendered for taxes(527) —
 (5) —
 —
 (5)
Balance at November 1, 201932,372,693
 $324
 $358,648
 $(25,126) $(13,361) $320,485


 Common Stock Issued 
Additional Paid-in
Capital
 Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Equity
(in thousands except share data)Shares Amount 
Balance at February 2, 201832,101,793
 $320
 $347,175
 $(29,810) $(10,592) $307,093
Net loss—
 —
 —
 (2,630) —
 (2,630)
Cumulative translation adjustment, net of tax—
 —
 —
 —
 (1,636) (1,636)
Change in accounting principle related to revenue recognition—
 —
 —
 1,060
 —
 1,060
Stock-based compensation expense—
 —
 967
 —
 —
 967
Vesting of restricted shares132,620
 —
 —
 —
 —
 —
Restricted stock shares surrendered for taxes(26,295) —
 —
 —
 —
 —
Balance at May 4, 201832,208,118
 $320
 $348,142
 $(31,380) $(12,228) $304,854
Net loss—
 —
 —
 (5,285) —
 (5,285)
Cumulative translation adjustment, net of tax—
 —
 —
 —
 (1,540) (1,540)
Stock-based compensation expense—
 —
 1,729
 —
 —
 1,729
Vesting of restricted shares6,173
 —
 —
 —
 —
 —
Restricted stock shares surrendered for taxes(2,001) —
 (533) —
 —
 (533)
Balance at August 3, 201832,212,290
 $320
 $349,338
 $(36,665) $(13,768) $299,225
Net income—
 —
 —
 3,294
 —
 3,294
Cumulative translation adjustment, net of tax—
 —
 —
 —
 (39) (39)
Stock-based compensation expense—
 —
 1,736
 —
 —
 1,736
Vesting of restricted shares1,320
 —
 —
 —
 —
 —
Restricted stock shares surrendered for taxes(1,969) —
 (10) —
 —
 (10)
Balance at November 3, 201832,211,641
 320
 351,064
 (33,371) (13,807) $304,206


LANDS’ END, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business
Lands' End, Inc. ("Lands' End" or the "Company") is a leading multi-channeluni-channel retailer of casual clothing, accessories, footwear and home products. We offer products through catalogs, online at www.landsend.comand affiliated specialty and international websites,, on third party online marketplaces and through retail locations. We are a classic American lifestyle brand with a passion for quality, legendary service and real value, and seek to deliver timeless style for men, women, men, kids and the home.
Terms that are commonly used in the Company's notes to Condensed Consolidated Financial Statements are defined as follows:
• ABL Facilities - Collectively, the Prior ABL Facility and the Current ABL Facility
• Adjusted EBITDA - Net income (loss) net of Income tax benefit, Other income, net, Interest expense, Depreciation and amortization and certain significant items
• ASC - FASB Accounting Standards Codification
• ASU - FASB Accounting Standards Update
• CAM - Common area maintenance for leased properties
• Company Operated stores - Lands' End retail stores
• Current ABL Facility - Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders
• Adjusted EBITDA - Net loss net of Income tax benefit, Other income (expense), net, Interest expense, Depreciation and amortization and certain significant items
• ASC - FASB Accounting Standards Codification, which serves as the source for authoritative GAAP, as supplemented by rules and interpretive releases by the SEC which are also sources of authoritative GAAP for SEC registrants
• ASU - FASB Accounting Standards Update
• CAM - Common area maintenance for leased properties
• Debt Facilities - Collectively, the Current ABL Facility and the Term Loan Facility
• Deferred Awards - Time vesting stock awards
• EPS - Earnings (loss) per share
• ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
• FASB - Financial Accounting Standards Board
• First Quarter 20182019 - The thirteen13 weeks ended May 4, 20183, 2019
• Fiscal 2017 - The fifty-three weeks ended February 2, 2018
• Fiscal 2018 - The fifty-two52 weeks endingended February 1, 2019
• Fiscal 20202019 - The fifty-two52 weeks ending January 29, 202131, 2020
• Fourth Quarter 20172019 - The fourteenthe 13 weeks ended February 2, 2018ending January 31, 2020
• GAAP - Accounting principles generally accepted in the United States
• Lands' End Shops at Sears - Lands' End shops operated within Sears stores
• LIBOR - London inter-bank offered rate
• Option Awards - Stock option awards
• Performance Awards - Performance-based stock awards
• Prior ABL Facility - Asset-based senior secured credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders, terminated November 16, 2017

5

Table of Contents

• Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries (other than, for all periods following the Separation, Lands' End)
• SEC - United States Securities and Exchange Commission

7

Table of Contents

• Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
• SHMC - Sears Holdings Management Corporation, a subsidiary of Sears Holdings Corporation
• Target Shares - Shares to be delivered to participants based on achievement of target performance metrics
• Tax Act - The Tax Cuts and Jobs Act passed by the United States government on December 22, 2017
• Tax Sharing Agreement - A tax sharing agreement entered into by Sears Holdings Corporation and Lands' End in connection with the Separation
• Term Loan Facility - Term loan credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
• Third Quarter 2018 - The thirteen13 weeks ended November 2, 2018
• Third Quarter 20172019 - The thirteen13 weeks ended October 27, 2017November 1, 2019
• Transform Holdco - Transform Holdco LLC, an affiliate of ESL, which on February 11, 2019 acquired from Sears Holdings substantially all of the go-forward retail footprint, and other assets and component businesses of Sears Holdings as a going concern
• UTBs - Gross unrecognized tax benefits
• Year-to-Date 2018 - The thirty-nine39 weeks ended November 2, 2018
• Year-to-Date 20172019 - The thirty-nine39 weeks ended October 27, 2017November 1, 2019
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Lands' End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands' End Annual Report on Form 10-K filed with the SEC on March 29, 2018.28, 2019.
Reclassifications
In the First Quarter 2018, the Company adopted ASU 2016-18, Restricted Cash, which changed the required presentation of Restricted cash on the Condensed Consolidated Statements of Cash Flows to include those amounts generally described as Restricted cash or restricted cash equivalents with Cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown. As a result of the adoption, the Company reclassified the amount of beginning-of-period cash, cash equivalents, and restricted cash presented in the Condensed Consolidated Statement of Cash Flows to include Restricted cash.

68

Table of Contents

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Revenue from Contracts with Customers
Leases

In May 2014,February 2016 the FASB issued ASU 2014-09, Revenue from Contracts with Customers2016-02, Leases (“ASC 842”), which provides guidancechanged how companies account for revenue recognition. In First Quarter 2018,leases. On February 2, 2019, the Company adopted the guidance using the modified retrospective method resultingComparatives under 840 option approach which waives the requirement to apply ASC 842 in only those contractsthe comparative periods presented within the financial statements in the year of adoption. Lands' End elected the practical expedient package, which among other practical expedients, includes the option to retain the historical classification of leases entered into prior to February 2, 2019. The Company also elected the practical expedient to combine lease and non-lease components.

The Company is a lessee under various lease agreements for its equipment and retail operations. The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease possession (date in which the Company takes possession of the asset). At lease possession the Company also measures and recognizes a right-of-use asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. The lease term is defined as the noncancelable portion of the lease term plus any periods covered by an option to extend the lease, if it is reasonably certain that were openthe option will be exercised. For the purposes of recognizing right-of-use assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient of not recognizing a right-of-use asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The Company's leases are classified as operating leases, which are included in the Operating lease right-of-use asset, Lease liability - current and Lease liability - long-term on the Company's Condensed Consolidated Balance sheets.

Right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments, over the lease term, as of the possession date. Minimum lease payments include the fixed lease component of the agreement as well as any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Lease terms may include options to renew. If it is determined the lease will more likely than not be renewed, the right-of-use asset and lease liability for that lease will be adjusted to reflect the updated lease term. The Company does not have any leases with residual value guarantees or restrictions or covenants imposed by the lease.

The Company reviews its long-lived assets, including Operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset group exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset, the Company performs an impairment analysis. An impairment charge is recognized to the extent the sum of the estimated discounted future cash flows from the use of the asset is less than the carrying value. This charge is then allocated pro-rata to the assets in the asset group, including the Operating lease right-of-use asset. No assets are written down below their indicated fair value which, for the Operating lease right-of-use assets, can be based on market comparisons of rent. 

Due to the absence of an implicit rate in the Company’s lease contracts, the Company estimates its incremental borrowing rate for each lease based on the lease term, lease currency and the Company’s credit spread. The yield curve selected at the lease possession date of adoption requiring assessment. The comparative information presentedrepresents one notch above the Company’s unsecured credit rating, and therefore is considered a close proxy for the incremental borrowing rate the Company would incur for secured debt.

Lease expense is recognized on a straight-line basis over the lease term and is included in Selling and administrative expense in the Condensed Consolidated Financial Statements wasof Operations. Variable lease payments that do not restateddepend on a rate or index and is reported under the accounting standards in effect for the periods presented. short-term rentals (leases with terms less than 12 months) are expensed as incurred.

The impact of adoption of thisthe new lease guidance did not have, and is not expected to have, a significant impact on our reported revenue, gross margin or income from operations.
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 Direct segment is when the merchandise is expected to be received by the customer and for the Retail segment, is at the time of sale in the store. Revenue is adjusted for estimated returns and volume rebates with a corresponding liability recorded. Effective in the First Quarter 2018, the Company changed its balance sheet presentation for estimated product returns by reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns. The product return asset is reported within Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet. Prior to adoption, product return assets were netted against the returns liability and reported within Other current liabilities. The impactSheets as of the adoption was recorded as a non-cash transaction in Other operating assets and Other operating liabilities in the Condensed Consolidated Statement of Cash Flows. The returns liability and payments received from customers for future delivery of products are reported within Other current liabilities in the Condensed Consolidated Balance Sheet. The adoption of this guidance did not have an impact on the recording of these liabilities.

Recognition of Breakage for Certain Prepaid Stored-Value Products

The Company sells gift certificates, gift cards and e-certificates (collectively, "gift cards") to customers through both the Direct and Retail segments. The gift cards do not have expiration dates. Revenue from gift cards is recognized when (i) the gift card is redeemed by the customer for merchandise, or (ii) as gift card breakage, an estimate of gift cards which will not be redeemed where the Company does not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions.

In March 2016, the FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. This update clarifies when it is acceptable to recognize the unredeemed portion of prepaid gift cards into income. The Company has evaluated the impacts of this ASU and has identified a change in the timing of recognition of revenue from gift cards. The Company will recognize breakage income over the breakage period for the estimated portion of unredeemed gift cards that is unlikely to be redeemed where the Company does not have an obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Previously the Company recognized gift card breakage after three years of no activity, or when the likelihood of redemption was considered remote. This guidance was adopted by the Company during First Quarter 2018 and resulted in a cumulative impact to be recognized as a reduction in Accumulated deficit and Other current liabilities of $1.1 million for estimated gift card breakage occurring prior to Fiscal 2018, under the modified retrospective approach described under the preceding Revenue from Contracts with Customers section.

February 2, 2019 was:

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The impact of adoption on the Condensed Consolidated Balance Sheet as of February 3, 2018 was:
(in thousands) February 2, 2018 (As reported) Impact of Adoption February 3, 2018 February 1, 2019 (As reported) Impact of Adoption February 2, 2019
Assets:            
Prepaid expenses and other current assets $26,659
 $10,425
 $37,084
Operating lease right-of-use asset $—
 $27,494
 $27,494
            
Liabilities:            
Other current liabilities 100,257
 9,365
 109,622
Lease liability - current —
 9,892
 9,892
Lease liability - long-term —
 21,700
 21,700
            
Stockholders' Equity:            
Accumulated deficit (29,810) 1,060
 (28,750) (17,159) (1,741)
(1) 
(18,900)

The impact(1) At the time of implementation, the new revenue recognition guidance on our Condensed Consolidated Balance Sheet asCompany determined certain Operating lease right-of-use assets were impaired and recorded an adjustment to beginning retained earnings related to these impairments, net of November 2, 2018 was:
  November 2, 2018
(in thousands) Balances Without Adoption Impact of Adoption As Reported
Assets:      
   Prepaid expenses and other current assets $38,246
 $10,755
 $49,001
       
Liabilities:      
   Other current liabilities 106,736
 9,631
 116,367
       
Stockholders' Equity:      
   Accumulated deficit (34,494) 1,123
 (33,371)
tax.

See Note 12,13, RevenueLeases for additional disclosures.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Restricted Cash. This ASU requires the inclusion of Restricted cash with Cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Condensed Consolidated Statement of Cash Flows. This guidance was adopted by the Company during First Quarter 2018. As a result of the adoption, the Company changed the presentation in its Condensed Consolidated Statements of Cash Flows for all periods presented.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases, which will replace the existing guidance in ASC 840, Leases. This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. This guidance will be effective for the Company in the first quarter of its fiscal year ending January 31, 2020. The Company is still evaluating the overall impact on the Company's Condensed Consolidated Financial Statements, however, it is expected that the standard will result in a material increase in the assets and liabilities recorded on the Company's Consolidated Balance Sheet.

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NOTE 3. EARNINGS/(LOSS) PER SHARE
The numerator for both basic and diluted EPS is net income (loss). The denominator for basic EPS is based upon the number of weighted average shares of Lands’ End common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of Lands' End common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with USU.S. GAAP. Potentially dilutive securities for the diluted EPS calculations consist of nonvested equity shares of common stock and in-the-money outstanding options where the current stock options,price exceeds the option strike price, if any, to purchase the Company’s common stock.
The following table summarizes the components of basic and diluted EPS:
 13 Weeks Ended 39 Weeks Ended 13 Weeks Ended 39 Weeks Ended
(in thousands, except per share amounts) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Net income (loss) $3,294
 $162
 $(4,621) $(11,557) $3,606
 $3,294
 $(6,226) $(4,621)
                
Basic weighted average common shares outstanding 32,211
 32,095
 32,182
 32,068
 32,371
 32,211
 32,333
 32,182
Dilutive effect of stock awards 103
 22
 —
 —
 28
 103
 —
 —
Diluted weighted average common shares outstanding 32,314
 32,117
 32,182
 32,068
 32,398
 32,314
 32,333
 32,182
                
Basic Earnings (Loss) per share $0.10
 $0.01
 $(0.14) $(0.36)
Diluted Earnings (Loss) per share $0.10
 $0.01
 $(0.14) $(0.36)
Basic earnings (loss) per share $0.11
 $0.10
 $(0.19) $(0.14)
Diluted earnings (loss) per share $0.11
 $0.10
 $(0.19) $(0.14)
Stock awards are considered anti-dilutive based on the application of the treasury stock method or in the event of a net loss. There were 653,235, 484,743, 827,057, 408,092,763,163 and 692,175714,530 anti-dilutive shares excluded from the diluted weighted average shares outstanding for Third Quarter 2018,2019, Third Quarter 2017,2018, Year-to-Date 2019 and Year-to-Date 2018, and Year-to-Date 2017, respectively.


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NOTE 4. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments.
  13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017
Beginning balance: Accumulated other comprehensive loss (net of tax of $3,660, $6,054, $2,816 and $6,691, respectively) $(13,768) $(11,287) $(10,592) $(12,426)
Other comprehensive income (loss):        
Foreign currency translation adjustments (net of tax (benefit) expense of $10, $66, $854, and $(571), respectively) (39) (79) (3,215) 1,060
Ending balance: Accumulated other comprehensive loss (net of tax of $3,670, $6,120, $3,670, and $6,120, respectively) $(13,807) $(11,366) $(13,807) $(11,366)
  13 Weeks Ended 39 Weeks Ended
(in thousands) November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Beginning balance: Accumulated other comprehensive loss (net of tax of $4,165, $3,660, $3,505 and $2,816 respectively) $(15,651) $(13,768) $(13,183) $(10,592)
Other comprehensive income (loss):        
Foreign currency translation adjustments (net of tax expense (benefit) of $(613), $10, $47 and $854 respectively) 2,290
 (39) (178) (3,215)
Ending balance: Accumulated other comprehensive loss (net of tax of $3,552, $3,670, $3,552 and $3,670 respectively) $(13,361) $(13,807) $(13,361) $(13,807)

No amounts were reclassified out of Accumulated other comprehensive income (loss) during any of the periods presented.

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NOTE 5. DEBT
The Company's debt consisted of the following:
 November 2, 2018 October 27, 2017 February 2, 2018 November 1, 2019 November 2, 2018 February 1, 2019
(in thousands) Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
Term Loan Facility, maturing April 4, 2021 $491,825
 5.49% $496,975
 4.49% $495,688
 4.82% $386,675
(1) 
5.29% $491,825
 5.49% $490,538
 5.77%
Current ABL Facility, maturing November 16, 2022(1)
 —
 —% —
 —% —
 —%
ABL Facility, maturing November 16, 2022 80,000
 3.54% —
 —% —
 —%
 491,825
   496,975
   495,688
   466,675
   491,825
   490,538
  
Less: Current maturities in Other current liabilities 5,150
   5,150
   5,150
  
Less: Current maturities in Current liabilities 85,150
   5,150
   5,150
  
Less: Unamortized debt issuance costs 3,274
   4,628
   4,290
   1,919
   3,274
   2,935
  
Long-term debt, net $483,401
   $487,197
   $486,248
   $379,606
   $483,401
   $482,453
  
(1) October 27, 2017 amounts pertainReflects voluntary prepayment of $100 million to Prior ABL Facility.the Term Loan Facility in First Quarter 2019.

The following table summarizes the Company's borrowing availability under the ABL Facilities:Facility:
(in thousands) November 2, 2018 October 27, 2017 February 2, 2018
Current ABL Facility maximum borrowing(1)
 $175,000
 $175,000
 $175,000
Outstanding Letters of Credit(1)
 22,621
 17,788
 22,328
Borrowing availability under ABL(1)
 $152,379
 $157,212
 $152,672
(in thousands) November 1, 2019 November 2, 2018 February 1, 2019
ABL Facility maximum borrowing $175,000
 $175,000
 $175,000
Current borrowings under ABL 80,000
 —
 —
Outstanding letters of credit 12,531
 22,621
 21,111
Borrowing availability under ABL $82,469
 $152,379
 $153,889
(1) October 27, 2017 amounts pertain to Prior ABL Facility.
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Interest; Fees

The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL FacilitiesFacility is subject to adjustment based on the average excess availability under the ABL FacilitiesFacility for the preceding fiscal quarter. LIBOR borrowings will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively.Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.Facility.
Customary agency fees are payable pursuant to the termsin respect of the Debt Facilities. The ABL FacilitiesFacility fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility, and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties, and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries 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. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of November 2, 2018.

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1, 2019.
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.

NOTE 6. STOCK-BASED COMPENSATION
The Company expenses the fair value of all stock awards over their respective vesting periods, ensuring that, the amount of cumulative compensation cost 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 compensation expense for an estimated forfeiture rate for those shares not expected to vest and to recognize compensation cost on a straight-line basis for awards that only have a service requirement with multiple vest dates.
The Company has granted the following types of stock awards to employees at management levels and above:
i.Time vesting stock awards ("Deferred Awards") are in the form of restricted stock units and only require each recipient to complete a service period for the awardsaward to be earned. Deferred Awards generally vest over three years. The fair value of Deferred Awards is based on the closing price of the Company's common stock on the grant date and is reduced for estimated forfeitures of those awards not expected to vest due to employee turnover.
ii.Performance-based stock awards ("Performance Awards") are in the form of restricted stock units and have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. For Performance Awards granted in Fiscal 2018 and after, the Target Shares earned can range from 50% to 200% once minimum thresholds have been reached, and depend on the achievement of Adjusted EBITDA and revenue performance measures for the cumulative three-fiscal year performance period beginning in the fiscal year of the grant date. The applicable percentage of the Target Shares, as determined by performance, vest after the completion of the applicable three year performance period, and unearned Target Shares are forfeited. The fair value of the Performance Awards granted in Fiscal 2018 and after are based on the closing price of the Company’s common stock on the grant date. Stock based compensation expense is recognized ratably over the related service period, reduced for estimated forfeitures of those awards not expected to vest due to employee turnover, and adjusted based on the Company's estimate of the percentage of the aggregate

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Target Shares expected to be earned. Based on performance to date, the Company is currently accruing for Performance Awards based on a 100% payout, which is reflected in the financial information below.
iii.Stock option awards ("Option Awards") provide the recipient with the option to purchase a set number of shares at a stated exercise price over the term of the contract, which is ten years for all Option Awards currently outstanding. Options are granted with a strike price equal to the stock price on the date of grant and vest ratably over a four year period.
iii.Performance-based stock awards ("Performance Awards") are in the form of restricted stock units and have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. Performance Awards granted prior to Fiscal 2018 had annual vesting, but due to the performance criteria, were not eligible for straight-line expensing. All Performance Awards granted prior to Fiscal 2018 were forfeited during the First Quarter 2018. For Performance Awards granted in Fiscal 2018, the Target Shares earned can range from 0% to 200% and depend on the achievement of Adjusted EBITDA and revenue performance measures for the cumulative three-fiscal year performance period from Fiscal 2018 to Fiscal 2020. The applicable percentage of the Target Shares, as determined by performance, vest after the completion of the applicable three year performance period, and unearned Target Shares are forfeited. The fair value of the Performance Awards granted in Fiscal 2018 is based on the closing price of the Company’s common stock on the grant date. Stock-based compensation expense is recognized ratably over the related service period reduced for estimated forfeitures of those awards not expected to vest due to employee turnover and adjusted based on the Company's estimate of the percentage of the aggregate Target Shares expected to be earned.
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 13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Deferred Awards $1,237
 $879
 $3,177
 $2,315
 $1,531
 $1,237
 $4,429
 $3,177
Performance Awards 611
 312
 1,642
 694
Option Awards 187
 176
 561
 452
 187
 187
 561
 561
Performance Awards 312
 —
 694
 88
Total stock-based compensation expense
$1,736
 $1,055
 $4,432
 $2,855

$2,329
 $1,736
 $6,632
 $4,432
The following table provides a summary of the Deferred Awards activity for Year-to-Date 2019:
  Deferred Awards
(in thousands, except per share amounts) Number of Shares Weighted Average Grant Date Fair Value per Share
Unvested as of February 1, 2019 594
 $21.96
Granted 416
 15.67
Vested (197) 22.11
Forfeited or expired (49) 20.29
Unvested as of November 1, 2019 764
 18.57

Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $8.8 million as of November 1, 2019, which is expected to be recognized ratably over a weighted average period of 1.8 years. Deferred Awards granted to employees during Fiscal 2019 vest ratably over a period of three years.

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The following table provides a summary of the activities for stock awardsPerformance Awards activity for Year-to-Date 2018:2019:
 Deferred Awards Option Awards Performance Awards Performance Awards
(in thousands, except per share amounts) Number of Shares Weighted Average Grant Date Fair Value per Share Number of Shares Weighted Average Grant Date Fair Value per Share 
Number of Shares(1)
 Weighted Average Grant Date Fair Value per Share Number of Shares Weighted Average Grant Date Fair Value per Share
Unvested as of February 2, 2018 497
 $22.07
 343
 $8.73
 15
 $21.94
Unvested as of February 1, 2019 176
 $21.93
Granted 292
 21.97
 —
 —
 195
 21.90
 265
 15.73
Vested (139) 22.68
 (86) 8.73
 —
 —
 —
 —
Forfeited or expired (21) 22.41
 —
 —
 (18) 21.93
 (20) 19.09
Unvested as of November 2, 2018 629
 21.86
 257
 8.73
 192
 21.90
Unvested as of November 1, 2019 421
 18.15
(1) For those awards with respect to which the performance period is not yet complete, the number of granted and unvested shares in the table above is based on the participants earning their Target Shares at 100%; however, the cumulative expense recognized reflects changes in estimated achievement of the performance measures as they occur.
Total unrecognized stock-based compensation expense related to unvested DeferredPerformance Awards was approximately $8.8$4.6 million as of November 2, 2018,1, 2019, which is expected to be recognized ratably over a weighted average period of 2.12.0 years. DeferredPerformance Awards granted to various employees during Fiscal 2018 generally2019 vest, ratably overif earned, after completion of the applicable three-year performance period.
The following table provides a periodsummary of three years.the Options Award activity for Year-to-Date 2019:
  Option Awards
(in thousands, except per share amounts) Number of Shares Weighted Average Grant Date Fair Value per Share
Unvested as of February 1, 2019 257
 $8.73
Granted —
 —
Vested (86) 8.73
Forfeited or expired —
 —
Unvested as of November 1, 2019 171
 8.73

Total unrecognized stock-based compensation expense related to unvested Option Awards was approximately $1.8$1.0 million as of November 2, 2018,1, 2019, which is expected to be recognized ratably over a weighted average period of 2.41.4 years. The Option Awards have a life of ten years and vest ratably over the first four years. The fair value of each Option Award was estimated on the grant date using the Black-Scholes option pricing model. As of November 2, 2018, 85,7841, 2019, 171,567 shares related to Option Awards were exercisable. No options have been exercised as of November 2, 2018.1, 2019.
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $3.0 million as of November 2, 2018, which is expected to be recognized ratably over a weighted average period of 2.4 years. Performance Awards granted to various employees during Fiscal 2018 vest, if earned, after completion of the applicable three-year performance period.
NOTE 7. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Restricted cash is reflected on the Condensed Consolidated Balance Sheets at fair value. The fair value of restricted cash was $1.8 million, $2.1 million $1.6 million and $2.4$1.9 million as of November 1, 2019, November 2, 2018 October 27, 2017 and February 2, 2018,1, 2019, respectively based on Level 1 inputs. Restricted cash amounts are valued based upon statements received from financial institutions.
The carrying amount of the Company's Cash and cash equivalents, Accounts receivable, net, Accounts payable, Current borrowings, and Other current liabilities approximate their fair value as recorded due to the short-term maturity of these instruments.
Carrying values and fair values of long-term debt, including the short-term portion, in the Condensed Consolidated Balance Sheets are as follows:
 November 2, 2018 October 27, 2017 February 2, 2018 November 1, 2019 November 2, 2018 February 1, 2019
(in thousands) 
Carrying
Amount
 
Fair
Value
 Carrying
Amount		 Fair
Value		 Carrying
Amount		 Fair
Value		 
Carrying
Amount
 
Fair
Value
 Carrying
Amount		 Fair
Value		 Carrying
Amount		 Fair
Value
Long-term debt, including short-term portion $491,825
 $475,226
 $496,975
 $414,353
 $495,688
 $443,641
 $386,675
 $372,175
 $491,825
 $475,226
 $490,538
 $460,493
Long-term debt, including short-term portion was valued utilizing Level 2 valuation techniques based on the closing inactive market bid price on November 1, 2019, November 2, 2018, October 27, 2017, and February 2, 2018.1, 2019. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of November 1, 2019, November 2, 2018, October 27, 2017, and February 2, 2018.

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1, 2019.


NOTE 8. INCOME TAXES

Provision for Income Taxes

The Company recorded aan income tax expense for the Third Quarter 2019 of 27.2%. This results in an income tax benefit Year-to-Date 2019 of 51.9%. Comparatively, the Company reported an income tax benefit of 581.6% and 68.5% for the Third Quarter 2018 and Year-to-Date 2018 with effective tax rates of 581.6% and 68.5%, respectively. This compares to effective tax rates of 3.0% and 33.7% forThe difference between the Third Quarter 20172019 tax rate and Year-to-Date 2017. The higher effective tax benefit for the Third Quarter 2018 tax rate was primarily due to revised estimates of the impact due toof the Tax Act as more fully described below. The Year-to-Date 2019 tax rate reflects the benefit of the Company’s election to treat certain

14


foreign entities as a U.S. branch. The Year-to-Date 2018 rate reflects the revised estimates related to the Tax Act and the benefits of favorable state tax audit settlements for periods prior to the Separation which were recorded in the first quarter.Separation.

Tax Act

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. In connection with the Tax Act, the Company re-measured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future under the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, a provisional amount for the change in law was recorded in Fourth Quarter 2017. The Company has revised estimates related to the Tax Act and has recorded a benefit of $3.7 million in the Third Quarter 2018. The Company is still investigating potential planning opportunities as they present themselves. As such, the Company will continue its assessment of the impact of the Tax Act on the business and Consolidated Financial Statements throughout the one-year measurement period as provided by SAB 118.

