UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended May 1,July 31, 2020
-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 |
| (I.R.S. Employer |
|
|
|
1 Lands’ End Lane Dodgeville, Wisconsin |
| 53595 |
|
|
|
(Address of Principal Executive Offices) |
| (Zip Code) |
(608) 935-9341
(Registrant’s Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, par value $0.01 per share |
| LE |
| The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES Yes☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES Yes☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
Large accelerated filer | ☐ |
| Accelerated filer | ☒ |
|
|
|
|
|
Non-accelerated filer | ☐ |
| Smaller reporting company | ☐ |
|
|
|
|
|
Emerging growth company | ☐ |
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
As of July 20,September 4, 2020 the registrant had 32,600,59032,603,664 shares of common stock, $0.01 par value, outstanding.
Explanatory Note
In reliance on the Securities and Exchange Commission (the “SEC”) Order Under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, SEC Release No. 34-88465, dated March 25, 2020 (the “Order”), the Company delayed the filing of this Quarterly Report on Form 10-Q, which was originally due on June 10, 2020.
The Company required additional time to finalize this Quarterly Report on Form 10-Q due to circumstances related to the coronavirus disease 2019 (COVID-19) pandemic. Areas such as impairment review of goodwill and long-lived assets, inventory reserves, lease accounting, other contingencies and accounting for the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) were complexities due to the impact of the COVID-19 pandemic that the Company deemed it necessary to review further prior to the finalization of the financial statements. Among other factors, the furlough of a majority of its corporate staff through May 26, 2020 and the “Safer at Home” order that was in effect for the State of Wisconsin from March 26, 2020 to May 14, 2020 materially impacted the Company’s employees, including employees who assist in preparing this Quarterly Report on Form 10-Q. In addition, since mid-March, management of the Company has been focused on responding to the pandemic and implementing programs and changes at the Company, including those regarding furloughs, workforce reductions, inventory management, liquidity management and financial flexibility, reductions in capital investment, store closures and re-opening plans, and the safety and