Impacts from Sears
Pursuant to the Tax Sharing Agreement, Sears Holdings Corporation is generally responsible for all United States federal, state and local UTBs, through the date of the Separation. As of November 2, 2018, the Company had UTBs of $1.9 million. Of this amount, $1.5 million would, if recognized, impact its effective tax rate, with the remaining amount being comprised of UTBs related to gross temporary differences or other indirect benefits. Accordingly, an indemnification asset from Sears Holdings Corporation for the pre-Separation UTBs is recorded in Other assets in the Condensed Consolidated Balance Sheets.

On October 15, 2018, Sears Holdings Corporation and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code (collectively the “Sears Filing").

As a result of the Sears Filing, the Company believes that the recovery of the UTBs provided by the Tax Sharing Agreement is uncertain. The Company recorded a non-cash charge of $2.6 million in the Third Quarter 2018 as the result of establishing a reserve against the indemnification asset. The indemnification asset was $0, $12.0 million and $7.4 million as of November 2, 2018, October 27, 2017, and February 2, 2018, respectively.

NOTE 9. 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.position.


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NOTE 10. RELATED PARTY TRANSACTIONS
According to statements on Schedule 13D filed with the SEC by ESL, ESL beneficially owns significant portions of both the Company's and Sears Holdings Corporation's outstanding shares of common stock. Therefore, Sears Holdings Corporation, the Company's former parent company, is considered a related party.
On February 11, 2019 Transform Holdco acquired from Sears Holdings substantially all of the go-forward retail footprint, and other assets and component businesses of Sears Holdings as a going concern. The Company believes that ESL holds a significant portion of the membership interest of Transform Holdco and therefore considers that entity to be a related party as well.
In connection with and subsequent to the Separation, the Company entered into various agreements with Sears Holdings which, among other things, (i) govern specified aspects of the Company's relationship following the Separation, especially with regards to the Lands’ End Shops at Sears, and (ii) establish terms pursuant to which subsidiaries of Sears Holdings Corporation are providing services to the Company. DescriptionsSome of these transactions are includedagreements have been assumed by and assigned to Transform Holdco in the Company's Fiscal 2017 Form 10-K filedconnection with the SEC on March 29, 2018 and proxy statement filed withproceedings related to the SEC on April 6, 2018.Sears Filing (as defined below).
The components of the transactions between the Company and Sears Holdings or Transform Holdco, which exclude pass-through payments to or from third parties, are as follows:
Lands’ End Shops at Sears
Related party costs charged by Sears Holdings or Transform Holdco to the Company related to Lands’ End Shops at Sears are as follows:
 13 Weeks Ended 39 Weeks Ended 13 Weeks Ended 39 Weeks Ended
(in thousands, except for number of stores) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Rent, CAM and occupancy costs $3,483
 $5,376
 $12,004
 $16,882
 $907
 $3,483
 $2,990
 $12,004
Retail services, store labor 3,231
 5,268
 11,084
 16,410
 779
 3,231
 2,637
 11,084
Financial services and payment processing 350
 479
 1,191
 1,627
 106
 350
 249
 1,191
Supply chain costs 126
 167
 362
 558
 5
 126
 93
 362
Total expenses $7,190
 $11,290
 $24,641
 $35,477
 $1,797
 $7,190
 $5,969
 $24,641
Number of Lands’ End Shops at Sears at period end 125
 188
 125
 188
 36
 125
 36
 125
General Corporate Services
Related party costs charged by Sears Holdings or Transform Holdco to the Company for general corporate services are as follows:
  13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017
Sourcing $2,830
 $3,445
 $6,144
 $8,525
Shop Your Way 251
 83
 633
 780
Shared services 48
 48
 143
 143
Total expenses $3,129
 $3,576
 $6,920
 $9,448
The Company's contract under which it receives sourcing services from an affiliate of Sears Holdings runs through June 30, 2020. The Company participates in Sears Holdings' Shop Your Way program in the Lands' End Shops at Sears.

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  13 Weeks Ended 39 Weeks Ended
(in thousands) November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Sourcing $3,192
 $2,830
 $6,173
 $6,144
Shop Your Way 25
 251
 79
 633
Shared services 48
 48
 143
 143
Total expenses $3,265
 $3,129
 $6,395
 $6,920
Use of Intellectual Property or Services
Related party revenue and costs charged by the Company to and from Sears Holdings or Transform Holdco for the use of intellectual property or services is as follows:
 13 Weeks Ended 39 Weeks Ended 13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Call center services $—
 $—
 $—
 $1,160
Lands' End business outfitters revenue 216
 222
 834
 764
 $1
 $216
 $4
 $834
Credit card revenue 184
 205
 506
 638
 92
 184
 248
 506
Royalty income 43
 55
 156
 169
 30
 43
 131
 156
Gift card (expense) (4) (7) (12) (20)
Gift card expense (3) (4) (8) (12)
Total income $439
 $475
 $1,484
 $2,711
 $120
 $439
 $375
 $1,484
Call Center Services
The Company had entered into a contract with SHMC to provide call center services in support of Sears Holdings’ Shop Your Way member loyalty program. This income was net of agreed upon costs directly attributable to the Company providing these services. The income was included in Net revenue and costs are included in Selling and administrative expenses in the Condensed Consolidated Statements of Operations. The contract for call center services expired on April 30, 2017.
Additional Balance Sheet Information
At November 2,
On October 15, 2018, October 27, 2017Sears Holdings Corporation and February 2, 2018, the Company included $1.0 million, $3.1 million and $2.0 million in Accounts receivable, net, respectively, and $3.1 million and $2.9 million in Accounts payable on October 27, 2017 and February 2, 2018, respectively,certain of its subsidiaries filed voluntary petitions in the Condensed Consolidated Balance Sheets to reflect amounts due from and owed to Sears Holdings.
United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code (collectively the “Sears Filing"). Following the Sears Filing, the Company began netting payables due to Sears Holdings or Transform Holdco, as applicable, against receivables due from Sears Holdings or Transform Holdco if and as allowed under its contracts. As a result, receivables and payables have been netted, and are presented as a net receivable balance in Accounts receivable, net.net in the Condensed Consolidated Balance Sheets.


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The Company recorded an Accounts receivable, net balance of $1.2 million and $1.0 million from Sears Holdings or Transform Holdco in the Condensed Consolidated Balance Sheets as of November 1, 2019 and November 2, 2018 respectively. The Company recorded an Accounts receivable, net balance of $0.1 million from Sears Holdings or Transform Holdco in the Consolidated Balance Sheets as of February 1, 2019.

In the Third Quarter 2018, the Company recorded a non-cash charge of $2.6 million in Other expense, net, in theits Condensed Statement of Operations due to establishingreflect a reserve against the indemnification asset relatedrelating to the indemnification by Sears Holdings Corporation of the pre-Separation UTBs (including penalties and interest) for which Sears Holdings Corporation is responsibleindemnified the Company under a Tax Sharing Agreement entered into in connection with the Separation, the recovery of which had become uncertain as a result of the Sears Filing. Sears Holdings rejected the Tax Sharing Agreement. Due to the Sears Filing, there is substantial doubt regarding the collectabilityAgreement, per an order approved on April 4, 2019. There was not an indemnification receivable as of this contingent asset. At October 27, 2017November 1, 2019 and February 2, 2018, respectively, a $12.0 million and $7.4 million indemnification receivable was recorded in Other assets in the Condensed Consolidated Balance Sheets.1, 2019.

NOTE 11. SEGMENT REPORTING
The Company is a leading multi-channel retailer of casual clothing, accessories, footwear and home products,products. Lands' End is growing its multi-channel distribution network which is designed to allow the consumer to interact with the Company with a consistent customer experience whether on Company websites, third party marketplaces, at Company Operated stores or other distribution channels. As the Company expands this distribution network, and has twoin
conjunction with the accelerated closures of Lands' End Shops at Sears, the historical structure of separate reportable segments: Directsegments for retail stores and direct-to-consumer was no longer representative of the way the current Chief Operating Decision Maker evaluates the business units and allocates resources.
Therefore, as of February 1, 2019, the Company updated its segment reporting to better align with this multi-channel strategy. The Company's operating segments consist of U.S. eCommerce, Outfitters, Europe eCommerce, Japan eCommerce and Retail. Product revenue is divided by product categories: Apparel and Non-apparel. The Non-apparel revenue includes accessories, footwear, and home goods. ServicesCompany determined that each of the operating segments share similar economic and other revenue includes embroidery, monogramming, gift wrapping, shipping and other services. qualitative characteristics thus the results of the operating segments are aggregated into one reportable external segment, consistent with the Company's multi-channel business approach. Prior year information has been restated to reflect this change.
Net revenue is aggregatedpresented by product categorychannel in the following table:


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 13 Weeks Ended 39 Weeks Ended 13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Net revenue:                
Apparel $279,620
 $263,309
 $794,788
 $743,794
Non-apparel 40,238
 37,303
 97,286
 91,148
Service and other 21,712
 24,877
 57,266
 61,102
eCommerce $242,328
 $231,517
 $669,880
 $634,082
Outfitters 83,342
 82,261
 191,877
 229,671
Retail 14,353
 27,792
 38,966
 85,587
Total net revenue $341,570
 $325,489
 $949,340
 $896,044
 $340,023
 $341,570
 $900,723
 $949,340
The Company identifies reportable segments according to how business activities are managed and evaluated. Each of the Company’s reportable segments are strategic business units that offer similar products and services but are either shipped directly from its warehouses (Direct) or sold through retail stores (Retail). Adjusted EBITDA is the primary measure used to make decisions on allocating resources and assessing performance of each operating segment. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net, Interest expense, Depreciation and amortization and certain significant items that while periodically affecting the Company's results, may vary significantly from period to period and may have a disproportionate effect in a given period, which may affect comparability of results. Reportable segment assets are those directly used in or clearly allocable to an operating segment’s operations. Depreciation, amortization, and property and equipment expenditures are recognized in each respective segment. There were no material transactions between reporting segments for any periods presented.
The Direct segment sells products through the Company’s e-commerce websites and direct mail catalogs. Operating costs consist primarily of direct marketing costs (catalog and e-commerce marketing costs); order processing and shipping costs; direct labor and benefits costs and facility costs. Assets primarily include goodwill and trade name intangible assets, inventory, accounts receivable, prepaid expenses (deferred catalog costs), technology infrastructure, and property and equipment.
The Retail segment sells products and services through dedicated Lands’ End Shops at Sears across the United States and through Company Operated stores. Operating costs consist primarily of labor and benefits costs; rent, CAM and occupancy costs; distribution costs; and in-store marketing costs. Assets primarily include retail inventory, fixtures and leasehold improvements.
Corporate overhead and other expenses include unallocated shared-service costs, which primarily consist of employee services and financial services, legal and corporate expenses. These expenses include labor and benefits costs, corporate headquarters occupancy costs and other administrative expenses. Assets include corporate headquarters and facilities, corporate cash and cash equivalents and deferred income taxes.
Financial information by segment is presented in the following tables:
SUMMARY OF SEGMENT DATA

 13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017
Net revenue: 


    
Direct $313,778

$290,326
 $863,753
 $778,554
Retail 27,792

35,163
 85,587
 117,490
Total net revenue $341,570
 $325,489
 $949,340
 $896,044

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  13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017
Adjusted EBITDA:        
Direct $30,284
 $29,100
 $68,379
 $54,018
Retail (3,595) (6,003) (7,763) (7,405)
Corporate / other (11,001) (10,245) (28,179) (25,635)
Total adjusted EBITDA $15,688
 $12,852
 $32,437
 $20,978
(Gain) loss on property and equipment (162) 89
 121
 151
Transfer of corporate functions 4
 475
 10
 2,401
Depreciation and amortization 7,361
 6,347
 20,420
 19,031
Operating income (loss) $8,485
 $5,941
 $11,886
 $(605)
Interest expense 7,303
 6,350
 21,216
 18,642
Other expense (income), net 1,866
 (576) 5,317
 (1,812)
Income tax (benefit) expense (3,978) 5
 (10,026) (5,878)
NET INCOME (LOSS) $3,294
 $162
 $(4,621) $(11,557)
  13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017
Depreciation and amortization:        
Direct $6,887
 $5,747
 $18,692
 $17,015
Retail 177
 285
 752
 992
Corporate / other 297
 315
 976
 1,024
Total depreciation and amortization $7,361
 $6,347
 $20,420
 $19,031
(in thousands) November 2, 2018 October 27, 2017 February 2, 2018
Total Assets:      
Direct $961,289
 $934,508
 $856,986
Retail 55,511
 67,965
 49,933
Corporate / other 131,918
 118,007
 217,216
Total assets $1,148,718
 $1,120,480
 $1,124,135
  13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017
Capital expenditures:        
Direct $9,129
 $8,791
 $29,591
 $29,004
Retail 1,828
 —
 3,569
 10
Corporate / other $—
 $129
 $—
 $129
Total capital expenditures $10,957
 $8,920
 $33,160
 $29,143
NOTE 12. REVENUE
The Company adopted authoritative guidance related to the recognition of revenue from contracts with customers effective First Quarter 2018 using the modified retrospective method. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect

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for the periods presented. See Note 2, Recent Accounting Pronouncements, for a discussion of the significant changes resulting from adoption of the guidance. The adoption of the guidance did not have a significant impact on 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 Direct segmenteCommerce and Outfitters channels is when the merchandise is expected to be received by the customer and for the Retail segmentchannel 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. There were no changes to estimates in Third Quarter 2018.2019.
The Company's revenue is disaggregated by product categorieschannel and geographic location. Revenue by product categorychannel is presented in Note 11, Segment Reporting. Revenue by geographic location was:
  13 Weeks Ended 39 Weeks Ended
(in thousands) November 2, 2018 October 27, 2017 November 2, 2018 October 27, 2017
Net revenue:        
North America $300,900
 $283,771
 $828,078
 $780,926
Europe 30,783
 31,848
 87,888
 84,053
Asia 9,887
 9,870
 33,374
 31,065
Total Net revenue $341,570
 $325,489
 $949,340
 $896,044
The Company elected to exclude from revenue, taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities, and as a result there is no change in presentation from prior comparative periods.
  13 Weeks Ended 39 Weeks Ended
(in thousands) November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Net revenue:        
United States $297,166
 $295,070
 $768,609
 $812,746
Europe 28,344
 31,190
 87,870
 89,287
Asia 9,633
 10,273
 33,271
 35,033
Other 4,880
 5,037
 10,973
 12,274
Total Net revenue $340,023
 $341,570
 $900,723
 $949,340
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

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Condensed Consolidated Statements of Operations. The following table summarizes the deferred revenue associated with payments received in advance of the transfer of control to the customer, which is reported in Other current liabilities in the Condensed Consolidated Balance Sheets, andas well as amounts recognized through Net revenue for each period presented. The remainder of deferred revenue as of November 2, 20181, 2019 is expected to be recognized in Net revenue in the fiscal quarter ending February 1, 2019,January 31, 2020, as products are delivered to customers.
 November 2, 2018 13 Weeks Ended 39 Weeks Ended
(in thousands) 13 Weeks Ended 39 Weeks Ended November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Deferred Revenue Beginning of Period $8,461
 $12,838
 $9,411
 $8,796
 $9,051
 $12,993
Deferred Revenue Recognized in Period (8,461) (12,838) (9,411) (8,796) (9,051) (12,993)
Revenue Deferred in Period 21,960
 21,960
 15,178
 22,117
 15,178
 22,117
Deferred Revenue End of Period $21,960
 $21,960
 $15,178
 $22,117
 $15,178
 $22,117

Revenue from gift cards is recognized when (i) the gift card is redeemed by the customer for merchandise, or (ii) as gift card breakage, an estimate of gift cards which will not be redeemed where the Company does not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions. Gift card breakage is recorded within Net revenue in the Condensed Consolidated Statements of Operations. Prior to their redemption, gift cards are recorded as a liability, included within Other current liabilities in the Condensed Consolidated Balance Sheets. The total contract liability related to gift cards issued was $20.7 million, $16.0 million $17.7 million and $19.3$18.2 million as of November 1, 2019, November 2, 2018 October 27, 2017 and February 2, 2018,1, 2019, respectively. The liability is estimated based on expected

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breakage that considers historical patterns of redemption. The following table provides the reconciliation of the contract liability related to gift cards:

 November 2, 2018 13 Weeks Ended 39 Weeks Ended
(in thousands) 13 Weeks Ended 39 Weeks Ended November 1, 2019 November 2, 2018 November 1, 2019 November 2, 2018
Balance as of Beginning of Period $16,626
 $19,272
 $20,443
 $16,626
 $18,191
 $19,272
Gift cards sold 14,790
 40,143
 17,473
 14,790
 46,497
 40,143
Gift cards redeemed (15,258) (41,605) (17,041) (15,258) (43,121) (41,605)
Gift card breakage (183) (1,835) (171) (183) (863) (1,835)
Balance as of November 2, 2018 $15,975
 $15,975
Balance as of November 1, 2019 $20,704
 $15,975
 $20,704
 $15,975
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 November 1, 2019, November 2, 2018 October 27, 2017 and February 2, 2018,1, 2019, $22.9 million, $23.7 million $12.0 million and $11.1$22.2 million, respectively, of refund liabilities, primarily associated with product returns, were reported in Other current liabilities in the Condensed Consolidated Balance Sheets. Prior to adoption,An asset for product return assets and return liabilities were reported net within Other current liabilities. As of the adoption date, the product return assets were reclassified and reported as a component ofreturns is recorded in Prepaid expenses and other current assets and return liabilities continued to be reported in Other current liabilities in the Company's Condensed Consolidated Balance Sheet. Seesheets.

NOTE 13. LEASES

The Company is a lessee under various lease agreements for its retail operations and equipment including a master lease agreement for its Lands' End Shops at Sears. Refer also to Note 2,10, Recent Accounting PronouncementsRelated Party Transactions, for additional details on. All leases are classified as operating leases. The Company’s leases have remaining terms of less than one year to ten years and contain various renewal options. The period which is subject to an option to extend the impactlease is included in the lease term if it is reasonably certain that the option will be exercised. Options to extend are reviewed within two years of this change.the option date.


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The components of lease expense are as follows:
 13 Weeks Ended 39 Weeks Ended
(in thousands)November 1, 2019 November 1, 2019
Operating lease expense$2,380
 $6,780
Variable lease expense432
 1,228
Lease expense$2,812
 $8,008

Short-term lease cost was not material for Third Quarter 2019 and Year-to-Date 2019.

Supplemental balance sheet information related to operating leases are as follows:
(in thousands, except as noted below)November 1, 2019
Operating lease right-of-use asset$31,380
Lease liability - current6,344
Lease liability - long-term30,971
Weighted average remaining lease term in years7.72 years
Weighted average discount rate6.47%

Supplemental cash flow information related to operating leases are as follows:
39 Weeks Ended
(in thousands)November 1, 2019
Operating cash outflows from operating leases7,783

Maturities of operating lease liabilities as of November 1, 2019 are as follows (in thousands):
2019, excluding the 39 weeks ended November 1, 2019$2,847
20207,422
20216,237
20225,499
20234,732
Thereafter21,806
Total operating lease payments$48,543
Less imputed interest11,228
Present value of lease liabilities$37,315


Total future commitments under the Company’s operating leases as of February 1, 2019 were as follows for the fiscal years ending (in thousands):
2019$10,851
20206,338
20214,873
20223,828
20232,839
Thereafter10,590
Total minimum payments required$39,319


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The table above was updated from the version previously included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2019 within the Notes to Consolidated Financial Statements to adjust for certain inconsistencies that management identified in First Quarter 2019 during the implementation of ASC 842, Leases. Specifically, the Company corrected the schedule to include additional lease commitments for lease contracts signed in Fiscal 2018, with commencement dates in Fiscal 2019.

In Year-to-Date 2019, the Company took possession of retail spaces that resulted in an increase in Operating lease right-of-use asset of $9.9 million, Lease liability - current of $0.7 million and Lease liability - long-term of $11.3 million. Additionally, in Third Quarter 2019, the Company entered into several leases where possession of a retail space will occur in Fourth Quarter 2019.

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 Statements Concerning Forward-Looking Statements" below and "Item 1A. Risk Factors" in our Annual Report filed on Form 10-K for the year ended February 2, 20181, 2019 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:

•ABL Facilities - Collectively, the Prior ABL Facility and the Current ABL Facility
•Company Operated stores - Retail stores operated by Lands' End
•Current ABL Facility - Asset-based-Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders
•Company Operated stores - Lands' End retail stores in the Retail channel
•Debt Facilities - Collectively, the ABL FacilitiesFacility and the Term Loan Facility
•ERP - Enterprise resource planning software solutions
•ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
•First Quarter 20182019 - The thirteen13 weeks ended May 4, 20183, 2019
•Fiscal 2018 - The fifty-two52 weeks ended February 1, 2019
•Fiscal 2019 - The 52 weeks ending February 1,January 31, 2020
•Fourth Quarter 2019 - the 13 weeks ending January 31, 2020
•GAAP - Accounting principles generally accepted in the United States
•Lands' End Shops at Sears - Lands' End shops operated within Sears stores
•LIBOR - London inter-bank offered rate
•Prior ABL Facility - Asset-based senior secured credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders, terminated November 16, 2017
•Same Store Sales - Net revenue, from stores that have been open for at least 12 full months where selling square footage has not changed by 15% or more within the past year
•Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries (other than, for all periods following the Separation, Lands' End)
•SEC - United States Securities and Exchange Commission
•Third Quarter 2018 - The 13 weeks ended November 2, 2018
•Third Quarter 2019 - The 13 weeks ended November 1, 2019
•Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
•Term Loan Facility - Term loan credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
•Third Quarter 2018 - The thirteen weeks ended November 2, 2018
•Third Quarter 2017 - The thirteen weeks ended October 27, 2017
•UK Borrower - A United Kingdom subsidiary borrower of Lands’ End under the Prior ABL Facility
•UTBs - Gross unrecognized tax benefits

2019

Table of Contents

•Transform Holdco - Transform Holdco LLC, an affiliate of ESL, which on February 11, 2019 acquired from Sears Holdings substantially all of the go-forward retail footprint, and other assets and component businesses of Sears Holdings as a going concern
•Year-to-Date 2018 - The thirty-nine39 weeks ended November 2, 2018
•Year-to-Date 20172019 - The thirty-nine39 weeks ended October 27, 2017November 1, 2019

Introduction
Management's discussion and analysis of financial condition and results of operations accompanies our Condensed Consolidated Financial Statements and provides additional information about our business, financial condition, liquidity and capital resources, cash flows and results of operations. We have organized the information as follows:
Executive overview. This section provides a brief description of our business, accounting basis of presentation and a brief summary of our results of operations.
Discussion and analysis. This section highlights items affecting the comparability of our financial results and provides an analysis of our segment results of operations for Third Quarter 2018, Third Quarter 2017, Year-to-Date 2018 and Year-to-Date 2017.
Liquidity and capital resources. This section provides an overview of our historical and anticipated cash and financing activities. We also review our historical sources and uses of cash in our operating, investing and financing activities.
Contractual Obligations and Off-Balance-Sheet Arrangements. This section provides details of the Company's off-balance-sheet arrangements and contractual obligations for the next five years and thereafter.
Financial Instruments with Off-Balance-Sheet Risk. This section discusses financial instruments of the Company that could have off-balance-sheet risk.
Application of critical accounting policies and estimates. This section summarizes the accounting policies that we consider important to our financial condition and results of operations and which require significant judgment or estimates to be made in their application.
Recent accounting pronouncements. This section summarizes recently issued accounting pronouncements and the impact or expected impact on the Company's financial statements.
Executive Overview

Description of the Company

Lands' End Inc. is a leading multi-channeluni-channel retailer of casual clothing, accessories, footwear and home products. We offer products through catalogs, online at www.landsend.com international websites,, on third party online marketplaces and through retail locations. We are a classic American lifestyle brand with a passion for quality, legendary service and real value, and seek to deliver timeless style for men, women, men, kids and the home.

Lands’ End was founded in 1963 in Chicago 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."
The
As the Company identifiesevolves its uni-channel strategy, and in conjunction with the accelerated closures of Lands' End Shops at Sears, during Fiscal 2018 we determined it was more appropriate to combine the previously disclosed external reportable segments of Direct and Retail, into one combined external reportable segment as it more closely represents how we are managing the Company. We identify our operating segments according to how our business activities are managed and evaluated. EachOur operating segments consist of U.S. eCommerce, Retail, Outfitters, Europe eCommerce and Japan eCommerce. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the Company’s reportableresults of our operating segments are strategic business units that offer similar products and services but are either shipped directly from our warehouses (Direct) or sold through retail stores (Retail).aggregated into one external reportable segment.
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.
Related party
Following the Separation, we began operating as a separate, publicly traded company, independent from Sears Holdings. According to statements on Schedule 13D filed with the SEC by ESL, ESL beneficially ownsowned significant portions of both

21

Table of Contents

the Company's and Sears Holdings Corporation's outstanding shares of common stock. Therefore Sears Holdings Corporation, the Company's former parent company, is considered a related party both prior to and subsequent to the Separation. On February 11, 2019, Transform Holdco acquired from Sears Holdings substantially all of the go-forward retail footprint, and other assets and component businesses of Sears Holdings as a going concern. We believe that ESL holds a significant portion of the membership interests of Transform Holdco and therefore consider that entity to be a related party as well.
Seasonality
We experience seasonal fluctuations in our net revenue and operating results and historically have realized a significant portion of our net salesrevenue and earnings for the year during our fourth fiscal quarter. We generated an average of 35%35.1% of our Net revenue in the fourth fiscal quarter of the past three years. Thus, lower than expected fourth quarter net revenue could have an adverse impact on our annual operating results.
Working capital requirements typically increase during the second and third quarter of the fiscal year as inventory builds to support our peak shipping/selling period and, accordingly, typically decrease during the fourth quarter of the fiscal year as inventory is shipped/sold. Cash provided by operating activities is typically higher in the fourth quarter of the fiscal year due to reduced working capital requirements during that period.

20

Table of Contents

Results of Operations
The following table sets forth, for the periods indicated, selected income statement data:

 13 Weeks Ended 13 Weeks Ended

 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018
(in thousands) 
 39 Weeks Ended 39 Weeks Ended
 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018
(in thousands) $’s % of
Net revenue		 $’s % of Net revenue 


22


Depreciation and amortization is not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.
Net Income (Loss) and Adjusted EBITDA

We recorded Net income of $3.3$3.6 million andin Third Quarter 2019 compared to Net lossincome of $4.6$3.3 million in the Third Quarter 2018 and Year-to-Date 2018, respectively compared to Net income of $0.2 million and Net loss of $11.6 million in the Third Quarter 2017 and Year-to-Date 2017, respectively.2018. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net,expense/(benefit), Interest expense, Depreciation and amortization, and certain significant items set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses for comparable periods, and as an executive compensation metric. The methods used by the

21


Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

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

EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax costs or benefits.

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.
◦Transfer of corporate functions - severance and contract losses associated with a transition of certain corporate activities from our New York office to our Dodgeville headquarters.

◦Gain or loss on property and equipment - management considers the gains or losses on asset valuation, including impairments, to result from investing decisions rather than ongoing operations.

 


13 Weeks Ended


November 2, 2018
October 27, 2017
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,294

1.0 %
$162

— %
Income tax (benefit) expense
(3,978)
(1.2)%
5

— %
Other expense (income), net
1,866

0.5 %
(576)
(0.2)%
Interest expense
7,303

2.1 %
6,350

2.0 %
Operating income
8,485

2.5 %
5,941

1.8 %
Depreciation and amortization
7,361

2.2 %
6,347

1.9 %
Transfer of corporate functions
4

— %
475

0.1 %
(Gain) loss on property and equipment
(162)
— %
89

— %
Adjusted EBITDA
$15,688

4.6 %
$12,852

3.9 %

23




13 Weeks Ended


November 1, 2019
November 2, 2018
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,606

1.1 %
$3,294

1.0 %
Income tax expense (benefit)
1,346

0.4 %
(3,978)
(1.2)%
Other (income) expense, net
(166)
— %
1,866

0.5 %
Interest expense
6,121

1.8 %
7,303

2.1 %
Operating income
10,907

3.2 %
8,485

2.5 %
Depreciation and amortization
8,076

2.4 %
7,361

2.2 %
Other operating (income) expense
(206)
(0.1)%
4

— %
(Gain) on property and equipment
(19)
— %
(162)
— %
Adjusted EBITDA
$18,758

5.5 %
$15,688

4.6 %
 39 Weeks Ended 39 Weeks Ended
 November 2, 2018 October 27, 2017 November 1, 2019 November 2, 2018
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue		 $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(4,621) (0.5)% $(11,557) (1.3)% $(6,226) (0.7)% $(4,621) (0.5)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)% (6,713) (0.7)% (10,026) (1.1)%
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Interest expense 21,216
 2.2 % 18,642
 2.1 % 20,190
 2.2 % 21,216
 2.2 %
Operating income (loss) 11,886
 1.3 % (605) (0.1)%
Operating income 5,611
 0.6 % 11,886
 1.3 %
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 % 23,101
 2.6 % 20,420
 2.2 %
Transfer of corporate functions 10
 — % 2,401
 0.3 %
Loss on property and equipment 121
 — % 151
 — %
Other operating expense —
 — % 10
 — %
(Gain) loss on property and equipment (99) — % 121
 — %
Adjusted EBITDA $32,437
 3.4 % $20,978
 2.3 % $28,613
 3.2 % $32,437
 3.4 %


In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments: Direct (sold through e-commerce websitesthree channels: eCommerce, Outfitters, and direct mail catalogs) and Retail (sold through stores).Retail. A key measure in the evaluation of our business is revenue performance by segment.channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.

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To evaluate revenue performance for the Direct segmenteCommerce and Outfitters channels we use Net revenue. For our Retail segment,channel, we use Company Operated stores Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations on the first daywhen it has comparable prior year sales. Stores in which thebeen open for at least 14 months and selling square footage has not changed by 15% or more as a result of a remodel, expansion, reduction or relocation are excluded from Same Store Sales calculations untilwithin the first day they have comparable prior year sales.past year. Online sales and sales generated through our in-store web portal are considered revenue in our Direct segmenteCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis

Third Quarter 20182019 compared with Third Quarter 20172018

Net Revenue

Net revenue for Third Quarter 20182019 was $341.6$340.0 million, compared with $325.5$341.6 million in the comparable period of the prior year, an increasea decrease of $16.1$1.5 million, or 4.9%0.5%. The increase was comprised of an increaseSales growth in our Direct segmenteCommerce channel of $23.5 million4.7% and Outfitters of 1.3% was offset by a decrease in ourthe Retail segmentchannel of $7.4 million.48.4%.
Direct segment
eCommerce Net revenue was $313.8$242.3 million for Third Quarter 2018,2019, an increase of $23.5$10.8 million or 8.1%4.7%, from the comparable period of the prior year. The increase was led by greater demand in key items and growth in new customer acquisition.

Outfitters Net revenue was $83.3 million for Third Quarter 2019, an increase of $1.1 million or 1.3%, from the comparable period of the prior year. The increase was due to growth in our school uniform business.

Retail Net revenue was $14.4 million in Third Quarter 2019, a decrease of $13.4 million or 48.4%, from the comparable period of the prior year. This decrease was driven by a significant reduction in the Direct segmentnumber of our Lands' End Shops at Sears locations. Our U.S. Company Operated stores experienced an increase of 8.3% in Same Store Sales. On November 1, 2019 the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears compared with 125 Lands’ End Shops at Sears November 2, 2018.

Gross Profit

Gross profit increased $3.2 million to $154.2 million primarily due to growth in our eCommerce channel. Gross margin increased to 45.3%, in Third Quarter 2019, compared with 44.2%, in Third Quarter 2018. The gross margin increase of approximately 110 basis points was primarily due to a more disciplined promotional strategy.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.1 million to $135.4 million or 39.8% of total Net revenue, in Third Quarter 2019, compared with $135.3 million or 39.6% of Net revenue, in Third Quarter 2018. This increase was primarily due to planned higher marketing spend, offset by the continued focus on the efficient management of our cost structure.

Depreciation and Amortization

Depreciation and amortization expense was $8.1 million in Third Quarter 2019, an increase of $0.7 million or 9.7%, compared with $7.4 million in Third Quarter 2018. This increase was primarily attributable to depreciation associated with our multi-year ERP system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense, Net

Other operating (income) expense, net was insignificant in Third Quarter 2019 and Third Quarter 2018.


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Operating Income

Operating income was $10.9 million in Third Quarter 2019 compared to Operating income of $8.5 million in Third Quarter 2018.

Interest Expense

Interest expense was $6.1 million in Third Quarter 2019 compared to $7.3 million in Third Quarter 2018, reflective of the $100 million voluntary prepayment on the term loan, partially offset by increased interest rates.

Other (Income) Expense

Other income was $0.2 million in Third Quarter 2019 compared to Other expense of $1.9 million in Third Quarter 2018.

Income Tax Expense

The Company recorded a tax expense at an overall effective tax rate of 27.2% for the Third Quarter 2019. This compares to an income tax benefit at an overall effective rate of 581.6% for Third Quarter 2018. The tax benefit recorded for Third Quarter 2018 was primarily due to revised estimates of the impact due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

Net Income

As a result of the above factors, Net income was $3.6 million and diluted earnings per share was $0.11 in Third Quarter 2019 compared with a Net income of $3.3 million and diluted earnings per share of $0.10 in Third Quarter 2018.

Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $18.8 million in Third Quarter 2019 as compared to $15.7 million in Third Quarter 2018.
Year-to-Date 2019 compared with Year-to-Date 2018

Net Revenue

Net revenue for Year-to-Date 2019 was $900.7 million, compared with $949.3 million in the comparable period of the prior year, a decrease of $48.6 million, or 5.1%. Sales growth in our eCommerce channel of 5.6% was more than offset by decreases in our Outfitters and Retail channels of 16.5% and 54.5% respectively.

eCommerce Net revenue was $669.9 million for Year-to-Date 2019, an increase of $35.8 million or 5.6%, from the comparable period of the prior year. The increase was primarily attributable to the continued growth in our U.S. eCommerce business. We continued to increase our buyer file and our conversion rate in ourthe U.S. eCommerce business helping to drive the increase, particularly indriven by greater demand for key items and growth in our assortment such as outerwear, knit tops, denim, flannel, and home.new customer acquisitions.
Retail segment
Outfitters Net revenue was $27.8$191.9 million for Third Quarter 2018,Year-to-Date 2019, a decrease of $7.4$37.8 million or 21.0%16.5%, from the comparable period of the prior year. The decrease was primarily attributable to the Delta Air Lines launch in the prior year.

Retail Net revenue was $39.0 million in Year-to-Date 2019, a decrease of $46.6 million or 54.5%, from the comparable period of the prior year, primarily driven by a significant reduction in the number of our Lands' End Shops at Sears locations. Consolidated Same Store Sales increased 11.8% as compared to the same period of the prior year.locations partially offset by growth in our U.S. Company Operated stores. Our USU.S. Company Operated stores experienced an increase of 15.1%9.0% in Same Store Sales. OurOn November 1, 2019, the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears experienced an increase of 11.7% in Same Store Sales primarily due to liquidating stores. On November 2, 2018, the Company hadcompared with 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.November 2, 2018.

24



Gross Profit

Gross profit increased $9.0decreased $17.6 million to $151.0$403.1 million and gross margin increased to 44.2% of total Net revenue, in Third Quarter 2018, compared with $142.0 million, and gross margin of 43.6% of total Net revenue, in Third Quarter 2017. The Gross profit increase was comprised of an increase in our Direct segment of $9.9 million and decrease in our Retail segment of $0.9 million.
Direct segment Gross profit increased $9.9 million to $139.9 million in Third Quarter 2018 from $130.0 million in Third Quarter 2017. Direct segment gross margin decreased approximately 20 basis points to 44.6% of total Net revenue in Third Quarter 2018, compared with 44.8% of total Net revenue in Third Quarter 2017. The gross margin decrease wasprimarily due to increased shipping costs, partially offset by stronger merchandise margins and effective inventory managementthe impact of our seasonal assortment.
Retail segment Gross profit decreased $0.9 million to $11.1 million in Third Quarter 2018 from $12.0 million in Third Quarter 2017. Retail segment gross margin increased approximately 570 basis points to 39.9% of Net revenue, in Third Quarter 2018, compared to 34.2% of Net revenue, in Third Quarter 2017 through full priced selling mix, promotional productivity and improved quality of our seasonal assortment, which led to higher sell through and reduced markdowns.
Selling and Administrative Expenses
Selling and administrative expenses increased $6.2 million to $135.3 million, a decrease of approximately 10 basis points to 39.6% of total Net revenue, in Third Quarter 2018, compared with $129.1 million, or 39.7% of Net revenue, in Third Quarter 2017. The increase in Selling and administrative expenses was due to an increase of $8.8 millionthe Delta Air Lines launch in the Direct Segmentprior year and $0.7 million in Corporate expenses, offset by a decrease of $3.3 million in the Retail segment.
Direct segment Selling and administrative expenses were $109.6 million, an increase of approximately 20 basis points to 34.9% of Net revenue, in Third Quarter 2018, compared with $100.8 million, or 34.7% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the increased marketing investment in addition to personnel costs and incentive accruals related to the continued growth of the US Direct business.
Retail segment Selling and administrative expenses were $14.7 million, an increase of approximately 160 basis points to 52.9% of Net revenue, in Third Quarter 2018, compared with $18.0 million, or 51.3% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the reduction in the number offewer Lands' End Shops at Sears, partially offset by improved leverage with new Company Operated stores.the growth in our eCommerce channel. Gross margin increased to 44.8% in Year-to-Date 2019, compared to 44.3% Year-to-Date 2018. The gross margin increase of approximately 50 basis points was primarily related to a more disciplined promotional strategy.
Corporate/other
Selling and Administrative Expenses

Selling and administrative expenses were $11.0decreased $13.8 million to $374.5 million, or 41.6% of total Net revenue, in Year-to-Date 2019, compared with $10.3 million for Third Quarter 2018 and Third Quarter 2017, respectively. The $0.7$388.3 million, or 6.8%,40.9% of Net revenue, in Year-to-Date 2018. The 70 basis point increase was largely attributablereflects deleverage primarily related to an increasethe Delta Air Lines launch and significant reduction in personnel costs and incentive accruals.the number of our Lands’ End Shops at Sears locations from the prior year.

Depreciation and Amortization

Depreciation and amortization expense was $7.4$23.1 million in Third Quarter 2018,Year-to-Date 2019, an increase of $1.0$2.7 million or 16.0%13.1%, compared with $6.4$20.4 million in Third Quarter 2017,Year-to-Date 2018. This increase was primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.implementation, continued investment in our digital infrastructure, and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense Net

Other operating income net was insignificant$0.1 million in Third Quarter 2018Year-to-Date 2019 compared to other operating expense of $0.6 million in Third Quarter 2017, primarily due to severance charges associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.

25


Operating Income
Operating income was $8.5 million in Third Quarter 2018 compared to $5.9 million in Third Quarter 2017 primarily due to increased revenue driven by the Direct Segment and the leveraging of the existing cost structure.
Interest Expense
Interest expense was $7.3 million in Third Quarter 2018 compared to $6.4 million in Third Quarter 2017, reflective of a rising interest rate environment.
Other Expense (Income), Net
Other expense, net was $1.9 million in Third Quarter 2018 compared to other income, net of $0.6 million in Third Quarter 2017, driven by the establishment of a reserve against an indemnification asset.
Income Tax Benefit
The Income tax benefit was $4.0 million for Third Quarter 2018 compared to an insignificant amount in Third Quarter 2017. The effective tax rate was 581.6% in Third Quarter 2018 compared with 3.0% in Third Quarter 2017. The higher benefit is primarily due to revised estimates of the impact due to the Tax Act.
Net Income (Loss)
As a result of the above factors, Net income was $3.3 million and diluted income per share was $0.10 in Third Quarter 2018 compared with a Net income of $0.2 million and diluted earnings per share of $0.01 in Third Quarter 2017.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased 22.1% to $15.7 million in Third Quarter 2018 from $12.9 million in Third Quarter 2017.
Year-to-Date 2018 compared with Year-to-Date 2017
Net Revenue
Net revenue for Year-to-Date 2018 was $949.3 million, compared with $896.0 million in the comparable period of the prior year, an increase of $53.3 million or 5.9%. The increase was comprised of an increase in our Direct segment of $85.2 million and a decrease in our Retail segment of $31.9 million.
Direct segment Net revenue was $863.8 million for Year-to-Date 2018, an increase of $85.2 million, or 10.9%, from the comparable period of the prior year. The increase in the Direct segment was largely attributable to the launch of Delta Airlines business and an increase in our U.S. eCommerce business. In our U.S. eCommerce business, we increased our buyer file and conversion rate helping to drive increased revenue across our assortment.
Retail segment Net revenue was $85.6 million for Year-to-Date 2018, a decrease of $31.9 million, or 27.2%, from the comparable period of the prior year primarily due to the reduction of our Lands' End Shops at Sears. Consolidated Same Store Sales declined 5.9% compared to the same period of the prior year. The decrease was primarily attributable to a reduction of our Lands' End Shops at Sears locations and a 7.1% decrease in Lands' End Shops at Sears Same Store Sales. US Company Operated stores experienced an increase of 1.6% in Same Store Sales. On November 2, 2018, the Company operated 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.
Gross Profit
Gross profit increased $22.0 million to $420.8 million and gross margin decreased approximately 20 basis points to 44.3% of Net revenue in Year-to-Date 2018, compared with $398.8 million, or 44.5% of Net revenue, in Year-to-Date 2017. The Gross profit increase was comprised of an increase in our Direct segment of $32.7 million offset by decrease in our Retail segment of $10.6 million.
Direct segment Gross profit increased 9.3% to $385.3 million in Year-to-Date 2018 from $352.6 million in Year-to-Date 2017. Direct segment gross margin decreased approximately 70 basis points to 44.6% of Net revenue for Year-

26


to-Date 2018, compared with 45.3% of Net revenue for Year-to-Date 2017. The gross margin decrease was primarily attributable to increased promotional activity in the highly competitive retail environment as well as the launch of the lower margin Delta Airlines business.
Retail segment Gross profit decreased 23.0% to $35.4 million in Year-to-Date 2018 from $46.0 million in Year-to-Date 2017. Retail segment gross margin increased approximately 220 basis points to 41.4% of Net revenue for Year-to-Date 2018, compared to 39.2% of Net revenue for Year-to-Date 2017 primarily attributable to effective inventory management requiring lower markdowns of our assortment.
Selling and Administrative Expenses
Selling and administrative expenses increased 2.8% to $388.3 million, a decrease of approximately 130 basis points to 40.9% of Net revenue, in Year-to-Date 2018, compared with $377.8 million, or 42.2% of Net revenue, in Year-to-Date 2017. The increase in Selling and administrative expenses was primarily due to an increase of $18.3 million in the Direct segment and $2.4 million in Corporate expenses, partially offset by a decrease of $10.2 million in the Retail segment.
Direct segment Selling and administrative expenses were $316.9 million, a decrease of approximately 170 basis points to 36.7% of Net revenue, in Year-to-Date 2018, compared with $298.6 million, or 38.4% of Net revenue, for Year-to-Date 2017. The basis point decrease was largely attributable to improved cost leverage, partially offset by increased personnel costs and incentive accruals.
Retail segment Selling and administrative expenses were $43.2 million, an increase of approximately 500 basis points to 50.5% of Net revenue, in Year-to-Date 2018, compared with $53.4 million, or 45.5% of Net revenue, in Year-to-Date 2017. The basis point increase was largely attributable to the reduction in the number of Lands' End Shops at Sears and negative Lands’ End Shops at Sears same store sales.
Corporate/other Selling and administrative expenses were $28.2 million compared with $25.8 million in Year-to-Date 2018 and Year-to-Date 2017, respectively. The $2.4 million, or 9.3%, increase was primarily due to an increase in personnel costs and incentive accruals.
Depreciation and Amortization
Depreciation and amortization expense was $20.4 million in Year-to-Date 2018, an increase of $1.4 million, or 7.3%, compared with $19.0 million in Year-to-Date 2017, primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.
Other Operating (Income) Expense, Net
Other operating (income) expense, net was expense of $0.1 million in Year-to-Date 2018 compared to expense of $2.6 million in the Year-to-Date 2017, due to severance charges in the Year-to-Date 2017 associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.2018.

Operating Income (Loss)

Operating income was $5.6 million in Year-to-Date 2019 compared to Operating income of $11.9 million in Year-to-Date 2018 comparedprimarily due to Operating loss of $0.6the Delta Air Lines launch in the prior year, partially offset by growth in the eCommerce business.

Interest Expense

Interest expense was $20.2 million in Year-to-Date 2017. The increase was primarily due2019 compared to improved growth in our Direct business, partially offset by closures of Lands' End Shops at Sears.
Interest Expense
Interest expense was $21.2 million in Year-to-Date 2018, compared to $18.6 million in Year-to-Date 2017, reflective of a risingthe $100 million voluntary prepayment on the term loan in First Quarter 2019, partially offset by increased interest rate environment.

27

rates.

Other (Income) Expense, Net

Other income, net was $1.6 million in Year-to-Date 2019 compared to Other expense, net wasof $5.3 million in Year-to-Date 2018 compared to Other income, net of $1.8 million in Year-to-Date 2017.2018. Other expense, net in Year-to-Date 2018 was primarily attributable to the reversal of an indemnification asset and accrued interest due to a favorable state tax audit, and a reserve taken against the remaining indemnification asset.

Income Tax Benefit
Income tax benefit was $10.0 million for Year-to-Date 2018 compared to $5.9 million in Year-to-Date 2017.
The effective tax rate was 51.9% in Year-to-Date 2019 compared with 68.5% in Year-to-Date 2018 compared with 33.7% in2018. The Year-to-Date 2017. The higher2019 tax rate reflects the benefit resulted from impacts of the Company’s election to treat certain foreign entities as a U.S. branch. The Year-to-Date 2018 rate reflects revised estimates related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and the reversalbenefits of UTBs as a consequence of the favorable state tax audit settlements for periods prior to the Separation.

Net Loss

As a result of the above factors, Net loss was $6.2 million and diluted loss per share was $0.19 in Year-to-Date 2019 compared with a Net loss of $4.6 million and diluted loss per share wasof $0.14 in Year-to-Date 2018 compared with Net loss2018.

25



Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA increased 54.6%was $28.6 million in Year-to-Date 2019 as compared to $32.4 million in Year-to-Date 2018 from $21.0 million in Year-to-Date 2017.2018.

28


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 Current ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. We expect that our cash on hand and cash flows from operations, along with our Current ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. Cash generated from our net salesrevenue and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionatesignificant amount of Netnet revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year.
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the Current ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capital and other general corporate purposes and, aspurposes. As of November 2, 2018, was undrawn other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.
Also on November 16, 2017,credit of $12.5 million and $82.5 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company terminated all loanincurred $1.5 million in debt origination fees. The fees related documentsto the Term Loan Facility were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Prior ABL Facility and repaid all outstanding amounts thereunder.

The Prior ABL Facility provided for maximum borrowings of $175.0 million for Lands' End, subject to a borrowing base, with a $30.0 million sub facility for the UK Borrower. The Prior ABL Facility had a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The Prior ABL Facility was available for working capital and other general corporate purposes and was undrawn other than for letters of credit.Debt Facilities.
On April 4, 2014, Lands’ End entered into the $515.0 million Term Loan Facility of $515.0 million, the proceeds of which proceeds were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and expenses associated with the Debt Facilities at that time of approximately $11.4 million, with the remaining proceeds used for general corporate purposes. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Debt Facilities. In First Quarter 2019, Lands’ End made a $100 million voluntary prepayment on the Term Loan from excess cash on hand.
Maturity; Amortization and Prepayments
The Term Loan Facility amortizes at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows (as defined in the Term Loan Facility) in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events.
The Term Loan Facility matures on April 4, 2021 while the Current ABL Facility will mature no later than November 16, 2022.

29


Guarantees; Security
All domestic obligations under the Debt Facilities are unconditionally guaranteed by the Company and, subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The Current ABL Facility inis 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 also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The Current ABL Facility is also secured by a second priority security interest in the same collateral.

The Prior ABL Facility had the same terms to those stated above. In addition, the obligations of the UK Borrower under the Prior ABL Facility were guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom.
Interest; Fees

26


The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL FacilitiesFacility is subject to adjustment based on the average excess availability under the ABL FacilitiesFacility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively.Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.Facility.
Customary agency fees are payable pursuant to the termsin respect of the Debt Facilities. The ABL FacilitiesFacility fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries 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. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of November 2, 2018.1, 2019.
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.
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, and material judgments and change of control.
Cash Flows from Operating Activities
Net cash used in operating activities decreasedincreased to $125.0 million in Year-to-Date 2019 from $52.2 million in the Year-to-Date 2018, from a net cash use of $87.8 million in the Year-to-Date 2017, primarily driven by improved working capital management through:
Lower Accounts payable paymentsan increase in Fiscal 2018 due to timing of inventory receiptssupporting the Fourth Quarter 2019 American Airlines launch and payments,

30


Higher receipts from Accounts receivable, net in Fiscal 2018 due to high customer receivables outstanding at the beginning of the year relatedaccelerated shipments prior to the Delta Airlines launch.implementation of tariffs.
Cash Flows from Investing Activities
Net cash used in investing activities was $33.0$28.5 million and $29.1$33.0 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively. Cash used in investing activities for both periods was primarily used for investments to update our information technology infrastructure and property and equipment.
For Fiscal 2018,2019, we planexpect to invest a total of approximately $40.0 million in capital expenditures for strategic investments and infrastructure, primarily associated with our ERPEnterprise Order Management investment, other technology investments, expansion in U.S Company Operated stores and general corporate needs.
Cash Flows from Financing Activities
Net cash used in financing activities was $4.4$24.6 million and $4.5$4.4 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively, consisting primarily of our quarterly payments ona $100 million voluntary prepayment of our Term Loan Facility in First Quarter 2019 and quarterly scheduled payments offset by borrowings under the ABL Facility. Amounts borrowed during Third Quarter 2019 are expected to be repaid in full during Fourth Quarter 2019 using cash flows generated from operations.
Contractual Obligations and Off-Balance-Sheet Arrangements

27


There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018.1, 2019. During First Quarter 2019, Lands' End made a $100 million voluntary prepayment on the Term Loan Facility, from excess cash on hand.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into an asset-based lending credit agreement with Wells Fargo Bank, National Association,the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capitalmillion and other general corporate purposes. The Current ABL Facility will mature no later than November 16, 2022, subject to customary extension provisions provided for therein. The Current ABL Facility is available for working capital and other general corporate purposes and was undrawn at purposes. As of November 2, 2018, other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.credit of $12.5 million and $82.5 million in availability under the ABL Facility.
Also on November 16, 2017, the Company terminated all loan related documents of the Prior ABL Facility and repaid all outstanding amounts thereunder.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, and Note 2, Recent Accounting Pronouncements. There have been no significant changes in our critical accounting policies or their application since February 2, 2018, except as described below.1, 2019.

Effective First Quarter 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenue, gross margins or income from operations. However, we have implemented a change in our balance sheet presentation for expected product returns and are now reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns, where these were previously netted in Other current liabilities. The product return asset is reported within Prepaid expenses and other current assets. The returns liability and payments received from customers for future delivery of products are reported within Other current liabilities in the Condensed Consolidated Balance Sheets.
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.

31



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, 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" 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

28


uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2018,1, 2019, as modified by "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.

3229


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. A significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of November 2, 2018,1, 2019, we had $8.9$7.3 million of cash denominated in foreign currencies, principally in British Pound Sterling, Euros, Yen and Yen.Hong Kong Dollars. We do not enter into financial instruments for trading purposes or hedging and have not used any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with the Term Loan Facility and the Current ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $4.9$3.9 million change in our annual cash interest expenses. Assuming our Current ABL Facility was fully drawn to a principal amount equal to $175.0 million, each one percentage point change in interest rates would result in a $1.8 million change in our annual cash interest expense.

3330


ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, Lands’ End’s Chief Executive Officer and President and Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer have concluded that, as of November 2, 2018,1, 2019, 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 Third Fiscal Quarter Ended November 2, 20181, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


3431


PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in 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.



3532


ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, which was filed with the SEC on March 29, 2018 (the "Form 10-K"), except as outlined below.28, 2019.

Risk factors appearing in the 10-K which reference our relationship with Sears Holdings Corporation are hereby supplemented to reflect that on October 15, 2018, Sears Holdings Corporation and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code.


3633

Index of Exhibits

ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
3.1
 Amended and Restated Certificate of Incorporation of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on March 20, 2014 (File No. 001-09769)).
   
3.2
 Amended and Restated Bylaws of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on April 8, 2014 (File No. 001-09769)).
  
31.1
 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
31.2
 Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
32.1
 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   
101.INS XBRL Instance Document*
  
101.SCH XBRL Taxonomy Extension Schema Document*
  
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
  
101.DEF XBRL Taxonomy Extension Definition Document*
  
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
  
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
   
*Filed herewith.
   
**Furnished herewith.

3734


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Lands’ End, Inc.
(Registrant)

Dated: December 6, 20183, 2019

By:/s/ James F. Gooch
 James F. Gooch
 
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
(Principal Financial Officer)





3835

s
% of
Net revenue		 $’s % of
Net revenue		 
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of Net revenue
Net revenue $949,340
 100.0 % $896,044
 100.0 %
Cost of sales (excluding depreciation and amortization) 528,587
 55.7 % 497,262
 55.5 %
Gross profit 420,753
 44.3 % 398,782
 44.5 %
Selling and administrative 388,315
 40.9 % 377,804
 42.2 %
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Other operating expense, net 132
 — % 2,552
 0.3 %
Operating income 11,886
 1.3 % (605) (0.1)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Loss before income taxes (14,647) (1.5)% (17,435) (1.9)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
NET LOSS $(4,621) (0.5)% $(11,557) (1.3)%
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $'s % of
Net revenue		 $’s % of
Net revenue
Net revenue $900,723
 100.0 % $949,340
 100.0 %
Cost of sales (excluding depreciation and amortization) 497,589
 55.2 % 528,587
 55.7 %
Gross profit 403,134
 44.8 % 420,753
 44.3 %
Selling and administrative 374,521
 41.6 % 388,315
 40.9 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating income (expense), net (99) — % 132
 — %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Loss before income taxes (12,939) (1.4)% (14,647) (1.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
NET LOSS $(6,226) (0.7)% $(4,621) (0.5)%


22


Depreciation and amortization is not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.
Net Income (Loss) and Adjusted EBITDA

We recorded Net income of $3.3$3.6 million andin Third Quarter 2019 compared to Net lossincome of $4.6$3.3 million in the Third Quarter 2018 and Year-to-Date 2018, respectively compared to Net income of $0.2 million and Net loss of $11.6 million in the Third Quarter 2017 and Year-to-Date 2017, respectively.2018. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net,expense/(benefit), Interest expense, Depreciation and amortization, and certain significant items set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses for comparable periods, and as an executive compensation metric. The methods used by the

21


Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

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

EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax costs or benefits.

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.
◦Transfer of corporate functions - severance and contract losses associated with a transition of certain corporate activities from our New York office to our Dodgeville headquarters.

◦Gain or loss on property and equipment - management considers the gains or losses on asset valuation, including impairments, to result from investing decisions rather than ongoing operations.

 


13 Weeks Ended


November 2, 2018
October 27, 2017
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,294

1.0 %
$162

— %
Income tax (benefit) expense
(3,978)
(1.2)%
5

— %
Other expense (income), net
1,866

0.5 %
(576)
(0.2)%
Interest expense
7,303

2.1 %
6,350

2.0 %
Operating income
8,485

2.5 %
5,941

1.8 %
Depreciation and amortization
7,361

2.2 %
6,347

1.9 %
Transfer of corporate functions
4

— %
475

0.1 %
(Gain) loss on property and equipment
(162)
— %
89

— %
Adjusted EBITDA
$15,688

4.6 %
$12,852

3.9 %

23




13 Weeks Ended


November 1, 2019
November 2, 2018
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,606

1.1 %
$3,294

1.0 %
Income tax expense (benefit)
1,346

0.4 %
(3,978)
(1.2)%
Other (income) expense, net
(166)
— %
1,866

0.5 %
Interest expense
6,121

1.8 %
7,303

2.1 %
Operating income
10,907

3.2 %
8,485

2.5 %
Depreciation and amortization
8,076

2.4 %
7,361

2.2 %
Other operating (income) expense
(206)
(0.1)%
4

— %
(Gain) on property and equipment
(19)
— %
(162)
— %
Adjusted EBITDA
$18,758

5.5 %
$15,688

4.6 %
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(4,621) (0.5)% $(11,557) (1.3)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Operating income (loss) 11,886
 1.3 % (605) (0.1)%
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Transfer of corporate functions 10
 — % 2,401
 0.3 %
Loss on property and equipment 121
 — % 151
 — %
Adjusted EBITDA $32,437
 3.4 % $20,978
 2.3 %
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(6,226) (0.7)% $(4,621) (0.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating expense —
 — % 10
 — %
(Gain) loss on property and equipment (99) — % 121
 — %
Adjusted EBITDA $28,613
 3.2 % $32,437
 3.4 %


In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments: Direct (sold through e-commerce websitesthree channels: eCommerce, Outfitters, and direct mail catalogs) and Retail (sold through stores).Retail. A key measure in the evaluation of our business is revenue performance by segment.channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.

22


To evaluate revenue performance for the Direct segmenteCommerce and Outfitters channels we use Net revenue. For our Retail segment,channel, we use Company Operated stores Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations on the first daywhen it has comparable prior year sales. Stores in which thebeen open for at least 14 months and selling square footage has not changed by 15% or more as a result of a remodel, expansion, reduction or relocation are excluded from Same Store Sales calculations untilwithin the first day they have comparable prior year sales.past year. Online sales and sales generated through our in-store web portal are considered revenue in our Direct segmenteCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis

Third Quarter 20182019 compared with Third Quarter 20172018

Net Revenue

Net revenue for Third Quarter 20182019 was $341.6$340.0 million, compared with $325.5$341.6 million in the comparable period of the prior year, an increasea decrease of $16.1$1.5 million, or 4.9%0.5%. The increase was comprised of an increaseSales growth in our Direct segmenteCommerce channel of $23.5 million4.7% and Outfitters of 1.3% was offset by a decrease in ourthe Retail segmentchannel of $7.4 million.48.4%.
Direct segment
eCommerce Net revenue was $313.8$242.3 million for Third Quarter 2018,2019, an increase of $23.5$10.8 million or 8.1%4.7%, from the comparable period of the prior year. The increase was led by greater demand in key items and growth in new customer acquisition.

Outfitters Net revenue was $83.3 million for Third Quarter 2019, an increase of $1.1 million or 1.3%, from the comparable period of the prior year. The increase was due to growth in our school uniform business.

Retail Net revenue was $14.4 million in Third Quarter 2019, a decrease of $13.4 million or 48.4%, from the comparable period of the prior year. This decrease was driven by a significant reduction in the Direct segmentnumber of our Lands' End Shops at Sears locations. Our U.S. Company Operated stores experienced an increase of 8.3% in Same Store Sales. On November 1, 2019 the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears compared with 125 Lands’ End Shops at Sears November 2, 2018.

Gross Profit

Gross profit increased $3.2 million to $154.2 million primarily due to growth in our eCommerce channel. Gross margin increased to 45.3%, in Third Quarter 2019, compared with 44.2%, in Third Quarter 2018. The gross margin increase of approximately 110 basis points was primarily due to a more disciplined promotional strategy.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.1 million to $135.4 million or 39.8% of total Net revenue, in Third Quarter 2019, compared with $135.3 million or 39.6% of Net revenue, in Third Quarter 2018. This increase was primarily due to planned higher marketing spend, offset by the continued focus on the efficient management of our cost structure.

Depreciation and Amortization

Depreciation and amortization expense was $8.1 million in Third Quarter 2019, an increase of $0.7 million or 9.7%, compared with $7.4 million in Third Quarter 2018. This increase was primarily attributable to depreciation associated with our multi-year ERP system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense, Net

Other operating (income) expense, net was insignificant in Third Quarter 2019 and Third Quarter 2018.


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Operating Income

Operating income was $10.9 million in Third Quarter 2019 compared to Operating income of $8.5 million in Third Quarter 2018.

Interest Expense

Interest expense was $6.1 million in Third Quarter 2019 compared to $7.3 million in Third Quarter 2018, reflective of the $100 million voluntary prepayment on the term loan, partially offset by increased interest rates.

Other (Income) Expense

Other income was $0.2 million in Third Quarter 2019 compared to Other expense of $1.9 million in Third Quarter 2018.

Income Tax Expense

The Company recorded a tax expense at an overall effective tax rate of 27.2% for the Third Quarter 2019. This compares to an income tax benefit at an overall effective rate of 581.6% for Third Quarter 2018. The tax benefit recorded for Third Quarter 2018 was primarily due to revised estimates of the impact due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

Net Income

As a result of the above factors, Net income was $3.6 million and diluted earnings per share was $0.11 in Third Quarter 2019 compared with a Net income of $3.3 million and diluted earnings per share of $0.10 in Third Quarter 2018.

Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $18.8 million in Third Quarter 2019 as compared to $15.7 million in Third Quarter 2018.
Year-to-Date 2019 compared with Year-to-Date 2018

Net Revenue

Net revenue for Year-to-Date 2019 was $900.7 million, compared with $949.3 million in the comparable period of the prior year, a decrease of $48.6 million, or 5.1%. Sales growth in our eCommerce channel of 5.6% was more than offset by decreases in our Outfitters and Retail channels of 16.5% and 54.5% respectively.

eCommerce Net revenue was $669.9 million for Year-to-Date 2019, an increase of $35.8 million or 5.6%, from the comparable period of the prior year. The increase was primarily attributable to the continued growth in our U.S. eCommerce business. We continued to increase our buyer file and our conversion rate in ourthe U.S. eCommerce business helping to drive the increase, particularly indriven by greater demand for key items and growth in our assortment such as outerwear, knit tops, denim, flannel, and home.new customer acquisitions.
Retail segment
Outfitters Net revenue was $27.8$191.9 million for Third Quarter 2018,Year-to-Date 2019, a decrease of $7.4$37.8 million or 21.0%16.5%, from the comparable period of the prior year. The decrease was primarily attributable to the Delta Air Lines launch in the prior year.

Retail Net revenue was $39.0 million in Year-to-Date 2019, a decrease of $46.6 million or 54.5%, from the comparable period of the prior year, primarily driven by a significant reduction in the number of our Lands' End Shops at Sears locations. Consolidated Same Store Sales increased 11.8% as compared to the same period of the prior year.locations partially offset by growth in our U.S. Company Operated stores. Our USU.S. Company Operated stores experienced an increase of 15.1%9.0% in Same Store Sales. OurOn November 1, 2019, the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears experienced an increase of 11.7% in Same Store Sales primarily due to liquidating stores. On November 2, 2018, the Company hadcompared with 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.November 2, 2018.

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Gross Profit

Gross profit increased $9.0decreased $17.6 million to $151.0$403.1 million and gross margin increased to 44.2% of total Net revenue, in Third Quarter 2018, compared with $142.0 million, and gross margin of 43.6% of total Net revenue, in Third Quarter 2017. The Gross profit increase was comprised of an increase in our Direct segment of $9.9 million and decrease in our Retail segment of $0.9 million.
Direct segment Gross profit increased $9.9 million to $139.9 million in Third Quarter 2018 from $130.0 million in Third Quarter 2017. Direct segment gross margin decreased approximately 20 basis points to 44.6% of total Net revenue in Third Quarter 2018, compared with 44.8% of total Net revenue in Third Quarter 2017. The gross margin decrease wasprimarily due to increased shipping costs, partially offset by stronger merchandise margins and effective inventory managementthe impact of our seasonal assortment.
Retail segment Gross profit decreased $0.9 million to $11.1 million in Third Quarter 2018 from $12.0 million in Third Quarter 2017. Retail segment gross margin increased approximately 570 basis points to 39.9% of Net revenue, in Third Quarter 2018, compared to 34.2% of Net revenue, in Third Quarter 2017 through full priced selling mix, promotional productivity and improved quality of our seasonal assortment, which led to higher sell through and reduced markdowns.
Selling and Administrative Expenses
Selling and administrative expenses increased $6.2 million to $135.3 million, a decrease of approximately 10 basis points to 39.6% of total Net revenue, in Third Quarter 2018, compared with $129.1 million, or 39.7% of Net revenue, in Third Quarter 2017. The increase in Selling and administrative expenses was due to an increase of $8.8 millionthe Delta Air Lines launch in the Direct Segmentprior year and $0.7 million in Corporate expenses, offset by a decrease of $3.3 million in the Retail segment.
Direct segment Selling and administrative expenses were $109.6 million, an increase of approximately 20 basis points to 34.9% of Net revenue, in Third Quarter 2018, compared with $100.8 million, or 34.7% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the increased marketing investment in addition to personnel costs and incentive accruals related to the continued growth of the US Direct business.
Retail segment Selling and administrative expenses were $14.7 million, an increase of approximately 160 basis points to 52.9% of Net revenue, in Third Quarter 2018, compared with $18.0 million, or 51.3% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the reduction in the number offewer Lands' End Shops at Sears, partially offset by improved leverage with new Company Operated stores.the growth in our eCommerce channel. Gross margin increased to 44.8% in Year-to-Date 2019, compared to 44.3% Year-to-Date 2018. The gross margin increase of approximately 50 basis points was primarily related to a more disciplined promotional strategy.
Corporate/other
Selling and Administrative Expenses

Selling and administrative expenses were $11.0decreased $13.8 million to $374.5 million, or 41.6% of total Net revenue, in Year-to-Date 2019, compared with $10.3 million for Third Quarter 2018 and Third Quarter 2017, respectively. The $0.7$388.3 million, or 6.8%,40.9% of Net revenue, in Year-to-Date 2018. The 70 basis point increase was largely attributablereflects deleverage primarily related to an increasethe Delta Air Lines launch and significant reduction in personnel costs and incentive accruals.the number of our Lands’ End Shops at Sears locations from the prior year.

Depreciation and Amortization

Depreciation and amortization expense was $7.4$23.1 million in Third Quarter 2018,Year-to-Date 2019, an increase of $1.0$2.7 million or 16.0%13.1%, compared with $6.4$20.4 million in Third Quarter 2017,Year-to-Date 2018. This increase was primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.implementation, continued investment in our digital infrastructure, and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense Net

Other operating income net was insignificant$0.1 million in Third Quarter 2018Year-to-Date 2019 compared to other operating expense of $0.6 million in Third Quarter 2017, primarily due to severance charges associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.

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Operating Income
Operating income was $8.5 million in Third Quarter 2018 compared to $5.9 million in Third Quarter 2017 primarily due to increased revenue driven by the Direct Segment and the leveraging of the existing cost structure.
Interest Expense
Interest expense was $7.3 million in Third Quarter 2018 compared to $6.4 million in Third Quarter 2017, reflective of a rising interest rate environment.
Other Expense (Income), Net
Other expense, net was $1.9 million in Third Quarter 2018 compared to other income, net of $0.6 million in Third Quarter 2017, driven by the establishment of a reserve against an indemnification asset.
Income Tax Benefit
The Income tax benefit was $4.0 million for Third Quarter 2018 compared to an insignificant amount in Third Quarter 2017. The effective tax rate was 581.6% in Third Quarter 2018 compared with 3.0% in Third Quarter 2017. The higher benefit is primarily due to revised estimates of the impact due to the Tax Act.
Net Income (Loss)
As a result of the above factors, Net income was $3.3 million and diluted income per share was $0.10 in Third Quarter 2018 compared with a Net income of $0.2 million and diluted earnings per share of $0.01 in Third Quarter 2017.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased 22.1% to $15.7 million in Third Quarter 2018 from $12.9 million in Third Quarter 2017.
Year-to-Date 2018 compared with Year-to-Date 2017
Net Revenue
Net revenue for Year-to-Date 2018 was $949.3 million, compared with $896.0 million in the comparable period of the prior year, an increase of $53.3 million or 5.9%. The increase was comprised of an increase in our Direct segment of $85.2 million and a decrease in our Retail segment of $31.9 million.
Direct segment Net revenue was $863.8 million for Year-to-Date 2018, an increase of $85.2 million, or 10.9%, from the comparable period of the prior year. The increase in the Direct segment was largely attributable to the launch of Delta Airlines business and an increase in our U.S. eCommerce business. In our U.S. eCommerce business, we increased our buyer file and conversion rate helping to drive increased revenue across our assortment.
Retail segment Net revenue was $85.6 million for Year-to-Date 2018, a decrease of $31.9 million, or 27.2%, from the comparable period of the prior year primarily due to the reduction of our Lands' End Shops at Sears. Consolidated Same Store Sales declined 5.9% compared to the same period of the prior year. The decrease was primarily attributable to a reduction of our Lands' End Shops at Sears locations and a 7.1% decrease in Lands' End Shops at Sears Same Store Sales. US Company Operated stores experienced an increase of 1.6% in Same Store Sales. On November 2, 2018, the Company operated 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.
Gross Profit
Gross profit increased $22.0 million to $420.8 million and gross margin decreased approximately 20 basis points to 44.3% of Net revenue in Year-to-Date 2018, compared with $398.8 million, or 44.5% of Net revenue, in Year-to-Date 2017. The Gross profit increase was comprised of an increase in our Direct segment of $32.7 million offset by decrease in our Retail segment of $10.6 million.
Direct segment Gross profit increased 9.3% to $385.3 million in Year-to-Date 2018 from $352.6 million in Year-to-Date 2017. Direct segment gross margin decreased approximately 70 basis points to 44.6% of Net revenue for Year-

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to-Date 2018, compared with 45.3% of Net revenue for Year-to-Date 2017. The gross margin decrease was primarily attributable to increased promotional activity in the highly competitive retail environment as well as the launch of the lower margin Delta Airlines business.
Retail segment Gross profit decreased 23.0% to $35.4 million in Year-to-Date 2018 from $46.0 million in Year-to-Date 2017. Retail segment gross margin increased approximately 220 basis points to 41.4% of Net revenue for Year-to-Date 2018, compared to 39.2% of Net revenue for Year-to-Date 2017 primarily attributable to effective inventory management requiring lower markdowns of our assortment.
Selling and Administrative Expenses
Selling and administrative expenses increased 2.8% to $388.3 million, a decrease of approximately 130 basis points to 40.9% of Net revenue, in Year-to-Date 2018, compared with $377.8 million, or 42.2% of Net revenue, in Year-to-Date 2017. The increase in Selling and administrative expenses was primarily due to an increase of $18.3 million in the Direct segment and $2.4 million in Corporate expenses, partially offset by a decrease of $10.2 million in the Retail segment.
Direct segment Selling and administrative expenses were $316.9 million, a decrease of approximately 170 basis points to 36.7% of Net revenue, in Year-to-Date 2018, compared with $298.6 million, or 38.4% of Net revenue, for Year-to-Date 2017. The basis point decrease was largely attributable to improved cost leverage, partially offset by increased personnel costs and incentive accruals.
Retail segment Selling and administrative expenses were $43.2 million, an increase of approximately 500 basis points to 50.5% of Net revenue, in Year-to-Date 2018, compared with $53.4 million, or 45.5% of Net revenue, in Year-to-Date 2017. The basis point increase was largely attributable to the reduction in the number of Lands' End Shops at Sears and negative Lands’ End Shops at Sears same store sales.
Corporate/other Selling and administrative expenses were $28.2 million compared with $25.8 million in Year-to-Date 2018 and Year-to-Date 2017, respectively. The $2.4 million, or 9.3%, increase was primarily due to an increase in personnel costs and incentive accruals.
Depreciation and Amortization
Depreciation and amortization expense was $20.4 million in Year-to-Date 2018, an increase of $1.4 million, or 7.3%, compared with $19.0 million in Year-to-Date 2017, primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.
Other Operating (Income) Expense, Net
Other operating (income) expense, net was expense of $0.1 million in Year-to-Date 2018 compared to expense of $2.6 million in the Year-to-Date 2017, due to severance charges in the Year-to-Date 2017 associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.2018.

Operating Income (Loss)

Operating income was $5.6 million in Year-to-Date 2019 compared to Operating income of $11.9 million in Year-to-Date 2018 comparedprimarily due to Operating loss of $0.6the Delta Air Lines launch in the prior year, partially offset by growth in the eCommerce business.

Interest Expense

Interest expense was $20.2 million in Year-to-Date 2017. The increase was primarily due2019 compared to improved growth in our Direct business, partially offset by closures of Lands' End Shops at Sears.
Interest Expense
Interest expense was $21.2 million in Year-to-Date 2018, compared to $18.6 million in Year-to-Date 2017, reflective of a risingthe $100 million voluntary prepayment on the term loan in First Quarter 2019, partially offset by increased interest rate environment.

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rates.

Other (Income) Expense, Net

Other income, net was $1.6 million in Year-to-Date 2019 compared to Other expense, net wasof $5.3 million in Year-to-Date 2018 compared to Other income, net of $1.8 million in Year-to-Date 2017.2018. Other expense, net in Year-to-Date 2018 was primarily attributable to the reversal of an indemnification asset and accrued interest due to a favorable state tax audit, and a reserve taken against the remaining indemnification asset.

Income Tax Benefit
Income tax benefit was $10.0 million for Year-to-Date 2018 compared to $5.9 million in Year-to-Date 2017.
The effective tax rate was 51.9% in Year-to-Date 2019 compared with 68.5% in Year-to-Date 2018 compared with 33.7% in2018. The Year-to-Date 2017. The higher2019 tax rate reflects the benefit resulted from impacts of the Company’s election to treat certain foreign entities as a U.S. branch. The Year-to-Date 2018 rate reflects revised estimates related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and the reversalbenefits of UTBs as a consequence of the favorable state tax audit settlements for periods prior to the Separation.

Net Loss

As a result of the above factors, Net loss was $6.2 million and diluted loss per share was $0.19 in Year-to-Date 2019 compared with a Net loss of $4.6 million and diluted loss per share wasof $0.14 in Year-to-Date 2018 compared with Net loss2018.

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Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA increased 54.6%was $28.6 million in Year-to-Date 2019 as compared to $32.4 million in Year-to-Date 2018 from $21.0 million in Year-to-Date 2017.2018.

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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 Current ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. We expect that our cash on hand and cash flows from operations, along with our Current ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. Cash generated from our net salesrevenue and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionatesignificant amount of Netnet revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year.
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the Current ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capital and other general corporate purposes and, aspurposes. As of November 2, 2018, was undrawn other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.
Also on November 16, 2017,credit of $12.5 million and $82.5 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company terminated all loanincurred $1.5 million in debt origination fees. The fees related documentsto the Term Loan Facility were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Prior ABL Facility and repaid all outstanding amounts thereunder.

The Prior ABL Facility provided for maximum borrowings of $175.0 million for Lands' End, subject to a borrowing base, with a $30.0 million sub facility for the UK Borrower. The Prior ABL Facility had a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The Prior ABL Facility was available for working capital and other general corporate purposes and was undrawn other than for letters of credit.Debt Facilities.
On April 4, 2014, Lands’ End entered into the $515.0 million Term Loan Facility of $515.0 million, the proceeds of which proceeds were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and expenses associated with the Debt Facilities at that time of approximately $11.4 million, with the remaining proceeds used for general corporate purposes. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Debt Facilities. In First Quarter 2019, Lands’ End made a $100 million voluntary prepayment on the Term Loan from excess cash on hand.
Maturity; Amortization and Prepayments
The Term Loan Facility amortizes at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows (as defined in the Term Loan Facility) in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events.
The Term Loan Facility matures on April 4, 2021 while the Current ABL Facility will mature no later than November 16, 2022.

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Guarantees; Security
All domestic obligations under the Debt Facilities are unconditionally guaranteed by the Company and, subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The Current ABL Facility inis 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 also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The Current ABL Facility is also secured by a second priority security interest in the same collateral.

The Prior ABL Facility had the same terms to those stated above. In addition, the obligations of the UK Borrower under the Prior ABL Facility were guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom.
Interest; Fees

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The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL FacilitiesFacility is subject to adjustment based on the average excess availability under the ABL FacilitiesFacility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively.Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.Facility.
Customary agency fees are payable pursuant to the termsin respect of the Debt Facilities. The ABL FacilitiesFacility fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries 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. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of November 2, 2018.1, 2019.
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.
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, and material judgments and change of control.
Cash Flows from Operating Activities
Net cash used in operating activities decreasedincreased to $125.0 million in Year-to-Date 2019 from $52.2 million in the Year-to-Date 2018, from a net cash use of $87.8 million in the Year-to-Date 2017, primarily driven by improved working capital management through:
Lower Accounts payable paymentsan increase in Fiscal 2018 due to timing of inventory receiptssupporting the Fourth Quarter 2019 American Airlines launch and payments,

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Higher receipts from Accounts receivable, net in Fiscal 2018 due to high customer receivables outstanding at the beginning of the year relatedaccelerated shipments prior to the Delta Airlines launch.implementation of tariffs.
Cash Flows from Investing Activities
Net cash used in investing activities was $33.0$28.5 million and $29.1$33.0 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively. Cash used in investing activities for both periods was primarily used for investments to update our information technology infrastructure and property and equipment.
For Fiscal 2018,2019, we planexpect to invest a total of approximately $40.0 million in capital expenditures for strategic investments and infrastructure, primarily associated with our ERPEnterprise Order Management investment, other technology investments, expansion in U.S Company Operated stores and general corporate needs.
Cash Flows from Financing Activities
Net cash used in financing activities was $4.4$24.6 million and $4.5$4.4 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively, consisting primarily of our quarterly payments ona $100 million voluntary prepayment of our Term Loan Facility in First Quarter 2019 and quarterly scheduled payments offset by borrowings under the ABL Facility. Amounts borrowed during Third Quarter 2019 are expected to be repaid in full during Fourth Quarter 2019 using cash flows generated from operations.
Contractual Obligations and Off-Balance-Sheet Arrangements

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There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018.1, 2019. During First Quarter 2019, Lands' End made a $100 million voluntary prepayment on the Term Loan Facility, from excess cash on hand.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into an asset-based lending credit agreement with Wells Fargo Bank, National Association,the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capitalmillion and other general corporate purposes. The Current ABL Facility will mature no later than November 16, 2022, subject to customary extension provisions provided for therein. The Current ABL Facility is available for working capital and other general corporate purposes and was undrawn at purposes. As of November 2, 2018, other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.credit of $12.5 million and $82.5 million in availability under the ABL Facility.
Also on November 16, 2017, the Company terminated all loan related documents of the Prior ABL Facility and repaid all outstanding amounts thereunder.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, and Note 2, Recent Accounting Pronouncements. There have been no significant changes in our critical accounting policies or their application since February 2, 2018, except as described below.1, 2019.

Effective First Quarter 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenue, gross margins or income from operations. However, we have implemented a change in our balance sheet presentation for expected product returns and are now reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns, where these were previously netted in Other current liabilities. The product return asset is reported within Prepaid expenses and other current assets. The returns liability and payments received from customers for future delivery of products are reported within Other current liabilities in the Condensed Consolidated Balance Sheets.
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, cash flow, financial condition, 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" 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

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uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2018,1, 2019, as modified by "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.

3229


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. A significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of November 2, 2018,1, 2019, we had $8.9$7.3 million of cash denominated in foreign currencies, principally in British Pound Sterling, Euros, Yen and Yen.Hong Kong Dollars. We do not enter into financial instruments for trading purposes or hedging and have not used any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with the Term Loan Facility and the Current ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $4.9$3.9 million change in our annual cash interest expenses. Assuming our Current ABL Facility was fully drawn to a principal amount equal to $175.0 million, each one percentage point change in interest rates would result in a $1.8 million change in our annual cash interest expense.

3330


ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, Lands’ End’s Chief Executive Officer and President and Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer have concluded that, as of November 2, 2018,1, 2019, 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 Third Fiscal Quarter Ended November 2, 20181, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


3431


PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in 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.



3532


ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, which was filed with the SEC on March 29, 2018 (the "Form 10-K"), except as outlined below.28, 2019.

Risk factors appearing in the 10-K which reference our relationship with Sears Holdings Corporation are hereby supplemented to reflect that on October 15, 2018, Sears Holdings Corporation and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code.


3633

Index of Exhibits

ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
3.1
 Amended and Restated Certificate of Incorporation of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on March 20, 2014 (File No. 001-09769)).
   
3.2
 Amended and Restated Bylaws of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on April 8, 2014 (File No. 001-09769)).
  
31.1
 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
31.2
 Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
32.1
 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   
101.INS XBRL Instance Document*
  
101.SCH XBRL Taxonomy Extension Schema Document*
  
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
  
101.DEF XBRL Taxonomy Extension Definition Document*
  
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
  
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
   
*Filed herewith.
   
**Furnished herewith.

3734


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Lands’ End, Inc.
(Registrant)

Dated: December 6, 20183, 2019

By:/s/ James F. Gooch
 James F. Gooch
 
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
(Principal Financial Officer)





3835

s
% of
Net revenue		 $’s % of
Net revenue
Net revenue $341,570
 100.0 % $325,489
 100.0 % $340,023
 100.0 % $341,570
 100.0 %
Cost of sales (excluding depreciation and amortization) 190,608
 55.8 % 183,515
 56.4 % 185,848
 54.7 % 190,608
 55.8 %
Gross profit 150,962
 44.2 % 141,974
 43.6 % 154,175
 45.3 % 150,962
 44.2 %
Selling and administrative 135,274
 39.6 % 129,122
 39.7 % 135,417
 39.8 % 135,274
 39.6 %
Depreciation and amortization 7,361
 2.2 % 6,347
 1.9 % 8,076
 2.4 % 7,361
 2.2 %
Other operating (income) expense, net (158) — % 564
 0.2 %
Other operating income, net (225) (0.1)% (158) — %
Operating income 8,485
 2.5 % 5,941
 1.8 % 10,907
 3.2 % 8,485
 2.5 %
Interest expense 7,303
 2.1 % 6,350
 2.0 % 6,121
 1.8 % 7,303
 2.1 %
Other expense (income), net 1,866
 0.5 % (576) (0.2)%
Other (income) expense, net (166) — % 1,866
 0.5 %
Income (loss) before income taxes (684) (0.2)% 167
 0.1 % 4,952
 1.5 % (684) (0.2)%
Income tax (benefit) expense (3,978) (1.2)% 5
 — %
Income tax expense (benefit) 1,346
 0.4 % (3,978) (1.2)%
NET INCOME $3,294
 1.0 % $162
 — % $3,606
 1.1 % $3,294
 1.0 %
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of Net revenue
Net revenue $949,340
 100.0 % $896,044
 100.0 %
Cost of sales (excluding depreciation and amortization) 528,587
 55.7 % 497,262
 55.5 %
Gross profit 420,753
 44.3 % 398,782
 44.5 %
Selling and administrative 388,315
 40.9 % 377,804
 42.2 %
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Other operating expense, net 132
 — % 2,552
 0.3 %
Operating income 11,886
 1.3 % (605) (0.1)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Loss before income taxes (14,647) (1.5)% (17,435) (1.9)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
NET LOSS $(4,621) (0.5)% $(11,557) (1.3)%
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $'s % of
Net revenue		 $’s % of
Net revenue
Net revenue $900,723
 100.0 % $949,340
 100.0 %
Cost of sales (excluding depreciation and amortization) 497,589
 55.2 % 528,587
 55.7 %
Gross profit 403,134
 44.8 % 420,753
 44.3 %
Selling and administrative 374,521
 41.6 % 388,315
 40.9 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating income (expense), net (99) — % 132
 — %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Loss before income taxes (12,939) (1.4)% (14,647) (1.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
NET LOSS $(6,226) (0.7)% $(4,621) (0.5)%


22


Depreciation and amortization is not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.
Net Income (Loss) and Adjusted EBITDA

We recorded Net income of $3.3$3.6 million andin Third Quarter 2019 compared to Net lossincome of $4.6$3.3 million in the Third Quarter 2018 and Year-to-Date 2018, respectively compared to Net income of $0.2 million and Net loss of $11.6 million in the Third Quarter 2017 and Year-to-Date 2017, respectively.2018. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net,expense/(benefit), Interest expense, Depreciation and amortization, and certain significant items set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses for comparable periods, and as an executive compensation metric. The methods used by the

21


Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

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

EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax costs or benefits.

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.
◦Transfer of corporate functions - severance and contract losses associated with a transition of certain corporate activities from our New York office to our Dodgeville headquarters.

◦Gain or loss on property and equipment - management considers the gains or losses on asset valuation, including impairments, to result from investing decisions rather than ongoing operations.

 


13 Weeks Ended


November 2, 2018
October 27, 2017
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,294

1.0 %
$162

— %
Income tax (benefit) expense
(3,978)
(1.2)%
5

— %
Other expense (income), net
1,866

0.5 %
(576)
(0.2)%
Interest expense
7,303

2.1 %
6,350

2.0 %
Operating income
8,485

2.5 %
5,941

1.8 %
Depreciation and amortization
7,361

2.2 %
6,347

1.9 %
Transfer of corporate functions
4

— %
475

0.1 %
(Gain) loss on property and equipment
(162)
— %
89

— %
Adjusted EBITDA
$15,688

4.6 %
$12,852

3.9 %

23




13 Weeks Ended


November 1, 2019
November 2, 2018
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,606

1.1 %
$3,294

1.0 %
Income tax expense (benefit)
1,346

0.4 %
(3,978)
(1.2)%
Other (income) expense, net
(166)
— %
1,866

0.5 %
Interest expense
6,121

1.8 %
7,303

2.1 %
Operating income
10,907

3.2 %
8,485

2.5 %
Depreciation and amortization
8,076

2.4 %
7,361

2.2 %
Other operating (income) expense
(206)
(0.1)%
4

— %
(Gain) on property and equipment
(19)
— %
(162)
— %
Adjusted EBITDA
$18,758

5.5 %
$15,688

4.6 %
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(4,621) (0.5)% $(11,557) (1.3)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Operating income (loss) 11,886
 1.3 % (605) (0.1)%
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Transfer of corporate functions 10
 — % 2,401
 0.3 %
Loss on property and equipment 121
 — % 151
 — %
Adjusted EBITDA $32,437
 3.4 % $20,978
 2.3 %
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(6,226) (0.7)% $(4,621) (0.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating expense —
 — % 10
 — %
(Gain) loss on property and equipment (99) — % 121
 — %
Adjusted EBITDA $28,613
 3.2 % $32,437
 3.4 %


In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments: Direct (sold through e-commerce websitesthree channels: eCommerce, Outfitters, and direct mail catalogs) and Retail (sold through stores).Retail. A key measure in the evaluation of our business is revenue performance by segment.channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.

22


To evaluate revenue performance for the Direct segmenteCommerce and Outfitters channels we use Net revenue. For our Retail segment,channel, we use Company Operated stores Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations on the first daywhen it has comparable prior year sales. Stores in which thebeen open for at least 14 months and selling square footage has not changed by 15% or more as a result of a remodel, expansion, reduction or relocation are excluded from Same Store Sales calculations untilwithin the first day they have comparable prior year sales.past year. Online sales and sales generated through our in-store web portal are considered revenue in our Direct segmenteCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis

Third Quarter 20182019 compared with Third Quarter 20172018

Net Revenue

Net revenue for Third Quarter 20182019 was $341.6$340.0 million, compared with $325.5$341.6 million in the comparable period of the prior year, an increasea decrease of $16.1$1.5 million, or 4.9%0.5%. The increase was comprised of an increaseSales growth in our Direct segmenteCommerce channel of $23.5 million4.7% and Outfitters of 1.3% was offset by a decrease in ourthe Retail segmentchannel of $7.4 million.48.4%.
Direct segment
eCommerce Net revenue was $313.8$242.3 million for Third Quarter 2018,2019, an increase of $23.5$10.8 million or 8.1%4.7%, from the comparable period of the prior year. The increase was led by greater demand in key items and growth in new customer acquisition.

Outfitters Net revenue was $83.3 million for Third Quarter 2019, an increase of $1.1 million or 1.3%, from the comparable period of the prior year. The increase was due to growth in our school uniform business.

Retail Net revenue was $14.4 million in Third Quarter 2019, a decrease of $13.4 million or 48.4%, from the comparable period of the prior year. This decrease was driven by a significant reduction in the Direct segmentnumber of our Lands' End Shops at Sears locations. Our U.S. Company Operated stores experienced an increase of 8.3% in Same Store Sales. On November 1, 2019 the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears compared with 125 Lands’ End Shops at Sears November 2, 2018.

Gross Profit

Gross profit increased $3.2 million to $154.2 million primarily due to growth in our eCommerce channel. Gross margin increased to 45.3%, in Third Quarter 2019, compared with 44.2%, in Third Quarter 2018. The gross margin increase of approximately 110 basis points was primarily due to a more disciplined promotional strategy.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.1 million to $135.4 million or 39.8% of total Net revenue, in Third Quarter 2019, compared with $135.3 million or 39.6% of Net revenue, in Third Quarter 2018. This increase was primarily due to planned higher marketing spend, offset by the continued focus on the efficient management of our cost structure.

Depreciation and Amortization

Depreciation and amortization expense was $8.1 million in Third Quarter 2019, an increase of $0.7 million or 9.7%, compared with $7.4 million in Third Quarter 2018. This increase was primarily attributable to depreciation associated with our multi-year ERP system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense, Net

Other operating (income) expense, net was insignificant in Third Quarter 2019 and Third Quarter 2018.


23


Operating Income

Operating income was $10.9 million in Third Quarter 2019 compared to Operating income of $8.5 million in Third Quarter 2018.

Interest Expense

Interest expense was $6.1 million in Third Quarter 2019 compared to $7.3 million in Third Quarter 2018, reflective of the $100 million voluntary prepayment on the term loan, partially offset by increased interest rates.

Other (Income) Expense

Other income was $0.2 million in Third Quarter 2019 compared to Other expense of $1.9 million in Third Quarter 2018.

Income Tax Expense

The Company recorded a tax expense at an overall effective tax rate of 27.2% for the Third Quarter 2019. This compares to an income tax benefit at an overall effective rate of 581.6% for Third Quarter 2018. The tax benefit recorded for Third Quarter 2018 was primarily due to revised estimates of the impact due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

Net Income

As a result of the above factors, Net income was $3.6 million and diluted earnings per share was $0.11 in Third Quarter 2019 compared with a Net income of $3.3 million and diluted earnings per share of $0.10 in Third Quarter 2018.

Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $18.8 million in Third Quarter 2019 as compared to $15.7 million in Third Quarter 2018.
Year-to-Date 2019 compared with Year-to-Date 2018

Net Revenue

Net revenue for Year-to-Date 2019 was $900.7 million, compared with $949.3 million in the comparable period of the prior year, a decrease of $48.6 million, or 5.1%. Sales growth in our eCommerce channel of 5.6% was more than offset by decreases in our Outfitters and Retail channels of 16.5% and 54.5% respectively.

eCommerce Net revenue was $669.9 million for Year-to-Date 2019, an increase of $35.8 million or 5.6%, from the comparable period of the prior year. The increase was primarily attributable to the continued growth in our U.S. eCommerce business. We continued to increase our buyer file and our conversion rate in ourthe U.S. eCommerce business helping to drive the increase, particularly indriven by greater demand for key items and growth in our assortment such as outerwear, knit tops, denim, flannel, and home.new customer acquisitions.
Retail segment
Outfitters Net revenue was $27.8$191.9 million for Third Quarter 2018,Year-to-Date 2019, a decrease of $7.4$37.8 million or 21.0%16.5%, from the comparable period of the prior year. The decrease was primarily attributable to the Delta Air Lines launch in the prior year.

Retail Net revenue was $39.0 million in Year-to-Date 2019, a decrease of $46.6 million or 54.5%, from the comparable period of the prior year, primarily driven by a significant reduction in the number of our Lands' End Shops at Sears locations. Consolidated Same Store Sales increased 11.8% as compared to the same period of the prior year.locations partially offset by growth in our U.S. Company Operated stores. Our USU.S. Company Operated stores experienced an increase of 15.1%9.0% in Same Store Sales. OurOn November 1, 2019, the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears experienced an increase of 11.7% in Same Store Sales primarily due to liquidating stores. On November 2, 2018, the Company hadcompared with 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.November 2, 2018.

24



Gross Profit

Gross profit increased $9.0decreased $17.6 million to $151.0$403.1 million and gross margin increased to 44.2% of total Net revenue, in Third Quarter 2018, compared with $142.0 million, and gross margin of 43.6% of total Net revenue, in Third Quarter 2017. The Gross profit increase was comprised of an increase in our Direct segment of $9.9 million and decrease in our Retail segment of $0.9 million.
Direct segment Gross profit increased $9.9 million to $139.9 million in Third Quarter 2018 from $130.0 million in Third Quarter 2017. Direct segment gross margin decreased approximately 20 basis points to 44.6% of total Net revenue in Third Quarter 2018, compared with 44.8% of total Net revenue in Third Quarter 2017. The gross margin decrease wasprimarily due to increased shipping costs, partially offset by stronger merchandise margins and effective inventory managementthe impact of our seasonal assortment.
Retail segment Gross profit decreased $0.9 million to $11.1 million in Third Quarter 2018 from $12.0 million in Third Quarter 2017. Retail segment gross margin increased approximately 570 basis points to 39.9% of Net revenue, in Third Quarter 2018, compared to 34.2% of Net revenue, in Third Quarter 2017 through full priced selling mix, promotional productivity and improved quality of our seasonal assortment, which led to higher sell through and reduced markdowns.
Selling and Administrative Expenses
Selling and administrative expenses increased $6.2 million to $135.3 million, a decrease of approximately 10 basis points to 39.6% of total Net revenue, in Third Quarter 2018, compared with $129.1 million, or 39.7% of Net revenue, in Third Quarter 2017. The increase in Selling and administrative expenses was due to an increase of $8.8 millionthe Delta Air Lines launch in the Direct Segmentprior year and $0.7 million in Corporate expenses, offset by a decrease of $3.3 million in the Retail segment.
Direct segment Selling and administrative expenses were $109.6 million, an increase of approximately 20 basis points to 34.9% of Net revenue, in Third Quarter 2018, compared with $100.8 million, or 34.7% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the increased marketing investment in addition to personnel costs and incentive accruals related to the continued growth of the US Direct business.
Retail segment Selling and administrative expenses were $14.7 million, an increase of approximately 160 basis points to 52.9% of Net revenue, in Third Quarter 2018, compared with $18.0 million, or 51.3% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the reduction in the number offewer Lands' End Shops at Sears, partially offset by improved leverage with new Company Operated stores.the growth in our eCommerce channel. Gross margin increased to 44.8% in Year-to-Date 2019, compared to 44.3% Year-to-Date 2018. The gross margin increase of approximately 50 basis points was primarily related to a more disciplined promotional strategy.
Corporate/other
Selling and Administrative Expenses

Selling and administrative expenses were $11.0decreased $13.8 million to $374.5 million, or 41.6% of total Net revenue, in Year-to-Date 2019, compared with $10.3 million for Third Quarter 2018 and Third Quarter 2017, respectively. The $0.7$388.3 million, or 6.8%,40.9% of Net revenue, in Year-to-Date 2018. The 70 basis point increase was largely attributablereflects deleverage primarily related to an increasethe Delta Air Lines launch and significant reduction in personnel costs and incentive accruals.the number of our Lands’ End Shops at Sears locations from the prior year.

Depreciation and Amortization

Depreciation and amortization expense was $7.4$23.1 million in Third Quarter 2018,Year-to-Date 2019, an increase of $1.0$2.7 million or 16.0%13.1%, compared with $6.4$20.4 million in Third Quarter 2017,Year-to-Date 2018. This increase was primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.implementation, continued investment in our digital infrastructure, and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense Net

Other operating income net was insignificant$0.1 million in Third Quarter 2018Year-to-Date 2019 compared to other operating expense of $0.6 million in Third Quarter 2017, primarily due to severance charges associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.

25


Operating Income
Operating income was $8.5 million in Third Quarter 2018 compared to $5.9 million in Third Quarter 2017 primarily due to increased revenue driven by the Direct Segment and the leveraging of the existing cost structure.
Interest Expense
Interest expense was $7.3 million in Third Quarter 2018 compared to $6.4 million in Third Quarter 2017, reflective of a rising interest rate environment.
Other Expense (Income), Net
Other expense, net was $1.9 million in Third Quarter 2018 compared to other income, net of $0.6 million in Third Quarter 2017, driven by the establishment of a reserve against an indemnification asset.
Income Tax Benefit
The Income tax benefit was $4.0 million for Third Quarter 2018 compared to an insignificant amount in Third Quarter 2017. The effective tax rate was 581.6% in Third Quarter 2018 compared with 3.0% in Third Quarter 2017. The higher benefit is primarily due to revised estimates of the impact due to the Tax Act.
Net Income (Loss)
As a result of the above factors, Net income was $3.3 million and diluted income per share was $0.10 in Third Quarter 2018 compared with a Net income of $0.2 million and diluted earnings per share of $0.01 in Third Quarter 2017.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased 22.1% to $15.7 million in Third Quarter 2018 from $12.9 million in Third Quarter 2017.
Year-to-Date 2018 compared with Year-to-Date 2017
Net Revenue
Net revenue for Year-to-Date 2018 was $949.3 million, compared with $896.0 million in the comparable period of the prior year, an increase of $53.3 million or 5.9%. The increase was comprised of an increase in our Direct segment of $85.2 million and a decrease in our Retail segment of $31.9 million.
Direct segment Net revenue was $863.8 million for Year-to-Date 2018, an increase of $85.2 million, or 10.9%, from the comparable period of the prior year. The increase in the Direct segment was largely attributable to the launch of Delta Airlines business and an increase in our U.S. eCommerce business. In our U.S. eCommerce business, we increased our buyer file and conversion rate helping to drive increased revenue across our assortment.
Retail segment Net revenue was $85.6 million for Year-to-Date 2018, a decrease of $31.9 million, or 27.2%, from the comparable period of the prior year primarily due to the reduction of our Lands' End Shops at Sears. Consolidated Same Store Sales declined 5.9% compared to the same period of the prior year. The decrease was primarily attributable to a reduction of our Lands' End Shops at Sears locations and a 7.1% decrease in Lands' End Shops at Sears Same Store Sales. US Company Operated stores experienced an increase of 1.6% in Same Store Sales. On November 2, 2018, the Company operated 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.
Gross Profit
Gross profit increased $22.0 million to $420.8 million and gross margin decreased approximately 20 basis points to 44.3% of Net revenue in Year-to-Date 2018, compared with $398.8 million, or 44.5% of Net revenue, in Year-to-Date 2017. The Gross profit increase was comprised of an increase in our Direct segment of $32.7 million offset by decrease in our Retail segment of $10.6 million.
Direct segment Gross profit increased 9.3% to $385.3 million in Year-to-Date 2018 from $352.6 million in Year-to-Date 2017. Direct segment gross margin decreased approximately 70 basis points to 44.6% of Net revenue for Year-

26


to-Date 2018, compared with 45.3% of Net revenue for Year-to-Date 2017. The gross margin decrease was primarily attributable to increased promotional activity in the highly competitive retail environment as well as the launch of the lower margin Delta Airlines business.
Retail segment Gross profit decreased 23.0% to $35.4 million in Year-to-Date 2018 from $46.0 million in Year-to-Date 2017. Retail segment gross margin increased approximately 220 basis points to 41.4% of Net revenue for Year-to-Date 2018, compared to 39.2% of Net revenue for Year-to-Date 2017 primarily attributable to effective inventory management requiring lower markdowns of our assortment.
Selling and Administrative Expenses
Selling and administrative expenses increased 2.8% to $388.3 million, a decrease of approximately 130 basis points to 40.9% of Net revenue, in Year-to-Date 2018, compared with $377.8 million, or 42.2% of Net revenue, in Year-to-Date 2017. The increase in Selling and administrative expenses was primarily due to an increase of $18.3 million in the Direct segment and $2.4 million in Corporate expenses, partially offset by a decrease of $10.2 million in the Retail segment.
Direct segment Selling and administrative expenses were $316.9 million, a decrease of approximately 170 basis points to 36.7% of Net revenue, in Year-to-Date 2018, compared with $298.6 million, or 38.4% of Net revenue, for Year-to-Date 2017. The basis point decrease was largely attributable to improved cost leverage, partially offset by increased personnel costs and incentive accruals.
Retail segment Selling and administrative expenses were $43.2 million, an increase of approximately 500 basis points to 50.5% of Net revenue, in Year-to-Date 2018, compared with $53.4 million, or 45.5% of Net revenue, in Year-to-Date 2017. The basis point increase was largely attributable to the reduction in the number of Lands' End Shops at Sears and negative Lands’ End Shops at Sears same store sales.
Corporate/other Selling and administrative expenses were $28.2 million compared with $25.8 million in Year-to-Date 2018 and Year-to-Date 2017, respectively. The $2.4 million, or 9.3%, increase was primarily due to an increase in personnel costs and incentive accruals.
Depreciation and Amortization
Depreciation and amortization expense was $20.4 million in Year-to-Date 2018, an increase of $1.4 million, or 7.3%, compared with $19.0 million in Year-to-Date 2017, primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.
Other Operating (Income) Expense, Net
Other operating (income) expense, net was expense of $0.1 million in Year-to-Date 2018 compared to expense of $2.6 million in the Year-to-Date 2017, due to severance charges in the Year-to-Date 2017 associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.2018.

Operating Income (Loss)

Operating income was $5.6 million in Year-to-Date 2019 compared to Operating income of $11.9 million in Year-to-Date 2018 comparedprimarily due to Operating loss of $0.6the Delta Air Lines launch in the prior year, partially offset by growth in the eCommerce business.

Interest Expense

Interest expense was $20.2 million in Year-to-Date 2017. The increase was primarily due2019 compared to improved growth in our Direct business, partially offset by closures of Lands' End Shops at Sears.
Interest Expense
Interest expense was $21.2 million in Year-to-Date 2018, compared to $18.6 million in Year-to-Date 2017, reflective of a risingthe $100 million voluntary prepayment on the term loan in First Quarter 2019, partially offset by increased interest rate environment.

27

rates.

Other (Income) Expense, Net

Other income, net was $1.6 million in Year-to-Date 2019 compared to Other expense, net wasof $5.3 million in Year-to-Date 2018 compared to Other income, net of $1.8 million in Year-to-Date 2017.2018. Other expense, net in Year-to-Date 2018 was primarily attributable to the reversal of an indemnification asset and accrued interest due to a favorable state tax audit, and a reserve taken against the remaining indemnification asset.

Income Tax Benefit
Income tax benefit was $10.0 million for Year-to-Date 2018 compared to $5.9 million in Year-to-Date 2017.
The effective tax rate was 51.9% in Year-to-Date 2019 compared with 68.5% in Year-to-Date 2018 compared with 33.7% in2018. The Year-to-Date 2017. The higher2019 tax rate reflects the benefit resulted from impacts of the Company’s election to treat certain foreign entities as a U.S. branch. The Year-to-Date 2018 rate reflects revised estimates related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and the reversalbenefits of UTBs as a consequence of the favorable state tax audit settlements for periods prior to the Separation.

Net Loss

As a result of the above factors, Net loss was $6.2 million and diluted loss per share was $0.19 in Year-to-Date 2019 compared with a Net loss of $4.6 million and diluted loss per share wasof $0.14 in Year-to-Date 2018 compared with Net loss2018.

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Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA increased 54.6%was $28.6 million in Year-to-Date 2019 as compared to $32.4 million in Year-to-Date 2018 from $21.0 million in Year-to-Date 2017.2018.

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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 Current ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. We expect that our cash on hand and cash flows from operations, along with our Current ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. Cash generated from our net salesrevenue and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionatesignificant amount of Netnet revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year.
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the Current ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capital and other general corporate purposes and, aspurposes. As of November 2, 2018, was undrawn other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.
Also on November 16, 2017,credit of $12.5 million and $82.5 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company terminated all loanincurred $1.5 million in debt origination fees. The fees related documentsto the Term Loan Facility were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Prior ABL Facility and repaid all outstanding amounts thereunder.

The Prior ABL Facility provided for maximum borrowings of $175.0 million for Lands' End, subject to a borrowing base, with a $30.0 million sub facility for the UK Borrower. The Prior ABL Facility had a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The Prior ABL Facility was available for working capital and other general corporate purposes and was undrawn other than for letters of credit.Debt Facilities.
On April 4, 2014, Lands’ End entered into the $515.0 million Term Loan Facility of $515.0 million, the proceeds of which proceeds were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and expenses associated with the Debt Facilities at that time of approximately $11.4 million, with the remaining proceeds used for general corporate purposes. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Debt Facilities. In First Quarter 2019, Lands’ End made a $100 million voluntary prepayment on the Term Loan from excess cash on hand.
Maturity; Amortization and Prepayments
The Term Loan Facility amortizes at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows (as defined in the Term Loan Facility) in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events.
The Term Loan Facility matures on April 4, 2021 while the Current ABL Facility will mature no later than November 16, 2022.

29


Guarantees; Security
All domestic obligations under the Debt Facilities are unconditionally guaranteed by the Company and, subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The Current ABL Facility inis 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 also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The Current ABL Facility is also secured by a second priority security interest in the same collateral.

The Prior ABL Facility had the same terms to those stated above. In addition, the obligations of the UK Borrower under the Prior ABL Facility were guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom.
Interest; Fees

26


The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL FacilitiesFacility is subject to adjustment based on the average excess availability under the ABL FacilitiesFacility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively.Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.Facility.
Customary agency fees are payable pursuant to the termsin respect of the Debt Facilities. The ABL FacilitiesFacility fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries 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. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of November 2, 2018.1, 2019.
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.
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, and material judgments and change of control.
Cash Flows from Operating Activities
Net cash used in operating activities decreasedincreased to $125.0 million in Year-to-Date 2019 from $52.2 million in the Year-to-Date 2018, from a net cash use of $87.8 million in the Year-to-Date 2017, primarily driven by improved working capital management through:
Lower Accounts payable paymentsan increase in Fiscal 2018 due to timing of inventory receiptssupporting the Fourth Quarter 2019 American Airlines launch and payments,

30


Higher receipts from Accounts receivable, net in Fiscal 2018 due to high customer receivables outstanding at the beginning of the year relatedaccelerated shipments prior to the Delta Airlines launch.implementation of tariffs.
Cash Flows from Investing Activities
Net cash used in investing activities was $33.0$28.5 million and $29.1$33.0 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively. Cash used in investing activities for both periods was primarily used for investments to update our information technology infrastructure and property and equipment.
For Fiscal 2018,2019, we planexpect to invest a total of approximately $40.0 million in capital expenditures for strategic investments and infrastructure, primarily associated with our ERPEnterprise Order Management investment, other technology investments, expansion in U.S Company Operated stores and general corporate needs.
Cash Flows from Financing Activities
Net cash used in financing activities was $4.4$24.6 million and $4.5$4.4 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively, consisting primarily of our quarterly payments ona $100 million voluntary prepayment of our Term Loan Facility in First Quarter 2019 and quarterly scheduled payments offset by borrowings under the ABL Facility. Amounts borrowed during Third Quarter 2019 are expected to be repaid in full during Fourth Quarter 2019 using cash flows generated from operations.
Contractual Obligations and Off-Balance-Sheet Arrangements

27


There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018.1, 2019. During First Quarter 2019, Lands' End made a $100 million voluntary prepayment on the Term Loan Facility, from excess cash on hand.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into an asset-based lending credit agreement with Wells Fargo Bank, National Association,the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capitalmillion and other general corporate purposes. The Current ABL Facility will mature no later than November 16, 2022, subject to customary extension provisions provided for therein. The Current ABL Facility is available for working capital and other general corporate purposes and was undrawn at purposes. As of November 2, 2018, other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.credit of $12.5 million and $82.5 million in availability under the ABL Facility.
Also on November 16, 2017, the Company terminated all loan related documents of the Prior ABL Facility and repaid all outstanding amounts thereunder.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, and Note 2, Recent Accounting Pronouncements. There have been no significant changes in our critical accounting policies or their application since February 2, 2018, except as described below.1, 2019.

Effective First Quarter 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenue, gross margins or income from operations. However, we have implemented a change in our balance sheet presentation for expected product returns and are now reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns, where these were previously netted in Other current liabilities. The product return asset is reported within Prepaid expenses and other current assets. The returns liability and payments received from customers for future delivery of products are reported within Other current liabilities in the Condensed Consolidated Balance Sheets.
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.

31



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, 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" 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

28


uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2018,1, 2019, as modified by "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.

3229


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. A significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of November 2, 2018,1, 2019, we had $8.9$7.3 million of cash denominated in foreign currencies, principally in British Pound Sterling, Euros, Yen and Yen.Hong Kong Dollars. We do not enter into financial instruments for trading purposes or hedging and have not used any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with the Term Loan Facility and the Current ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $4.9$3.9 million change in our annual cash interest expenses. Assuming our Current ABL Facility was fully drawn to a principal amount equal to $175.0 million, each one percentage point change in interest rates would result in a $1.8 million change in our annual cash interest expense.

3330


ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, Lands’ End’s Chief Executive Officer and President and Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer have concluded that, as of November 2, 2018,1, 2019, 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 Third Fiscal Quarter Ended November 2, 20181, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


3431


PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in 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.



3532


ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, which was filed with the SEC on March 29, 2018 (the "Form 10-K"), except as outlined below.28, 2019.

Risk factors appearing in the 10-K which reference our relationship with Sears Holdings Corporation are hereby supplemented to reflect that on October 15, 2018, Sears Holdings Corporation and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code.


3633

Index of Exhibits

ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
3.1
 Amended and Restated Certificate of Incorporation of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on March 20, 2014 (File No. 001-09769)).
   
3.2
 Amended and Restated Bylaws of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on April 8, 2014 (File No. 001-09769)).
  
31.1
 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
31.2
 Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
32.1
 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   
101.INS XBRL Instance Document*
  
101.SCH XBRL Taxonomy Extension Schema Document*
  
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
  
101.DEF XBRL Taxonomy Extension Definition Document*
  
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
  
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
   
*Filed herewith.
   
**Furnished herewith.

3734


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Lands’ End, Inc.
(Registrant)

Dated: December 6, 20183, 2019

By:/s/ James F. Gooch
 James F. Gooch
 
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
(Principal Financial Officer)





3835

s		 % of
Net revenue		 $’s % of
Net revenue
Net revenue $949,340
 100.0 % $896,044
 100.0 % $900,723
 100.0 % $949,340
 100.0 %
Cost of sales (excluding depreciation and amortization) 528,587
 55.7 % 497,262
 55.5 % 497,589
 55.2 % 528,587
 55.7 %
Gross profit 420,753
 44.3 % 398,782
 44.5 % 403,134
 44.8 % 420,753
 44.3 %
Selling and administrative 388,315
 40.9 % 377,804
 42.2 % 374,521
 41.6 % 388,315
 40.9 %
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 % 23,101
 2.6 % 20,420
 2.2 %
Other operating expense, net 132
 — % 2,552
 0.3 %
Other operating income (expense), net (99) — % 132
 — %
Operating income 11,886
 1.3 % (605) (0.1)% 5,611
 0.6 % 11,886
 1.3 %
Interest expense 21,216
 2.2 % 18,642
 2.1 % 20,190
 2.2 % 21,216
 2.2 %
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Loss before income taxes (14,647) (1.5)% (17,435) (1.9)% (12,939) (1.4)% (14,647) (1.5)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)% (6,713) (0.7)% (10,026) (1.1)%
NET LOSS $(4,621) (0.5)% $(11,557) (1.3)% $(6,226) (0.7)% $(4,621) (0.5)%


22

Table of Contents

Depreciation and amortization is not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.
Net Income (Loss) and Adjusted EBITDA

We recorded Net income of $3.3$3.6 million andin Third Quarter 2019 compared to Net lossincome of $4.6$3.3 million in the Third Quarter 2018 and Year-to-Date 2018, respectively compared to Net income of $0.2 million and Net loss of $11.6 million in the Third Quarter 2017 and Year-to-Date 2017, respectively.2018. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net,expense/(benefit), Interest expense, Depreciation and amortization, and certain significant items set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses for comparable periods, and as an executive compensation metric. The methods used by the

21

Table of Contents

Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

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

EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax costs or benefits.

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.
◦Transfer of corporate functions - severance and contract losses associated with a transition of certain corporate activities from our New York office to our Dodgeville headquarters.

◦Gain or loss on property and equipment - management considers the gains or losses on asset valuation, including impairments, to result from investing decisions rather than ongoing operations.

 


13 Weeks Ended


November 2, 2018
October 27, 2017
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,294

1.0 %
$162

— %
Income tax (benefit) expense
(3,978)
(1.2)%
5

— %
Other expense (income), net
1,866

0.5 %
(576)
(0.2)%
Interest expense
7,303

2.1 %
6,350

2.0 %
Operating income
8,485

2.5 %
5,941

1.8 %
Depreciation and amortization
7,361

2.2 %
6,347

1.9 %
Transfer of corporate functions
4

— %
475

0.1 %
(Gain) loss on property and equipment
(162)
— %
89

— %
Adjusted EBITDA
$15,688

4.6 %
$12,852

3.9 %

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13 Weeks Ended


November 1, 2019
November 2, 2018
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,606

1.1 %
$3,294

1.0 %
Income tax expense (benefit)
1,346

0.4 %
(3,978)
(1.2)%
Other (income) expense, net
(166)
— %
1,866

0.5 %
Interest expense
6,121

1.8 %
7,303

2.1 %
Operating income
10,907

3.2 %
8,485

2.5 %
Depreciation and amortization
8,076

2.4 %
7,361

2.2 %
Other operating (income) expense
(206)
(0.1)%
4

— %
(Gain) on property and equipment
(19)
— %
(162)
— %
Adjusted EBITDA
$18,758

5.5 %
$15,688

4.6 %
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(4,621) (0.5)% $(11,557) (1.3)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Operating income (loss) 11,886
 1.3 % (605) (0.1)%
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Transfer of corporate functions 10
 — % 2,401
 0.3 %
Loss on property and equipment 121
 — % 151
 — %
Adjusted EBITDA $32,437
 3.4 % $20,978
 2.3 %
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(6,226) (0.7)% $(4,621) (0.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating expense —
 — % 10
 — %
(Gain) loss on property and equipment (99) — % 121
 — %
Adjusted EBITDA $28,613
 3.2 % $32,437
 3.4 %


In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments: Direct (sold through e-commerce websitesthree channels: eCommerce, Outfitters, and direct mail catalogs) and Retail (sold through stores).Retail. A key measure in the evaluation of our business is revenue performance by segment.channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.

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To evaluate revenue performance for the Direct segmenteCommerce and Outfitters channels we use Net revenue. For our Retail segment,channel, we use Company Operated stores Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations on the first daywhen it has comparable prior year sales. Stores in which thebeen open for at least 14 months and selling square footage has not changed by 15% or more as a result of a remodel, expansion, reduction or relocation are excluded from Same Store Sales calculations untilwithin the first day they have comparable prior year sales.past year. Online sales and sales generated through our in-store web portal are considered revenue in our Direct segmenteCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis

Third Quarter 20182019 compared with Third Quarter 20172018

Net Revenue

Net revenue for Third Quarter 20182019 was $341.6$340.0 million, compared with $325.5$341.6 million in the comparable period of the prior year, an increasea decrease of $16.1$1.5 million, or 4.9%0.5%. The increase was comprised of an increaseSales growth in our Direct segmenteCommerce channel of $23.5 million4.7% and Outfitters of 1.3% was offset by a decrease in ourthe Retail segmentchannel of $7.4 million.48.4%.
Direct segment
eCommerce Net revenue was $313.8$242.3 million for Third Quarter 2018,2019, an increase of $23.5$10.8 million or 8.1%4.7%, from the comparable period of the prior year. The increase was led by greater demand in key items and growth in new customer acquisition.

Outfitters Net revenue was $83.3 million for Third Quarter 2019, an increase of $1.1 million or 1.3%, from the comparable period of the prior year. The increase was due to growth in our school uniform business.

Retail Net revenue was $14.4 million in Third Quarter 2019, a decrease of $13.4 million or 48.4%, from the comparable period of the prior year. This decrease was driven by a significant reduction in the Direct segmentnumber of our Lands' End Shops at Sears locations. Our U.S. Company Operated stores experienced an increase of 8.3% in Same Store Sales. On November 1, 2019 the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears compared with 125 Lands’ End Shops at Sears November 2, 2018.

Gross Profit

Gross profit increased $3.2 million to $154.2 million primarily due to growth in our eCommerce channel. Gross margin increased to 45.3%, in Third Quarter 2019, compared with 44.2%, in Third Quarter 2018. The gross margin increase of approximately 110 basis points was primarily due to a more disciplined promotional strategy.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.1 million to $135.4 million or 39.8% of total Net revenue, in Third Quarter 2019, compared with $135.3 million or 39.6% of Net revenue, in Third Quarter 2018. This increase was primarily due to planned higher marketing spend, offset by the continued focus on the efficient management of our cost structure.

Depreciation and Amortization

Depreciation and amortization expense was $8.1 million in Third Quarter 2019, an increase of $0.7 million or 9.7%, compared with $7.4 million in Third Quarter 2018. This increase was primarily attributable to depreciation associated with our multi-year ERP system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense, Net

Other operating (income) expense, net was insignificant in Third Quarter 2019 and Third Quarter 2018.


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Operating Income

Operating income was $10.9 million in Third Quarter 2019 compared to Operating income of $8.5 million in Third Quarter 2018.

Interest Expense

Interest expense was $6.1 million in Third Quarter 2019 compared to $7.3 million in Third Quarter 2018, reflective of the $100 million voluntary prepayment on the term loan, partially offset by increased interest rates.

Other (Income) Expense

Other income was $0.2 million in Third Quarter 2019 compared to Other expense of $1.9 million in Third Quarter 2018.

Income Tax Expense

The Company recorded a tax expense at an overall effective tax rate of 27.2% for the Third Quarter 2019. This compares to an income tax benefit at an overall effective rate of 581.6% for Third Quarter 2018. The tax benefit recorded for Third Quarter 2018 was primarily due to revised estimates of the impact due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

Net Income

As a result of the above factors, Net income was $3.6 million and diluted earnings per share was $0.11 in Third Quarter 2019 compared with a Net income of $3.3 million and diluted earnings per share of $0.10 in Third Quarter 2018.

Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $18.8 million in Third Quarter 2019 as compared to $15.7 million in Third Quarter 2018.
Year-to-Date 2019 compared with Year-to-Date 2018

Net Revenue

Net revenue for Year-to-Date 2019 was $900.7 million, compared with $949.3 million in the comparable period of the prior year, a decrease of $48.6 million, or 5.1%. Sales growth in our eCommerce channel of 5.6% was more than offset by decreases in our Outfitters and Retail channels of 16.5% and 54.5% respectively.

eCommerce Net revenue was $669.9 million for Year-to-Date 2019, an increase of $35.8 million or 5.6%, from the comparable period of the prior year. The increase was primarily attributable to the continued growth in our U.S. eCommerce business. We continued to increase our buyer file and our conversion rate in ourthe U.S. eCommerce business helping to drive the increase, particularly indriven by greater demand for key items and growth in our assortment such as outerwear, knit tops, denim, flannel, and home.new customer acquisitions.
Retail segment
Outfitters Net revenue was $27.8$191.9 million for Third Quarter 2018,Year-to-Date 2019, a decrease of $7.4$37.8 million or 21.0%16.5%, from the comparable period of the prior year. The decrease was primarily attributable to the Delta Air Lines launch in the prior year.

Retail Net revenue was $39.0 million in Year-to-Date 2019, a decrease of $46.6 million or 54.5%, from the comparable period of the prior year, primarily driven by a significant reduction in the number of our Lands' End Shops at Sears locations. Consolidated Same Store Sales increased 11.8% as compared to the same period of the prior year.locations partially offset by growth in our U.S. Company Operated stores. Our USU.S. Company Operated stores experienced an increase of 15.1%9.0% in Same Store Sales. OurOn November 1, 2019, the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears experienced an increase of 11.7% in Same Store Sales primarily due to liquidating stores. On November 2, 2018, the Company hadcompared with 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.November 2, 2018.

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Gross Profit

Gross profit increased $9.0decreased $17.6 million to $151.0$403.1 million and gross margin increased to 44.2% of total Net revenue, in Third Quarter 2018, compared with $142.0 million, and gross margin of 43.6% of total Net revenue, in Third Quarter 2017. The Gross profit increase was comprised of an increase in our Direct segment of $9.9 million and decrease in our Retail segment of $0.9 million.
Direct segment Gross profit increased $9.9 million to $139.9 million in Third Quarter 2018 from $130.0 million in Third Quarter 2017. Direct segment gross margin decreased approximately 20 basis points to 44.6% of total Net revenue in Third Quarter 2018, compared with 44.8% of total Net revenue in Third Quarter 2017. The gross margin decrease wasprimarily due to increased shipping costs, partially offset by stronger merchandise margins and effective inventory managementthe impact of our seasonal assortment.
Retail segment Gross profit decreased $0.9 million to $11.1 million in Third Quarter 2018 from $12.0 million in Third Quarter 2017. Retail segment gross margin increased approximately 570 basis points to 39.9% of Net revenue, in Third Quarter 2018, compared to 34.2% of Net revenue, in Third Quarter 2017 through full priced selling mix, promotional productivity and improved quality of our seasonal assortment, which led to higher sell through and reduced markdowns.
Selling and Administrative Expenses
Selling and administrative expenses increased $6.2 million to $135.3 million, a decrease of approximately 10 basis points to 39.6% of total Net revenue, in Third Quarter 2018, compared with $129.1 million, or 39.7% of Net revenue, in Third Quarter 2017. The increase in Selling and administrative expenses was due to an increase of $8.8 millionthe Delta Air Lines launch in the Direct Segmentprior year and $0.7 million in Corporate expenses, offset by a decrease of $3.3 million in the Retail segment.
Direct segment Selling and administrative expenses were $109.6 million, an increase of approximately 20 basis points to 34.9% of Net revenue, in Third Quarter 2018, compared with $100.8 million, or 34.7% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the increased marketing investment in addition to personnel costs and incentive accruals related to the continued growth of the US Direct business.
Retail segment Selling and administrative expenses were $14.7 million, an increase of approximately 160 basis points to 52.9% of Net revenue, in Third Quarter 2018, compared with $18.0 million, or 51.3% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the reduction in the number offewer Lands' End Shops at Sears, partially offset by improved leverage with new Company Operated stores.the growth in our eCommerce channel. Gross margin increased to 44.8% in Year-to-Date 2019, compared to 44.3% Year-to-Date 2018. The gross margin increase of approximately 50 basis points was primarily related to a more disciplined promotional strategy.
Corporate/other
Selling and Administrative Expenses

Selling and administrative expenses were $11.0decreased $13.8 million to $374.5 million, or 41.6% of total Net revenue, in Year-to-Date 2019, compared with $10.3 million for Third Quarter 2018 and Third Quarter 2017, respectively. The $0.7$388.3 million, or 6.8%,40.9% of Net revenue, in Year-to-Date 2018. The 70 basis point increase was largely attributablereflects deleverage primarily related to an increasethe Delta Air Lines launch and significant reduction in personnel costs and incentive accruals.the number of our Lands’ End Shops at Sears locations from the prior year.

Depreciation and Amortization

Depreciation and amortization expense was $7.4$23.1 million in Third Quarter 2018,Year-to-Date 2019, an increase of $1.0$2.7 million or 16.0%13.1%, compared with $6.4$20.4 million in Third Quarter 2017,Year-to-Date 2018. This increase was primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.implementation, continued investment in our digital infrastructure, and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense Net

Other operating income net was insignificant$0.1 million in Third Quarter 2018Year-to-Date 2019 compared to other operating expense of $0.6 million in Third Quarter 2017, primarily due to severance charges associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.

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Table of Contents

Operating Income
Operating income was $8.5 million in Third Quarter 2018 compared to $5.9 million in Third Quarter 2017 primarily due to increased revenue driven by the Direct Segment and the leveraging of the existing cost structure.
Interest Expense
Interest expense was $7.3 million in Third Quarter 2018 compared to $6.4 million in Third Quarter 2017, reflective of a rising interest rate environment.
Other Expense (Income), Net
Other expense, net was $1.9 million in Third Quarter 2018 compared to other income, net of $0.6 million in Third Quarter 2017, driven by the establishment of a reserve against an indemnification asset.
Income Tax Benefit
The Income tax benefit was $4.0 million for Third Quarter 2018 compared to an insignificant amount in Third Quarter 2017. The effective tax rate was 581.6% in Third Quarter 2018 compared with 3.0% in Third Quarter 2017. The higher benefit is primarily due to revised estimates of the impact due to the Tax Act.
Net Income (Loss)
As a result of the above factors, Net income was $3.3 million and diluted income per share was $0.10 in Third Quarter 2018 compared with a Net income of $0.2 million and diluted earnings per share of $0.01 in Third Quarter 2017.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased 22.1% to $15.7 million in Third Quarter 2018 from $12.9 million in Third Quarter 2017.
Year-to-Date 2018 compared with Year-to-Date 2017
Net Revenue
Net revenue for Year-to-Date 2018 was $949.3 million, compared with $896.0 million in the comparable period of the prior year, an increase of $53.3 million or 5.9%. The increase was comprised of an increase in our Direct segment of $85.2 million and a decrease in our Retail segment of $31.9 million.
Direct segment Net revenue was $863.8 million for Year-to-Date 2018, an increase of $85.2 million, or 10.9%, from the comparable period of the prior year. The increase in the Direct segment was largely attributable to the launch of Delta Airlines business and an increase in our U.S. eCommerce business. In our U.S. eCommerce business, we increased our buyer file and conversion rate helping to drive increased revenue across our assortment.
Retail segment Net revenue was $85.6 million for Year-to-Date 2018, a decrease of $31.9 million, or 27.2%, from the comparable period of the prior year primarily due to the reduction of our Lands' End Shops at Sears. Consolidated Same Store Sales declined 5.9% compared to the same period of the prior year. The decrease was primarily attributable to a reduction of our Lands' End Shops at Sears locations and a 7.1% decrease in Lands' End Shops at Sears Same Store Sales. US Company Operated stores experienced an increase of 1.6% in Same Store Sales. On November 2, 2018, the Company operated 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.
Gross Profit
Gross profit increased $22.0 million to $420.8 million and gross margin decreased approximately 20 basis points to 44.3% of Net revenue in Year-to-Date 2018, compared with $398.8 million, or 44.5% of Net revenue, in Year-to-Date 2017. The Gross profit increase was comprised of an increase in our Direct segment of $32.7 million offset by decrease in our Retail segment of $10.6 million.
Direct segment Gross profit increased 9.3% to $385.3 million in Year-to-Date 2018 from $352.6 million in Year-to-Date 2017. Direct segment gross margin decreased approximately 70 basis points to 44.6% of Net revenue for Year-

26


to-Date 2018, compared with 45.3% of Net revenue for Year-to-Date 2017. The gross margin decrease was primarily attributable to increased promotional activity in the highly competitive retail environment as well as the launch of the lower margin Delta Airlines business.
Retail segment Gross profit decreased 23.0% to $35.4 million in Year-to-Date 2018 from $46.0 million in Year-to-Date 2017. Retail segment gross margin increased approximately 220 basis points to 41.4% of Net revenue for Year-to-Date 2018, compared to 39.2% of Net revenue for Year-to-Date 2017 primarily attributable to effective inventory management requiring lower markdowns of our assortment.
Selling and Administrative Expenses
Selling and administrative expenses increased 2.8% to $388.3 million, a decrease of approximately 130 basis points to 40.9% of Net revenue, in Year-to-Date 2018, compared with $377.8 million, or 42.2% of Net revenue, in Year-to-Date 2017. The increase in Selling and administrative expenses was primarily due to an increase of $18.3 million in the Direct segment and $2.4 million in Corporate expenses, partially offset by a decrease of $10.2 million in the Retail segment.
Direct segment Selling and administrative expenses were $316.9 million, a decrease of approximately 170 basis points to 36.7% of Net revenue, in Year-to-Date 2018, compared with $298.6 million, or 38.4% of Net revenue, for Year-to-Date 2017. The basis point decrease was largely attributable to improved cost leverage, partially offset by increased personnel costs and incentive accruals.
Retail segment Selling and administrative expenses were $43.2 million, an increase of approximately 500 basis points to 50.5% of Net revenue, in Year-to-Date 2018, compared with $53.4 million, or 45.5% of Net revenue, in Year-to-Date 2017. The basis point increase was largely attributable to the reduction in the number of Lands' End Shops at Sears and negative Lands’ End Shops at Sears same store sales.
Corporate/other Selling and administrative expenses were $28.2 million compared with $25.8 million in Year-to-Date 2018 and Year-to-Date 2017, respectively. The $2.4 million, or 9.3%, increase was primarily due to an increase in personnel costs and incentive accruals.
Depreciation and Amortization
Depreciation and amortization expense was $20.4 million in Year-to-Date 2018, an increase of $1.4 million, or 7.3%, compared with $19.0 million in Year-to-Date 2017, primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.
Other Operating (Income) Expense, Net
Other operating (income) expense, net was expense of $0.1 million in Year-to-Date 2018 compared to expense of $2.6 million in the Year-to-Date 2017, due to severance charges in the Year-to-Date 2017 associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.2018.

Operating Income (Loss)

Operating income was $5.6 million in Year-to-Date 2019 compared to Operating income of $11.9 million in Year-to-Date 2018 comparedprimarily due to Operating loss of $0.6the Delta Air Lines launch in the prior year, partially offset by growth in the eCommerce business.

Interest Expense

Interest expense was $20.2 million in Year-to-Date 2017. The increase was primarily due2019 compared to improved growth in our Direct business, partially offset by closures of Lands' End Shops at Sears.
Interest Expense
Interest expense was $21.2 million in Year-to-Date 2018, compared to $18.6 million in Year-to-Date 2017, reflective of a risingthe $100 million voluntary prepayment on the term loan in First Quarter 2019, partially offset by increased interest rate environment.

27

rates.

Other (Income) Expense, Net

Other income, net was $1.6 million in Year-to-Date 2019 compared to Other expense, net wasof $5.3 million in Year-to-Date 2018 compared to Other income, net of $1.8 million in Year-to-Date 2017.2018. Other expense, net in Year-to-Date 2018 was primarily attributable to the reversal of an indemnification asset and accrued interest due to a favorable state tax audit, and a reserve taken against the remaining indemnification asset.

Income Tax Benefit
Income tax benefit was $10.0 million for Year-to-Date 2018 compared to $5.9 million in Year-to-Date 2017.
The effective tax rate was 51.9% in Year-to-Date 2019 compared with 68.5% in Year-to-Date 2018 compared with 33.7% in2018. The Year-to-Date 2017. The higher2019 tax rate reflects the benefit resulted from impacts of the Company’s election to treat certain foreign entities as a U.S. branch. The Year-to-Date 2018 rate reflects revised estimates related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and the reversalbenefits of UTBs as a consequence of the favorable state tax audit settlements for periods prior to the Separation.

Net Loss

As a result of the above factors, Net loss was $6.2 million and diluted loss per share was $0.19 in Year-to-Date 2019 compared with a Net loss of $4.6 million and diluted loss per share wasof $0.14 in Year-to-Date 2018 compared with Net loss2018.

25

Table of $11.6 million and diluted loss per share of $0.36 in Year-to-Date 2017.Contents


Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA increased 54.6%was $28.6 million in Year-to-Date 2019 as compared to $32.4 million in Year-to-Date 2018 from $21.0 million in Year-to-Date 2017.2018.

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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 Current ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. We expect that our cash on hand and cash flows from operations, along with our Current ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. Cash generated from our net salesrevenue and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionatesignificant amount of Netnet revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year.
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the Current ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capital and other general corporate purposes and, aspurposes. As of November 2, 2018, was undrawn other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.
Also on November 16, 2017,credit of $12.5 million and $82.5 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company terminated all loanincurred $1.5 million in debt origination fees. The fees related documentsto the Term Loan Facility were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Prior ABL Facility and repaid all outstanding amounts thereunder.

The Prior ABL Facility provided for maximum borrowings of $175.0 million for Lands' End, subject to a borrowing base, with a $30.0 million sub facility for the UK Borrower. The Prior ABL Facility had a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The Prior ABL Facility was available for working capital and other general corporate purposes and was undrawn other than for letters of credit.Debt Facilities.
On April 4, 2014, Lands’ End entered into the $515.0 million Term Loan Facility of $515.0 million, the proceeds of which proceeds were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and expenses associated with the Debt Facilities at that time of approximately $11.4 million, with the remaining proceeds used for general corporate purposes. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Debt Facilities. In First Quarter 2019, Lands’ End made a $100 million voluntary prepayment on the Term Loan from excess cash on hand.
Maturity; Amortization and Prepayments
The Term Loan Facility amortizes at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows (as defined in the Term Loan Facility) in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events.
The Term Loan Facility matures on April 4, 2021 while the Current ABL Facility will mature no later than November 16, 2022.

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Guarantees; Security
All domestic obligations under the Debt Facilities are unconditionally guaranteed by the Company and, subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The Current ABL Facility inis 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 also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The Current ABL Facility is also secured by a second priority security interest in the same collateral.

The Prior ABL Facility had the same terms to those stated above. In addition, the obligations of the UK Borrower under the Prior ABL Facility were guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom.
Interest; Fees

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The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL FacilitiesFacility is subject to adjustment based on the average excess availability under the ABL FacilitiesFacility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively.Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.Facility.
Customary agency fees are payable pursuant to the termsin respect of the Debt Facilities. The ABL FacilitiesFacility fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries 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. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of November 2, 2018.1, 2019.
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.
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, and material judgments and change of control.
Cash Flows from Operating Activities
Net cash used in operating activities decreasedincreased to $125.0 million in Year-to-Date 2019 from $52.2 million in the Year-to-Date 2018, from a net cash use of $87.8 million in the Year-to-Date 2017, primarily driven by improved working capital management through:
Lower Accounts payable paymentsan increase in Fiscal 2018 due to timing of inventory receiptssupporting the Fourth Quarter 2019 American Airlines launch and payments,

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Higher receipts from Accounts receivable, net in Fiscal 2018 due to high customer receivables outstanding at the beginning of the year relatedaccelerated shipments prior to the Delta Airlines launch.implementation of tariffs.
Cash Flows from Investing Activities
Net cash used in investing activities was $33.0$28.5 million and $29.1$33.0 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively. Cash used in investing activities for both periods was primarily used for investments to update our information technology infrastructure and property and equipment.
For Fiscal 2018,2019, we planexpect to invest a total of approximately $40.0 million in capital expenditures for strategic investments and infrastructure, primarily associated with our ERPEnterprise Order Management investment, other technology investments, expansion in U.S Company Operated stores and general corporate needs.
Cash Flows from Financing Activities
Net cash used in financing activities was $4.4$24.6 million and $4.5$4.4 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively, consisting primarily of our quarterly payments ona $100 million voluntary prepayment of our Term Loan Facility in First Quarter 2019 and quarterly scheduled payments offset by borrowings under the ABL Facility. Amounts borrowed during Third Quarter 2019 are expected to be repaid in full during Fourth Quarter 2019 using cash flows generated from operations.
Contractual Obligations and Off-Balance-Sheet Arrangements

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There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018.1, 2019. During First Quarter 2019, Lands' End made a $100 million voluntary prepayment on the Term Loan Facility, from excess cash on hand.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into an asset-based lending credit agreement with Wells Fargo Bank, National Association,the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capitalmillion and other general corporate purposes. The Current ABL Facility will mature no later than November 16, 2022, subject to customary extension provisions provided for therein. The Current ABL Facility is available for working capital and other general corporate purposes and was undrawn at purposes. As of November 2, 2018, other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.credit of $12.5 million and $82.5 million in availability under the ABL Facility.
Also on November 16, 2017, the Company terminated all loan related documents of the Prior ABL Facility and repaid all outstanding amounts thereunder.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, and Note 2, Recent Accounting Pronouncements. There have been no significant changes in our critical accounting policies or their application since February 2, 2018, except as described below.1, 2019.

Effective First Quarter 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenue, gross margins or income from operations. However, we have implemented a change in our balance sheet presentation for expected product returns and are now reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns, where these were previously netted in Other current liabilities. The product return asset is reported within Prepaid expenses and other current assets. The returns liability and payments received from customers for future delivery of products are reported within Other current liabilities in the Condensed Consolidated Balance Sheets.
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, cash flow, financial condition, 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" 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

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uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2018,1, 2019, as modified by "Part II, Item 1A Risk Factors" of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. A significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of November 2, 2018,1, 2019, we had $8.9$7.3 million of cash denominated in foreign currencies, principally in British Pound Sterling, Euros, Yen and Yen.Hong Kong Dollars. We do not enter into financial instruments for trading purposes or hedging and have not used any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with the Term Loan Facility and the Current ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $4.9$3.9 million change in our annual cash interest expenses. Assuming our Current ABL Facility was fully drawn to a principal amount equal to $175.0 million, each one percentage point change in interest rates would result in a $1.8 million change in our annual cash interest expense.

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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, Lands’ End’s Chief Executive Officer and President and Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer have concluded that, as of November 2, 2018,1, 2019, 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 Third Fiscal Quarter Ended November 2, 20181, 2019 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
We are involved in 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.



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TableIndex of ContentsExhibits

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, which was filed with the SEC on March 29, 2018 (the "Form 10-K"), except as outlined below.28, 2019.

Risk factors appearing in the 10-K which reference our relationship with Sears Holdings Corporation are hereby supplemented to reflect that on October 15, 2018, Sears Holdings Corporation and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code.


3633

Index of Exhibits

ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
3.1
 Amended and Restated Certificate of Incorporation of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on March 20, 2014 (File No. 001-09769)).
   
3.2
 Amended and Restated Bylaws of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on April 8, 2014 (File No. 001-09769)).
  
31.1
 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
31.2
 Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
32.1
 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   
101.INS XBRL Instance Document*
  
101.SCH XBRL Taxonomy Extension Schema Document*
  
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
  
101.DEF XBRL Taxonomy Extension Definition Document*
  
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
  
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
   
*Filed herewith.
   
**Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Lands’ End, Inc.
(Registrant)

Dated: December 6, 20183, 2019

By:/s/ James F. Gooch
 James F. Gooch
 
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
(Principal Financial Officer)





3835

s
% of
Net revenue $’s % of
Net revenue 
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of Net revenue
Net revenue $949,340
 100.0 % $896,044
 100.0 %
Cost of sales (excluding depreciation and amortization) 528,587
 55.7 % 497,262
 55.5 %
Gross profit 420,753
 44.3 % 398,782
 44.5 %
Selling and administrative 388,315
 40.9 % 377,804
 42.2 %
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Other operating expense, net 132
 — % 2,552
 0.3 %
Operating income 11,886
 1.3 % (605) (0.1)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Loss before income taxes (14,647) (1.5)% (17,435) (1.9)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
NET LOSS $(4,621) (0.5)% $(11,557) (1.3)%
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $'s % of
Net revenue		 $’s % of
Net revenue
Net revenue $900,723
 100.0 % $949,340
 100.0 %
Cost of sales (excluding depreciation and amortization) 497,589
 55.2 % 528,587
 55.7 %
Gross profit 403,134
 44.8 % 420,753
 44.3 %
Selling and administrative 374,521
 41.6 % 388,315
 40.9 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating income (expense), net (99) — % 132
 — %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Loss before income taxes (12,939) (1.4)% (14,647) (1.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
NET LOSS $(6,226) (0.7)% $(4,621) (0.5)%


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Depreciation and amortization is not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.
Net Income (Loss) and Adjusted EBITDA

We recorded Net income of $3.3$3.6 million andin Third Quarter 2019 compared to Net lossincome of $4.6$3.3 million in the Third Quarter 2018 and Year-to-Date 2018, respectively compared to Net income of $0.2 million and Net loss of $11.6 million in the Third Quarter 2017 and Year-to-Date 2017, respectively.2018. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net,expense/(benefit), Interest expense, Depreciation and amortization, and certain significant items set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses for comparable periods, and as an executive compensation metric. The methods used by the

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Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

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

EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax costs or benefits.

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.
◦Transfer of corporate functions - severance and contract losses associated with a transition of certain corporate activities from our New York office to our Dodgeville headquarters.

◦Gain or loss on property and equipment - management considers the gains or losses on asset valuation, including impairments, to result from investing decisions rather than ongoing operations.

 


13 Weeks Ended


November 2, 2018
October 27, 2017
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,294

1.0 %
$162

— %
Income tax (benefit) expense
(3,978)
(1.2)%
5

— %
Other expense (income), net
1,866

0.5 %
(576)
(0.2)%
Interest expense
7,303

2.1 %
6,350

2.0 %
Operating income
8,485

2.5 %
5,941

1.8 %
Depreciation and amortization
7,361

2.2 %
6,347

1.9 %
Transfer of corporate functions
4

— %
475

0.1 %
(Gain) loss on property and equipment
(162)
— %
89

— %
Adjusted EBITDA
$15,688

4.6 %
$12,852

3.9 %

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13 Weeks Ended


November 1, 2019
November 2, 2018
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,606

1.1 %
$3,294

1.0 %
Income tax expense (benefit)
1,346

0.4 %
(3,978)
(1.2)%
Other (income) expense, net
(166)
— %
1,866

0.5 %
Interest expense
6,121

1.8 %
7,303

2.1 %
Operating income
10,907

3.2 %
8,485

2.5 %
Depreciation and amortization
8,076

2.4 %
7,361

2.2 %
Other operating (income) expense
(206)
(0.1)%
4

— %
(Gain) on property and equipment
(19)
— %
(162)
— %
Adjusted EBITDA
$18,758

5.5 %
$15,688

4.6 %
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(4,621) (0.5)% $(11,557) (1.3)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Operating income (loss) 11,886
 1.3 % (605) (0.1)%
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Transfer of corporate functions 10
 — % 2,401
 0.3 %
Loss on property and equipment 121
 — % 151
 — %
Adjusted EBITDA $32,437
 3.4 % $20,978
 2.3 %
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(6,226) (0.7)% $(4,621) (0.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating expense —
 — % 10
 — %
(Gain) loss on property and equipment (99) — % 121
 — %
Adjusted EBITDA $28,613
 3.2 % $32,437
 3.4 %


In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments: Direct (sold through e-commerce websitesthree channels: eCommerce, Outfitters, and direct mail catalogs) and Retail (sold through stores).Retail. A key measure in the evaluation of our business is revenue performance by segment.channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.

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To evaluate revenue performance for the Direct segmenteCommerce and Outfitters channels we use Net revenue. For our Retail segment,channel, we use Company Operated stores Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations on the first daywhen it has comparable prior year sales. Stores in which thebeen open for at least 14 months and selling square footage has not changed by 15% or more as a result of a remodel, expansion, reduction or relocation are excluded from Same Store Sales calculations untilwithin the first day they have comparable prior year sales.past year. Online sales and sales generated through our in-store web portal are considered revenue in our Direct segmenteCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis

Third Quarter 20182019 compared with Third Quarter 20172018

Net Revenue

Net revenue for Third Quarter 20182019 was $341.6$340.0 million, compared with $325.5$341.6 million in the comparable period of the prior year, an increasea decrease of $16.1$1.5 million, or 4.9%0.5%. The increase was comprised of an increaseSales growth in our Direct segmenteCommerce channel of $23.5 million4.7% and Outfitters of 1.3% was offset by a decrease in ourthe Retail segmentchannel of $7.4 million.48.4%.
Direct segment
eCommerce Net revenue was $313.8$242.3 million for Third Quarter 2018,2019, an increase of $23.5$10.8 million or 8.1%4.7%, from the comparable period of the prior year. The increase was led by greater demand in key items and growth in new customer acquisition.

Outfitters Net revenue was $83.3 million for Third Quarter 2019, an increase of $1.1 million or 1.3%, from the comparable period of the prior year. The increase was due to growth in our school uniform business.

Retail Net revenue was $14.4 million in Third Quarter 2019, a decrease of $13.4 million or 48.4%, from the comparable period of the prior year. This decrease was driven by a significant reduction in the Direct segmentnumber of our Lands' End Shops at Sears locations. Our U.S. Company Operated stores experienced an increase of 8.3% in Same Store Sales. On November 1, 2019 the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears compared with 125 Lands’ End Shops at Sears November 2, 2018.

Gross Profit

Gross profit increased $3.2 million to $154.2 million primarily due to growth in our eCommerce channel. Gross margin increased to 45.3%, in Third Quarter 2019, compared with 44.2%, in Third Quarter 2018. The gross margin increase of approximately 110 basis points was primarily due to a more disciplined promotional strategy.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.1 million to $135.4 million or 39.8% of total Net revenue, in Third Quarter 2019, compared with $135.3 million or 39.6% of Net revenue, in Third Quarter 2018. This increase was primarily due to planned higher marketing spend, offset by the continued focus on the efficient management of our cost structure.

Depreciation and Amortization

Depreciation and amortization expense was $8.1 million in Third Quarter 2019, an increase of $0.7 million or 9.7%, compared with $7.4 million in Third Quarter 2018. This increase was primarily attributable to depreciation associated with our multi-year ERP system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense, Net

Other operating (income) expense, net was insignificant in Third Quarter 2019 and Third Quarter 2018.


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Operating Income

Operating income was $10.9 million in Third Quarter 2019 compared to Operating income of $8.5 million in Third Quarter 2018.

Interest Expense

Interest expense was $6.1 million in Third Quarter 2019 compared to $7.3 million in Third Quarter 2018, reflective of the $100 million voluntary prepayment on the term loan, partially offset by increased interest rates.

Other (Income) Expense

Other income was $0.2 million in Third Quarter 2019 compared to Other expense of $1.9 million in Third Quarter 2018.

Income Tax Expense

The Company recorded a tax expense at an overall effective tax rate of 27.2% for the Third Quarter 2019. This compares to an income tax benefit at an overall effective rate of 581.6% for Third Quarter 2018. The tax benefit recorded for Third Quarter 2018 was primarily due to revised estimates of the impact due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

Net Income

As a result of the above factors, Net income was $3.6 million and diluted earnings per share was $0.11 in Third Quarter 2019 compared with a Net income of $3.3 million and diluted earnings per share of $0.10 in Third Quarter 2018.

Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $18.8 million in Third Quarter 2019 as compared to $15.7 million in Third Quarter 2018.
Year-to-Date 2019 compared with Year-to-Date 2018

Net Revenue

Net revenue for Year-to-Date 2019 was $900.7 million, compared with $949.3 million in the comparable period of the prior year, a decrease of $48.6 million, or 5.1%. Sales growth in our eCommerce channel of 5.6% was more than offset by decreases in our Outfitters and Retail channels of 16.5% and 54.5% respectively.

eCommerce Net revenue was $669.9 million for Year-to-Date 2019, an increase of $35.8 million or 5.6%, from the comparable period of the prior year. The increase was primarily attributable to the continued growth in our U.S. eCommerce business. We continued to increase our buyer file and our conversion rate in ourthe U.S. eCommerce business helping to drive the increase, particularly indriven by greater demand for key items and growth in our assortment such as outerwear, knit tops, denim, flannel, and home.new customer acquisitions.
Retail segment
Outfitters Net revenue was $27.8$191.9 million for Third Quarter 2018,Year-to-Date 2019, a decrease of $7.4$37.8 million or 21.0%16.5%, from the comparable period of the prior year. The decrease was primarily attributable to the Delta Air Lines launch in the prior year.

Retail Net revenue was $39.0 million in Year-to-Date 2019, a decrease of $46.6 million or 54.5%, from the comparable period of the prior year, primarily driven by a significant reduction in the number of our Lands' End Shops at Sears locations. Consolidated Same Store Sales increased 11.8% as compared to the same period of the prior year.locations partially offset by growth in our U.S. Company Operated stores. Our USU.S. Company Operated stores experienced an increase of 15.1%9.0% in Same Store Sales. OurOn November 1, 2019, the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears experienced an increase of 11.7% in Same Store Sales primarily due to liquidating stores. On November 2, 2018, the Company hadcompared with 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.November 2, 2018.

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Gross Profit

Gross profit increased $9.0decreased $17.6 million to $151.0$403.1 million and gross margin increased to 44.2% of total Net revenue, in Third Quarter 2018, compared with $142.0 million, and gross margin of 43.6% of total Net revenue, in Third Quarter 2017. The Gross profit increase was comprised of an increase in our Direct segment of $9.9 million and decrease in our Retail segment of $0.9 million.
Direct segment Gross profit increased $9.9 million to $139.9 million in Third Quarter 2018 from $130.0 million in Third Quarter 2017. Direct segment gross margin decreased approximately 20 basis points to 44.6% of total Net revenue in Third Quarter 2018, compared with 44.8% of total Net revenue in Third Quarter 2017. The gross margin decrease wasprimarily due to increased shipping costs, partially offset by stronger merchandise margins and effective inventory managementthe impact of our seasonal assortment.
Retail segment Gross profit decreased $0.9 million to $11.1 million in Third Quarter 2018 from $12.0 million in Third Quarter 2017. Retail segment gross margin increased approximately 570 basis points to 39.9% of Net revenue, in Third Quarter 2018, compared to 34.2% of Net revenue, in Third Quarter 2017 through full priced selling mix, promotional productivity and improved quality of our seasonal assortment, which led to higher sell through and reduced markdowns.
Selling and Administrative Expenses
Selling and administrative expenses increased $6.2 million to $135.3 million, a decrease of approximately 10 basis points to 39.6% of total Net revenue, in Third Quarter 2018, compared with $129.1 million, or 39.7% of Net revenue, in Third Quarter 2017. The increase in Selling and administrative expenses was due to an increase of $8.8 millionthe Delta Air Lines launch in the Direct Segmentprior year and $0.7 million in Corporate expenses, offset by a decrease of $3.3 million in the Retail segment.
Direct segment Selling and administrative expenses were $109.6 million, an increase of approximately 20 basis points to 34.9% of Net revenue, in Third Quarter 2018, compared with $100.8 million, or 34.7% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the increased marketing investment in addition to personnel costs and incentive accruals related to the continued growth of the US Direct business.
Retail segment Selling and administrative expenses were $14.7 million, an increase of approximately 160 basis points to 52.9% of Net revenue, in Third Quarter 2018, compared with $18.0 million, or 51.3% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the reduction in the number offewer Lands' End Shops at Sears, partially offset by improved leverage with new Company Operated stores.the growth in our eCommerce channel. Gross margin increased to 44.8% in Year-to-Date 2019, compared to 44.3% Year-to-Date 2018. The gross margin increase of approximately 50 basis points was primarily related to a more disciplined promotional strategy.
Corporate/other
Selling and Administrative Expenses

Selling and administrative expenses were $11.0decreased $13.8 million to $374.5 million, or 41.6% of total Net revenue, in Year-to-Date 2019, compared with $10.3 million for Third Quarter 2018 and Third Quarter 2017, respectively. The $0.7$388.3 million, or 6.8%,40.9% of Net revenue, in Year-to-Date 2018. The 70 basis point increase was largely attributablereflects deleverage primarily related to an increasethe Delta Air Lines launch and significant reduction in personnel costs and incentive accruals.the number of our Lands’ End Shops at Sears locations from the prior year.

Depreciation and Amortization

Depreciation and amortization expense was $7.4$23.1 million in Third Quarter 2018,Year-to-Date 2019, an increase of $1.0$2.7 million or 16.0%13.1%, compared with $6.4$20.4 million in Third Quarter 2017,Year-to-Date 2018. This increase was primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.implementation, continued investment in our digital infrastructure, and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense Net

Other operating income net was insignificant$0.1 million in Third Quarter 2018Year-to-Date 2019 compared to other operating expense of $0.6 million in Third Quarter 2017, primarily due to severance charges associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.

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Operating Income
Operating income was $8.5 million in Third Quarter 2018 compared to $5.9 million in Third Quarter 2017 primarily due to increased revenue driven by the Direct Segment and the leveraging of the existing cost structure.
Interest Expense
Interest expense was $7.3 million in Third Quarter 2018 compared to $6.4 million in Third Quarter 2017, reflective of a rising interest rate environment.
Other Expense (Income), Net
Other expense, net was $1.9 million in Third Quarter 2018 compared to other income, net of $0.6 million in Third Quarter 2017, driven by the establishment of a reserve against an indemnification asset.
Income Tax Benefit
The Income tax benefit was $4.0 million for Third Quarter 2018 compared to an insignificant amount in Third Quarter 2017. The effective tax rate was 581.6% in Third Quarter 2018 compared with 3.0% in Third Quarter 2017. The higher benefit is primarily due to revised estimates of the impact due to the Tax Act.
Net Income (Loss)
As a result of the above factors, Net income was $3.3 million and diluted income per share was $0.10 in Third Quarter 2018 compared with a Net income of $0.2 million and diluted earnings per share of $0.01 in Third Quarter 2017.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased 22.1% to $15.7 million in Third Quarter 2018 from $12.9 million in Third Quarter 2017.
Year-to-Date 2018 compared with Year-to-Date 2017
Net Revenue
Net revenue for Year-to-Date 2018 was $949.3 million, compared with $896.0 million in the comparable period of the prior year, an increase of $53.3 million or 5.9%. The increase was comprised of an increase in our Direct segment of $85.2 million and a decrease in our Retail segment of $31.9 million.
Direct segment Net revenue was $863.8 million for Year-to-Date 2018, an increase of $85.2 million, or 10.9%, from the comparable period of the prior year. The increase in the Direct segment was largely attributable to the launch of Delta Airlines business and an increase in our U.S. eCommerce business. In our U.S. eCommerce business, we increased our buyer file and conversion rate helping to drive increased revenue across our assortment.
Retail segment Net revenue was $85.6 million for Year-to-Date 2018, a decrease of $31.9 million, or 27.2%, from the comparable period of the prior year primarily due to the reduction of our Lands' End Shops at Sears. Consolidated Same Store Sales declined 5.9% compared to the same period of the prior year. The decrease was primarily attributable to a reduction of our Lands' End Shops at Sears locations and a 7.1% decrease in Lands' End Shops at Sears Same Store Sales. US Company Operated stores experienced an increase of 1.6% in Same Store Sales. On November 2, 2018, the Company operated 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.
Gross Profit
Gross profit increased $22.0 million to $420.8 million and gross margin decreased approximately 20 basis points to 44.3% of Net revenue in Year-to-Date 2018, compared with $398.8 million, or 44.5% of Net revenue, in Year-to-Date 2017. The Gross profit increase was comprised of an increase in our Direct segment of $32.7 million offset by decrease in our Retail segment of $10.6 million.
Direct segment Gross profit increased 9.3% to $385.3 million in Year-to-Date 2018 from $352.6 million in Year-to-Date 2017. Direct segment gross margin decreased approximately 70 basis points to 44.6% of Net revenue for Year-

26


to-Date 2018, compared with 45.3% of Net revenue for Year-to-Date 2017. The gross margin decrease was primarily attributable to increased promotional activity in the highly competitive retail environment as well as the launch of the lower margin Delta Airlines business.
Retail segment Gross profit decreased 23.0% to $35.4 million in Year-to-Date 2018 from $46.0 million in Year-to-Date 2017. Retail segment gross margin increased approximately 220 basis points to 41.4% of Net revenue for Year-to-Date 2018, compared to 39.2% of Net revenue for Year-to-Date 2017 primarily attributable to effective inventory management requiring lower markdowns of our assortment.
Selling and Administrative Expenses
Selling and administrative expenses increased 2.8% to $388.3 million, a decrease of approximately 130 basis points to 40.9% of Net revenue, in Year-to-Date 2018, compared with $377.8 million, or 42.2% of Net revenue, in Year-to-Date 2017. The increase in Selling and administrative expenses was primarily due to an increase of $18.3 million in the Direct segment and $2.4 million in Corporate expenses, partially offset by a decrease of $10.2 million in the Retail segment.
Direct segment Selling and administrative expenses were $316.9 million, a decrease of approximately 170 basis points to 36.7% of Net revenue, in Year-to-Date 2018, compared with $298.6 million, or 38.4% of Net revenue, for Year-to-Date 2017. The basis point decrease was largely attributable to improved cost leverage, partially offset by increased personnel costs and incentive accruals.
Retail segment Selling and administrative expenses were $43.2 million, an increase of approximately 500 basis points to 50.5% of Net revenue, in Year-to-Date 2018, compared with $53.4 million, or 45.5% of Net revenue, in Year-to-Date 2017. The basis point increase was largely attributable to the reduction in the number of Lands' End Shops at Sears and negative Lands’ End Shops at Sears same store sales.
Corporate/other Selling and administrative expenses were $28.2 million compared with $25.8 million in Year-to-Date 2018 and Year-to-Date 2017, respectively. The $2.4 million, or 9.3%, increase was primarily due to an increase in personnel costs and incentive accruals.
Depreciation and Amortization
Depreciation and amortization expense was $20.4 million in Year-to-Date 2018, an increase of $1.4 million, or 7.3%, compared with $19.0 million in Year-to-Date 2017, primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.
Other Operating (Income) Expense, Net
Other operating (income) expense, net was expense of $0.1 million in Year-to-Date 2018 compared to expense of $2.6 million in the Year-to-Date 2017, due to severance charges in the Year-to-Date 2017 associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.2018.

Operating Income (Loss)

Operating income was $5.6 million in Year-to-Date 2019 compared to Operating income of $11.9 million in Year-to-Date 2018 comparedprimarily due to Operating loss of $0.6the Delta Air Lines launch in the prior year, partially offset by growth in the eCommerce business.

Interest Expense

Interest expense was $20.2 million in Year-to-Date 2017. The increase was primarily due2019 compared to improved growth in our Direct business, partially offset by closures of Lands' End Shops at Sears.
Interest Expense
Interest expense was $21.2 million in Year-to-Date 2018, compared to $18.6 million in Year-to-Date 2017, reflective of a risingthe $100 million voluntary prepayment on the term loan in First Quarter 2019, partially offset by increased interest rate environment.

27

rates.

Other (Income) Expense, Net

Other income, net was $1.6 million in Year-to-Date 2019 compared to Other expense, net wasof $5.3 million in Year-to-Date 2018 compared to Other income, net of $1.8 million in Year-to-Date 2017.2018. Other expense, net in Year-to-Date 2018 was primarily attributable to the reversal of an indemnification asset and accrued interest due to a favorable state tax audit, and a reserve taken against the remaining indemnification asset.

Income Tax Benefit
Income tax benefit was $10.0 million for Year-to-Date 2018 compared to $5.9 million in Year-to-Date 2017.
The effective tax rate was 51.9% in Year-to-Date 2019 compared with 68.5% in Year-to-Date 2018 compared with 33.7% in2018. The Year-to-Date 2017. The higher2019 tax rate reflects the benefit resulted from impacts of the Company’s election to treat certain foreign entities as a U.S. branch. The Year-to-Date 2018 rate reflects revised estimates related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and the reversalbenefits of UTBs as a consequence of the favorable state tax audit settlements for periods prior to the Separation.

Net Loss

As a result of the above factors, Net loss was $6.2 million and diluted loss per share was $0.19 in Year-to-Date 2019 compared with a Net loss of $4.6 million and diluted loss per share wasof $0.14 in Year-to-Date 2018 compared with Net loss2018.

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Table of $11.6 million and diluted loss per share of $0.36 in Year-to-Date 2017.Contents


Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA increased 54.6%was $28.6 million in Year-to-Date 2019 as compared to $32.4 million in Year-to-Date 2018 from $21.0 million in Year-to-Date 2017.2018.

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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 Current ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. We expect that our cash on hand and cash flows from operations, along with our Current ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. Cash generated from our net salesrevenue and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionatesignificant amount of Netnet revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year.
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the Current ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capital and other general corporate purposes and, aspurposes. As of November 2, 2018, was undrawn other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.
Also on November 16, 2017,credit of $12.5 million and $82.5 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company terminated all loanincurred $1.5 million in debt origination fees. The fees related documentsto the Term Loan Facility were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Prior ABL Facility and repaid all outstanding amounts thereunder.

The Prior ABL Facility provided for maximum borrowings of $175.0 million for Lands' End, subject to a borrowing base, with a $30.0 million sub facility for the UK Borrower. The Prior ABL Facility had a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The Prior ABL Facility was available for working capital and other general corporate purposes and was undrawn other than for letters of credit.Debt Facilities.
On April 4, 2014, Lands’ End entered into the $515.0 million Term Loan Facility of $515.0 million, the proceeds of which proceeds were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and expenses associated with the Debt Facilities at that time of approximately $11.4 million, with the remaining proceeds used for general corporate purposes. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Debt Facilities. In First Quarter 2019, Lands’ End made a $100 million voluntary prepayment on the Term Loan from excess cash on hand.
Maturity; Amortization and Prepayments
The Term Loan Facility amortizes at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows (as defined in the Term Loan Facility) in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events.
The Term Loan Facility matures on April 4, 2021 while the Current ABL Facility will mature no later than November 16, 2022.

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Guarantees; Security
All domestic obligations under the Debt Facilities are unconditionally guaranteed by the Company and, subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The Current ABL Facility inis 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 also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The Current ABL Facility is also secured by a second priority security interest in the same collateral.

The Prior ABL Facility had the same terms to those stated above. In addition, the obligations of the UK Borrower under the Prior ABL Facility were guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom.
Interest; Fees

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The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL FacilitiesFacility is subject to adjustment based on the average excess availability under the ABL FacilitiesFacility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively.Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.Facility.
Customary agency fees are payable pursuant to the termsin respect of the Debt Facilities. The ABL FacilitiesFacility fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries 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. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of November 2, 2018.1, 2019.
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.
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, and material judgments and change of control.
Cash Flows from Operating Activities
Net cash used in operating activities decreasedincreased to $125.0 million in Year-to-Date 2019 from $52.2 million in the Year-to-Date 2018, from a net cash use of $87.8 million in the Year-to-Date 2017, primarily driven by improved working capital management through:
Lower Accounts payable paymentsan increase in Fiscal 2018 due to timing of inventory receiptssupporting the Fourth Quarter 2019 American Airlines launch and payments,

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Higher receipts from Accounts receivable, net in Fiscal 2018 due to high customer receivables outstanding at the beginning of the year relatedaccelerated shipments prior to the Delta Airlines launch.implementation of tariffs.
Cash Flows from Investing Activities
Net cash used in investing activities was $33.0$28.5 million and $29.1$33.0 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively. Cash used in investing activities for both periods was primarily used for investments to update our information technology infrastructure and property and equipment.
For Fiscal 2018,2019, we planexpect to invest a total of approximately $40.0 million in capital expenditures for strategic investments and infrastructure, primarily associated with our ERPEnterprise Order Management investment, other technology investments, expansion in U.S Company Operated stores and general corporate needs.
Cash Flows from Financing Activities
Net cash used in financing activities was $4.4$24.6 million and $4.5$4.4 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively, consisting primarily of our quarterly payments ona $100 million voluntary prepayment of our Term Loan Facility in First Quarter 2019 and quarterly scheduled payments offset by borrowings under the ABL Facility. Amounts borrowed during Third Quarter 2019 are expected to be repaid in full during Fourth Quarter 2019 using cash flows generated from operations.
Contractual Obligations and Off-Balance-Sheet Arrangements

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There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018.1, 2019. During First Quarter 2019, Lands' End made a $100 million voluntary prepayment on the Term Loan Facility, from excess cash on hand.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into an asset-based lending credit agreement with Wells Fargo Bank, National Association,the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capitalmillion and other general corporate purposes. The Current ABL Facility will mature no later than November 16, 2022, subject to customary extension provisions provided for therein. The Current ABL Facility is available for working capital and other general corporate purposes and was undrawn at purposes. As of November 2, 2018, other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.credit of $12.5 million and $82.5 million in availability under the ABL Facility.
Also on November 16, 2017, the Company terminated all loan related documents of the Prior ABL Facility and repaid all outstanding amounts thereunder.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, and Note 2, Recent Accounting Pronouncements. There have been no significant changes in our critical accounting policies or their application since February 2, 2018, except as described below.1, 2019.

Effective First Quarter 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenue, gross margins or income from operations. However, we have implemented a change in our balance sheet presentation for expected product returns and are now reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns, where these were previously netted in Other current liabilities. The product return asset is reported within Prepaid expenses and other current assets. The returns liability and payments received from customers for future delivery of products are reported within Other current liabilities in the Condensed Consolidated Balance Sheets.
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, cash flow, financial condition, 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" 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

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uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2018,1, 2019, as modified by "Part II, Item 1A Risk Factors" of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. A significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of November 2, 2018,1, 2019, we had $8.9$7.3 million of cash denominated in foreign currencies, principally in British Pound Sterling, Euros, Yen and Yen.Hong Kong Dollars. We do not enter into financial instruments for trading purposes or hedging and have not used any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with the Term Loan Facility and the Current ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $4.9$3.9 million change in our annual cash interest expenses. Assuming our Current ABL Facility was fully drawn to a principal amount equal to $175.0 million, each one percentage point change in interest rates would result in a $1.8 million change in our annual cash interest expense.

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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, Lands’ End’s Chief Executive Officer and President and Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer have concluded that, as of November 2, 2018,1, 2019, 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 Third Fiscal Quarter Ended November 2, 20181, 2019 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
We are involved in 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.



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ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, which was filed with the SEC on March 29, 2018 (the "Form 10-K"), except as outlined below.28, 2019.

Risk factors appearing in the 10-K which reference our relationship with Sears Holdings Corporation are hereby supplemented to reflect that on October 15, 2018, Sears Holdings Corporation and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code.


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Index of Exhibits

ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
3.1
 Amended and Restated Certificate of Incorporation of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on March 20, 2014 (File No. 001-09769)).
   
3.2
 Amended and Restated Bylaws of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on April 8, 2014 (File No. 001-09769)).
  
31.1
 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
31.2
 Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
32.1
 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   
101.INS XBRL Instance Document*
  
101.SCH XBRL Taxonomy Extension Schema Document*
  
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
  
101.DEF XBRL Taxonomy Extension Definition Document*
  
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
  
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
   
*Filed herewith.
   
**Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Lands’ End, Inc.
(Registrant)

Dated: December 6, 20183, 2019

By:/s/ James F. Gooch
 James F. Gooch
 
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
(Principal Financial Officer)





3835

s
% of
Net revenue $’s % of
Net revenueNet revenue $341,570
 100.0 % $325,489
 100.0 % $340,023
 100.0 % $341,570
 100.0 %Cost of sales (excluding depreciation and amortization) 190,608
 55.8 % 183,515
 56.4 % 185,848
 54.7 % 190,608
 55.8 %Gross profit 150,962
 44.2 % 141,974
 43.6 % 154,175
 45.3 % 150,962
 44.2 %Selling and administrative 135,274
 39.6 % 129,122
 39.7 % 135,417
 39.8 % 135,274
 39.6 %Depreciation and amortization 7,361
 2.2 % 6,347
 1.9 % 8,076
 2.4 % 7,361
 2.2 %Other operating (income) expense, net (158) — % 564
 0.2 %Other operating income, net (225) (0.1)% (158) — %Operating income 8,485
 2.5 % 5,941
 1.8 % 10,907
 3.2 % 8,485
 2.5 %Interest expense 7,303
 2.1 % 6,350
 2.0 % 6,121
 1.8 % 7,303
 2.1 %Other expense (income), net 1,866
 0.5 % (576) (0.2)%Other (income) expense, net (166) — % 1,866
 0.5 %Income (loss) before income taxes (684) (0.2)% 167
 0.1 % 4,952
 1.5 % (684) (0.2)%Income tax (benefit) expense (3,978) (1.2)% 5
 — %Income tax expense (benefit) 1,346
 0.4 % (3,978) (1.2)%NET INCOME $3,294
 1.0 % $162
 — % $3,606
 1.1 % $3,294
 1.0 %
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of Net revenue
Net revenue $949,340
 100.0 % $896,044
 100.0 %
Cost of sales (excluding depreciation and amortization) 528,587
 55.7 % 497,262
 55.5 %
Gross profit 420,753
 44.3 % 398,782
 44.5 %
Selling and administrative 388,315
 40.9 % 377,804
 42.2 %
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Other operating expense, net 132
 — % 2,552
 0.3 %
Operating income 11,886
 1.3 % (605) (0.1)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Loss before income taxes (14,647) (1.5)% (17,435) (1.9)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
NET LOSS $(4,621) (0.5)% $(11,557) (1.3)%
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $'s % of
Net revenue		 $’s % of
Net revenue
Net revenue $900,723
 100.0 % $949,340
 100.0 %
Cost of sales (excluding depreciation and amortization) 497,589
 55.2 % 528,587
 55.7 %
Gross profit 403,134
 44.8 % 420,753
 44.3 %
Selling and administrative 374,521
 41.6 % 388,315
 40.9 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating income (expense), net (99) — % 132
 — %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Loss before income taxes (12,939) (1.4)% (14,647) (1.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
NET LOSS $(6,226) (0.7)% $(4,621) (0.5)%


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Depreciation and amortization is not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.
Net Income (Loss) and Adjusted EBITDA

We recorded Net income of $3.3$3.6 million andin Third Quarter 2019 compared to Net lossincome of $4.6$3.3 million in the Third Quarter 2018 and Year-to-Date 2018, respectively compared to Net income of $0.2 million and Net loss of $11.6 million in the Third Quarter 2017 and Year-to-Date 2017, respectively.2018. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net,expense/(benefit), Interest expense, Depreciation and amortization, and certain significant items set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses for comparable periods, and as an executive compensation metric. The methods used by the

21

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Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

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

EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax costs or benefits.

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.
◦Transfer of corporate functions - severance and contract losses associated with a transition of certain corporate activities from our New York office to our Dodgeville headquarters.

◦Gain or loss on property and equipment - management considers the gains or losses on asset valuation, including impairments, to result from investing decisions rather than ongoing operations.

 


13 Weeks Ended


November 2, 2018
October 27, 2017
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,294

1.0 %
$162

— %
Income tax (benefit) expense
(3,978)
(1.2)%
5

— %
Other expense (income), net
1,866

0.5 %
(576)
(0.2)%
Interest expense
7,303

2.1 %
6,350

2.0 %
Operating income
8,485

2.5 %
5,941

1.8 %
Depreciation and amortization
7,361

2.2 %
6,347

1.9 %
Transfer of corporate functions
4

— %
475

0.1 %
(Gain) loss on property and equipment
(162)
— %
89

— %
Adjusted EBITDA
$15,688

4.6 %
$12,852

3.9 %

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13 Weeks Ended


November 1, 2019
November 2, 2018
(in thousands)
$’s
% of
Net revenue
$’s
% of
Net revenue
Net income
$3,606

1.1 %
$3,294

1.0 %
Income tax expense (benefit)
1,346

0.4 %
(3,978)
(1.2)%
Other (income) expense, net
(166)
— %
1,866

0.5 %
Interest expense
6,121

1.8 %
7,303

2.1 %
Operating income
10,907

3.2 %
8,485

2.5 %
Depreciation and amortization
8,076

2.4 %
7,361

2.2 %
Other operating (income) expense
(206)
(0.1)%
4

— %
(Gain) on property and equipment
(19)
— %
(162)
— %
Adjusted EBITDA
$18,758

5.5 %
$15,688

4.6 %
  39 Weeks Ended
  November 2, 2018 October 27, 2017
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(4,621) (0.5)% $(11,557) (1.3)%
Income tax benefit (10,026) (1.1)% (5,878) (0.7)%
Other expense (income), net 5,317
 0.6 % (1,812) (0.2)%
Interest expense 21,216
 2.2 % 18,642
 2.1 %
Operating income (loss) 11,886
 1.3 % (605) (0.1)%
Depreciation and amortization 20,420
 2.2 % 19,031
 2.1 %
Transfer of corporate functions 10
 — % 2,401
 0.3 %
Loss on property and equipment 121
 — % 151
 — %
Adjusted EBITDA $32,437
 3.4 % $20,978
 2.3 %
  39 Weeks Ended
  November 1, 2019 November 2, 2018
(in thousands) $’s % of
Net revenue		 $’s % of
Net revenue
Net loss $(6,226) (0.7)% $(4,621) (0.5)%
Income tax benefit (6,713) (0.7)% (10,026) (1.1)%
Other (income) expense, net (1,640) (0.2)% 5,317
 0.6 %
Interest expense 20,190
 2.2 % 21,216
 2.2 %
Operating income 5,611
 0.6 % 11,886
 1.3 %
Depreciation and amortization 23,101
 2.6 % 20,420
 2.2 %
Other operating expense —
 — % 10
 — %
(Gain) loss on property and equipment (99) — % 121
 — %
Adjusted EBITDA $28,613
 3.2 % $32,437
 3.4 %


In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments: Direct (sold through e-commerce websitesthree channels: eCommerce, Outfitters, and direct mail catalogs) and Retail (sold through stores).Retail. A key measure in the evaluation of our business is revenue performance by segment.channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.

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To evaluate revenue performance for the Direct segmenteCommerce and Outfitters channels we use Net revenue. For our Retail segment,channel, we use Company Operated stores Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations on the first daywhen it has comparable prior year sales. Stores in which thebeen open for at least 14 months and selling square footage has not changed by 15% or more as a result of a remodel, expansion, reduction or relocation are excluded from Same Store Sales calculations untilwithin the first day they have comparable prior year sales.past year. Online sales and sales generated through our in-store web portal are considered revenue in our Direct segmenteCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis

Third Quarter 20182019 compared with Third Quarter 20172018

Net Revenue

Net revenue for Third Quarter 20182019 was $341.6$340.0 million, compared with $325.5$341.6 million in the comparable period of the prior year, an increasea decrease of $16.1$1.5 million, or 4.9%0.5%. The increase was comprised of an increaseSales growth in our Direct segmenteCommerce channel of $23.5 million4.7% and Outfitters of 1.3% was offset by a decrease in ourthe Retail segmentchannel of $7.4 million.48.4%.
Direct segment
eCommerce Net revenue was $313.8$242.3 million for Third Quarter 2018,2019, an increase of $23.5$10.8 million or 8.1%4.7%, from the comparable period of the prior year. The increase was led by greater demand in key items and growth in new customer acquisition.

Outfitters Net revenue was $83.3 million for Third Quarter 2019, an increase of $1.1 million or 1.3%, from the comparable period of the prior year. The increase was due to growth in our school uniform business.

Retail Net revenue was $14.4 million in Third Quarter 2019, a decrease of $13.4 million or 48.4%, from the comparable period of the prior year. This decrease was driven by a significant reduction in the Direct segmentnumber of our Lands' End Shops at Sears locations. Our U.S. Company Operated stores experienced an increase of 8.3% in Same Store Sales. On November 1, 2019 the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears compared with 125 Lands’ End Shops at Sears November 2, 2018.

Gross Profit

Gross profit increased $3.2 million to $154.2 million primarily due to growth in our eCommerce channel. Gross margin increased to 45.3%, in Third Quarter 2019, compared with 44.2%, in Third Quarter 2018. The gross margin increase of approximately 110 basis points was primarily due to a more disciplined promotional strategy.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.1 million to $135.4 million or 39.8% of total Net revenue, in Third Quarter 2019, compared with $135.3 million or 39.6% of Net revenue, in Third Quarter 2018. This increase was primarily due to planned higher marketing spend, offset by the continued focus on the efficient management of our cost structure.

Depreciation and Amortization

Depreciation and amortization expense was $8.1 million in Third Quarter 2019, an increase of $0.7 million or 9.7%, compared with $7.4 million in Third Quarter 2018. This increase was primarily attributable to depreciation associated with our multi-year ERP system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense, Net

Other operating (income) expense, net was insignificant in Third Quarter 2019 and Third Quarter 2018.


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Table of Contents

Operating Income

Operating income was $10.9 million in Third Quarter 2019 compared to Operating income of $8.5 million in Third Quarter 2018.

Interest Expense

Interest expense was $6.1 million in Third Quarter 2019 compared to $7.3 million in Third Quarter 2018, reflective of the $100 million voluntary prepayment on the term loan, partially offset by increased interest rates.

Other (Income) Expense

Other income was $0.2 million in Third Quarter 2019 compared to Other expense of $1.9 million in Third Quarter 2018.

Income Tax Expense

The Company recorded a tax expense at an overall effective tax rate of 27.2% for the Third Quarter 2019. This compares to an income tax benefit at an overall effective rate of 581.6% for Third Quarter 2018. The tax benefit recorded for Third Quarter 2018 was primarily due to revised estimates of the impact due to the Tax Cuts and Jobs Act enacted on December 22, 2017.

Net Income

As a result of the above factors, Net income was $3.6 million and diluted earnings per share was $0.11 in Third Quarter 2019 compared with a Net income of $3.3 million and diluted earnings per share of $0.10 in Third Quarter 2018.

Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $18.8 million in Third Quarter 2019 as compared to $15.7 million in Third Quarter 2018.
Year-to-Date 2019 compared with Year-to-Date 2018

Net Revenue

Net revenue for Year-to-Date 2019 was $900.7 million, compared with $949.3 million in the comparable period of the prior year, a decrease of $48.6 million, or 5.1%. Sales growth in our eCommerce channel of 5.6% was more than offset by decreases in our Outfitters and Retail channels of 16.5% and 54.5% respectively.

eCommerce Net revenue was $669.9 million for Year-to-Date 2019, an increase of $35.8 million or 5.6%, from the comparable period of the prior year. The increase was primarily attributable to the continued growth in our U.S. eCommerce business. We continued to increase our buyer file and our conversion rate in ourthe U.S. eCommerce business helping to drive the increase, particularly indriven by greater demand for key items and growth in our assortment such as outerwear, knit tops, denim, flannel, and home.new customer acquisitions.
Retail segment
Outfitters Net revenue was $27.8$191.9 million for Third Quarter 2018,Year-to-Date 2019, a decrease of $7.4$37.8 million or 21.0%16.5%, from the comparable period of the prior year. The decrease was primarily attributable to the Delta Air Lines launch in the prior year.

Retail Net revenue was $39.0 million in Year-to-Date 2019, a decrease of $46.6 million or 54.5%, from the comparable period of the prior year, primarily driven by a significant reduction in the number of our Lands' End Shops at Sears locations. Consolidated Same Store Sales increased 11.8% as compared to the same period of the prior year.locations partially offset by growth in our U.S. Company Operated stores. Our USU.S. Company Operated stores experienced an increase of 15.1%9.0% in Same Store Sales. OurOn November 1, 2019, the Company had 22 U.S. Company Operated stores compared with 16 U.S. Company Operated stores on November 2, 2018. On November 1, 2019, the Company had 36 Lands’ End Shops at Sears experienced an increase of 11.7% in Same Store Sales primarily due to liquidating stores. On November 2, 2018, the Company hadcompared with 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.November 2, 2018.

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Table of Contents


Gross Profit

Gross profit increased $9.0decreased $17.6 million to $151.0$403.1 million and gross margin increased to 44.2% of total Net revenue, in Third Quarter 2018, compared with $142.0 million, and gross margin of 43.6% of total Net revenue, in Third Quarter 2017. The Gross profit increase was comprised of an increase in our Direct segment of $9.9 million and decrease in our Retail segment of $0.9 million.
Direct segment Gross profit increased $9.9 million to $139.9 million in Third Quarter 2018 from $130.0 million in Third Quarter 2017. Direct segment gross margin decreased approximately 20 basis points to 44.6% of total Net revenue in Third Quarter 2018, compared with 44.8% of total Net revenue in Third Quarter 2017. The gross margin decrease wasprimarily due to increased shipping costs, partially offset by stronger merchandise margins and effective inventory managementthe impact of our seasonal assortment.
Retail segment Gross profit decreased $0.9 million to $11.1 million in Third Quarter 2018 from $12.0 million in Third Quarter 2017. Retail segment gross margin increased approximately 570 basis points to 39.9% of Net revenue, in Third Quarter 2018, compared to 34.2% of Net revenue, in Third Quarter 2017 through full priced selling mix, promotional productivity and improved quality of our seasonal assortment, which led to higher sell through and reduced markdowns.
Selling and Administrative Expenses
Selling and administrative expenses increased $6.2 million to $135.3 million, a decrease of approximately 10 basis points to 39.6% of total Net revenue, in Third Quarter 2018, compared with $129.1 million, or 39.7% of Net revenue, in Third Quarter 2017. The increase in Selling and administrative expenses was due to an increase of $8.8 millionthe Delta Air Lines launch in the Direct Segmentprior year and $0.7 million in Corporate expenses, offset by a decrease of $3.3 million in the Retail segment.
Direct segment Selling and administrative expenses were $109.6 million, an increase of approximately 20 basis points to 34.9% of Net revenue, in Third Quarter 2018, compared with $100.8 million, or 34.7% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the increased marketing investment in addition to personnel costs and incentive accruals related to the continued growth of the US Direct business.
Retail segment Selling and administrative expenses were $14.7 million, an increase of approximately 160 basis points to 52.9% of Net revenue, in Third Quarter 2018, compared with $18.0 million, or 51.3% of Net revenue, in Third Quarter 2017. The basis point increase was largely attributable to the reduction in the number offewer Lands' End Shops at Sears, partially offset by improved leverage with new Company Operated stores.the growth in our eCommerce channel. Gross margin increased to 44.8% in Year-to-Date 2019, compared to 44.3% Year-to-Date 2018. The gross margin increase of approximately 50 basis points was primarily related to a more disciplined promotional strategy.
Corporate/other
Selling and Administrative Expenses

Selling and administrative expenses were $11.0decreased $13.8 million to $374.5 million, or 41.6% of total Net revenue, in Year-to-Date 2019, compared with $10.3 million for Third Quarter 2018 and Third Quarter 2017, respectively. The $0.7$388.3 million, or 6.8%,40.9% of Net revenue, in Year-to-Date 2018. The 70 basis point increase was largely attributablereflects deleverage primarily related to an increasethe Delta Air Lines launch and significant reduction in personnel costs and incentive accruals.the number of our Lands’ End Shops at Sears locations from the prior year.

Depreciation and Amortization

Depreciation and amortization expense was $7.4$23.1 million in Third Quarter 2018,Year-to-Date 2019, an increase of $1.0$2.7 million or 16.0%13.1%, compared with $6.4$20.4 million in Third Quarter 2017,Year-to-Date 2018. This increase was primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.implementation, continued investment in our digital infrastructure, and an increased number of U.S. Company Operated stores.

Other Operating (Income) Expense Net

Other operating income net was insignificant$0.1 million in Third Quarter 2018Year-to-Date 2019 compared to other operating expense of $0.6 million in Third Quarter 2017, primarily due to severance charges associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.

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Table of Contents

Operating Income
Operating income was $8.5 million in Third Quarter 2018 compared to $5.9 million in Third Quarter 2017 primarily due to increased revenue driven by the Direct Segment and the leveraging of the existing cost structure.
Interest Expense
Interest expense was $7.3 million in Third Quarter 2018 compared to $6.4 million in Third Quarter 2017, reflective of a rising interest rate environment.
Other Expense (Income), Net
Other expense, net was $1.9 million in Third Quarter 2018 compared to other income, net of $0.6 million in Third Quarter 2017, driven by the establishment of a reserve against an indemnification asset.
Income Tax Benefit
The Income tax benefit was $4.0 million for Third Quarter 2018 compared to an insignificant amount in Third Quarter 2017. The effective tax rate was 581.6% in Third Quarter 2018 compared with 3.0% in Third Quarter 2017. The higher benefit is primarily due to revised estimates of the impact due to the Tax Act.
Net Income (Loss)
As a result of the above factors, Net income was $3.3 million and diluted income per share was $0.10 in Third Quarter 2018 compared with a Net income of $0.2 million and diluted earnings per share of $0.01 in Third Quarter 2017.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased 22.1% to $15.7 million in Third Quarter 2018 from $12.9 million in Third Quarter 2017.
Year-to-Date 2018 compared with Year-to-Date 2017
Net Revenue
Net revenue for Year-to-Date 2018 was $949.3 million, compared with $896.0 million in the comparable period of the prior year, an increase of $53.3 million or 5.9%. The increase was comprised of an increase in our Direct segment of $85.2 million and a decrease in our Retail segment of $31.9 million.
Direct segment Net revenue was $863.8 million for Year-to-Date 2018, an increase of $85.2 million, or 10.9%, from the comparable period of the prior year. The increase in the Direct segment was largely attributable to the launch of Delta Airlines business and an increase in our U.S. eCommerce business. In our U.S. eCommerce business, we increased our buyer file and conversion rate helping to drive increased revenue across our assortment.
Retail segment Net revenue was $85.6 million for Year-to-Date 2018, a decrease of $31.9 million, or 27.2%, from the comparable period of the prior year primarily due to the reduction of our Lands' End Shops at Sears. Consolidated Same Store Sales declined 5.9% compared to the same period of the prior year. The decrease was primarily attributable to a reduction of our Lands' End Shops at Sears locations and a 7.1% decrease in Lands' End Shops at Sears Same Store Sales. US Company Operated stores experienced an increase of 1.6% in Same Store Sales. On November 2, 2018, the Company operated 125 Lands’ End Shops at Sears and 18 Company Operated stores compared with 188 Lands’ End Shops at Sears and 14 Company Operated stores on October 27, 2017.
Gross Profit
Gross profit increased $22.0 million to $420.8 million and gross margin decreased approximately 20 basis points to 44.3% of Net revenue in Year-to-Date 2018, compared with $398.8 million, or 44.5% of Net revenue, in Year-to-Date 2017. The Gross profit increase was comprised of an increase in our Direct segment of $32.7 million offset by decrease in our Retail segment of $10.6 million.
Direct segment Gross profit increased 9.3% to $385.3 million in Year-to-Date 2018 from $352.6 million in Year-to-Date 2017. Direct segment gross margin decreased approximately 70 basis points to 44.6% of Net revenue for Year-

26


to-Date 2018, compared with 45.3% of Net revenue for Year-to-Date 2017. The gross margin decrease was primarily attributable to increased promotional activity in the highly competitive retail environment as well as the launch of the lower margin Delta Airlines business.
Retail segment Gross profit decreased 23.0% to $35.4 million in Year-to-Date 2018 from $46.0 million in Year-to-Date 2017. Retail segment gross margin increased approximately 220 basis points to 41.4% of Net revenue for Year-to-Date 2018, compared to 39.2% of Net revenue for Year-to-Date 2017 primarily attributable to effective inventory management requiring lower markdowns of our assortment.
Selling and Administrative Expenses
Selling and administrative expenses increased 2.8% to $388.3 million, a decrease of approximately 130 basis points to 40.9% of Net revenue, in Year-to-Date 2018, compared with $377.8 million, or 42.2% of Net revenue, in Year-to-Date 2017. The increase in Selling and administrative expenses was primarily due to an increase of $18.3 million in the Direct segment and $2.4 million in Corporate expenses, partially offset by a decrease of $10.2 million in the Retail segment.
Direct segment Selling and administrative expenses were $316.9 million, a decrease of approximately 170 basis points to 36.7% of Net revenue, in Year-to-Date 2018, compared with $298.6 million, or 38.4% of Net revenue, for Year-to-Date 2017. The basis point decrease was largely attributable to improved cost leverage, partially offset by increased personnel costs and incentive accruals.
Retail segment Selling and administrative expenses were $43.2 million, an increase of approximately 500 basis points to 50.5% of Net revenue, in Year-to-Date 2018, compared with $53.4 million, or 45.5% of Net revenue, in Year-to-Date 2017. The basis point increase was largely attributable to the reduction in the number of Lands' End Shops at Sears and negative Lands’ End Shops at Sears same store sales.
Corporate/other Selling and administrative expenses were $28.2 million compared with $25.8 million in Year-to-Date 2018 and Year-to-Date 2017, respectively. The $2.4 million, or 9.3%, increase was primarily due to an increase in personnel costs and incentive accruals.
Depreciation and Amortization
Depreciation and amortization expense was $20.4 million in Year-to-Date 2018, an increase of $1.4 million, or 7.3%, compared with $19.0 million in Year-to-Date 2017, primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.
Other Operating (Income) Expense, Net
Other operating (income) expense, net was expense of $0.1 million in Year-to-Date 2018 compared to expense of $2.6 million in the Year-to-Date 2017, due to severance charges in the Year-to-Date 2017 associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.2018.

Operating Income (Loss)

Operating income was $5.6 million in Year-to-Date 2019 compared to Operating income of $11.9 million in Year-to-Date 2018 comparedprimarily due to Operating loss of $0.6the Delta Air Lines launch in the prior year, partially offset by growth in the eCommerce business.

Interest Expense

Interest expense was $20.2 million in Year-to-Date 2017. The increase was primarily due2019 compared to improved growth in our Direct business, partially offset by closures of Lands' End Shops at Sears.
Interest Expense
Interest expense was $21.2 million in Year-to-Date 2018, compared to $18.6 million in Year-to-Date 2017, reflective of a risingthe $100 million voluntary prepayment on the term loan in First Quarter 2019, partially offset by increased interest rate environment.

27

rates.

Other (Income) Expense, Net

Other income, net was $1.6 million in Year-to-Date 2019 compared to Other expense, net wasof $5.3 million in Year-to-Date 2018 compared to Other income, net of $1.8 million in Year-to-Date 2017.2018. Other expense, net in Year-to-Date 2018 was primarily attributable to the reversal of an indemnification asset and accrued interest due to a favorable state tax audit, and a reserve taken against the remaining indemnification asset.

Income Tax Benefit
Income tax benefit was $10.0 million for Year-to-Date 2018 compared to $5.9 million in Year-to-Date 2017.
The effective tax rate was 51.9% in Year-to-Date 2019 compared with 68.5% in Year-to-Date 2018 compared with 33.7% in2018. The Year-to-Date 2017. The higher2019 tax rate reflects the benefit resulted from impacts of the Company’s election to treat certain foreign entities as a U.S. branch. The Year-to-Date 2018 rate reflects revised estimates related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and the reversalbenefits of UTBs as a consequence of the favorable state tax audit settlements for periods prior to the Separation.

Net Loss

As a result of the above factors, Net loss was $6.2 million and diluted loss per share was $0.19 in Year-to-Date 2019 compared with a Net loss of $4.6 million and diluted loss per share wasof $0.14 in Year-to-Date 2018 compared with Net loss2018.

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Table of $11.6 million and diluted loss per share of $0.36 in Year-to-Date 2017.Contents


Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA increased 54.6%was $28.6 million in Year-to-Date 2019 as compared to $32.4 million in Year-to-Date 2018 from $21.0 million in Year-to-Date 2017.2018.

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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 Current ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. We expect that our cash on hand and cash flows from operations, along with our Current ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. Cash generated from our net salesrevenue and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionatesignificant amount of Netnet revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year.
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the Current ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capital and other general corporate purposes and, aspurposes. As of November 2, 2018, was undrawn other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.
Also on November 16, 2017,credit of $12.5 million and $82.5 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company terminated all loanincurred $1.5 million in debt origination fees. The fees related documentsto the Term Loan Facility were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Prior ABL Facility and repaid all outstanding amounts thereunder.

The Prior ABL Facility provided for maximum borrowings of $175.0 million for Lands' End, subject to a borrowing base, with a $30.0 million sub facility for the UK Borrower. The Prior ABL Facility had a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The Prior ABL Facility was available for working capital and other general corporate purposes and was undrawn other than for letters of credit.Debt Facilities.
On April 4, 2014, Lands’ End entered into the $515.0 million Term Loan Facility of $515.0 million, the proceeds of which proceeds were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and expenses associated with the Debt Facilities at that time of approximately $11.4 million, with the remaining proceeds used for general corporate purposes. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Debt Facilities. In First Quarter 2019, Lands’ End made a $100 million voluntary prepayment on the Term Loan from excess cash on hand.
Maturity; Amortization and Prepayments
The Term Loan Facility amortizes at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows (as defined in the Term Loan Facility) in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events.
The Term Loan Facility matures on April 4, 2021 while the Current ABL Facility will mature no later than November 16, 2022.

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Guarantees; Security
All domestic obligations under the Debt Facilities are unconditionally guaranteed by the Company and, subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The Current ABL Facility inis 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 also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The Current ABL Facility is also secured by a second priority security interest in the same collateral.

The Prior ABL Facility had the same terms to those stated above. In addition, the obligations of the UK Borrower under the Prior ABL Facility were guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom.
Interest; Fees

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The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL FacilitiesFacility is subject to adjustment based on the average excess availability under the ABL FacilitiesFacility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively.Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.Facility.
Customary agency fees are payable pursuant to the termsin respect of the Debt Facilities. The ABL FacilitiesFacility fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries 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. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of November 2, 2018.1, 2019.
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.
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, and material judgments and change of control.
Cash Flows from Operating Activities
Net cash used in operating activities decreasedincreased to $125.0 million in Year-to-Date 2019 from $52.2 million in the Year-to-Date 2018, from a net cash use of $87.8 million in the Year-to-Date 2017, primarily driven by improved working capital management through:
Lower Accounts payable paymentsan increase in Fiscal 2018 due to timing of inventory receiptssupporting the Fourth Quarter 2019 American Airlines launch and payments,

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Higher receipts from Accounts receivable, net in Fiscal 2018 due to high customer receivables outstanding at the beginning of the year relatedaccelerated shipments prior to the Delta Airlines launch.implementation of tariffs.
Cash Flows from Investing Activities
Net cash used in investing activities was $33.0$28.5 million and $29.1$33.0 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively. Cash used in investing activities for both periods was primarily used for investments to update our information technology infrastructure and property and equipment.
For Fiscal 2018,2019, we planexpect to invest a total of approximately $40.0 million in capital expenditures for strategic investments and infrastructure, primarily associated with our ERPEnterprise Order Management investment, other technology investments, expansion in U.S Company Operated stores and general corporate needs.
Cash Flows from Financing Activities
Net cash used in financing activities was $4.4$24.6 million and $4.5$4.4 million for Year-to-Date 20182019 and Year-to-Date 2017,2018, respectively, consisting primarily of our quarterly payments ona $100 million voluntary prepayment of our Term Loan Facility in First Quarter 2019 and quarterly scheduled payments offset by borrowings under the ABL Facility. Amounts borrowed during Third Quarter 2019 are expected to be repaid in full during Fourth Quarter 2019 using cash flows generated from operations.
Contractual Obligations and Off-Balance-Sheet Arrangements

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There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018.1, 2019. During First Quarter 2019, Lands' End made a $100 million voluntary prepayment on the Term Loan Facility, from excess cash on hand.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into an asset-based lending credit agreement with Wells Fargo Bank, National Association,the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capitalmillion and other general corporate purposes. The Current ABL Facility will mature no later than November 16, 2022, subject to customary extension provisions provided for therein. The Current ABL Facility is available for working capital and other general corporate purposes and was undrawn at purposes. As of November 2, 2018, other than for $22.61, 2019, the Company had outstanding borrowings of $80.0 million, in outstanding letters of credit.credit of $12.5 million and $82.5 million in availability under the ABL Facility.
Also on November 16, 2017, the Company terminated all loan related documents of the Prior ABL Facility and repaid all outstanding amounts thereunder.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, and Note 2, Recent Accounting Pronouncements. There have been no significant changes in our critical accounting policies or their application since February 2, 2018, except as described below.1, 2019.

Effective First Quarter 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenue, gross margins or income from operations. However, we have implemented a change in our balance sheet presentation for expected product returns and are now reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns, where these were previously netted in Other current liabilities. The product return asset is reported within Prepaid expenses and other current assets. The returns liability and payments received from customers for future delivery of products are reported within Other current liabilities in the Condensed Consolidated Balance Sheets.
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, cash flow, financial condition, 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" 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

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uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2018,1, 2019, as modified by "Part II, Item 1A Risk Factors" of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. A significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of November 2, 2018,1, 2019, we had $8.9$7.3 million of cash denominated in foreign currencies, principally in British Pound Sterling, Euros, Yen and Yen.Hong Kong Dollars. We do not enter into financial instruments for trading purposes or hedging and have not used any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with the Term Loan Facility and the Current ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $4.9$3.9 million change in our annual cash interest expenses. Assuming our Current ABL Facility was fully drawn to a principal amount equal to $175.0 million, each one percentage point change in interest rates would result in a $1.8 million change in our annual cash interest expense.

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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, Lands’ End’s Chief Executive Officer and President and Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer have concluded that, as of November 2, 2018,1, 2019, 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 Third Fiscal Quarter Ended November 2, 20181, 2019 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
We are involved in 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.



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TableIndex of ContentsExhibits

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended February 2, 2018,1, 2019, which was filed with the SEC on March 29, 2018 (the "Form 10-K"), except as outlined below.28, 2019.

Risk factors appearing in the 10-K which reference our relationship with Sears Holdings Corporation are hereby supplemented to reflect that on October 15, 2018, Sears Holdings Corporation and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code.


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Index of Exhibits

ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
3.1
 Amended and Restated Certificate of Incorporation of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on March 20, 2014 (File No. 001-09769)).
   
3.2
 Amended and Restated Bylaws of Lands' End, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on April 8, 2014 (File No. 001-09769)).
  
31.1
 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
31.2
 Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
  
32.1
 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   
101.INS XBRL Instance Document*
  
101.SCH XBRL Taxonomy Extension Schema Document*
  
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
  
101.DEF XBRL Taxonomy Extension Definition Document*
  
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
  
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
   
*Filed herewith.
   
**Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Lands’ End, Inc.
(Registrant)

Dated: December 6, 20183, 2019

By:/s/ James F. Gooch
 James F. Gooch
 
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
(Principal Financial Officer)





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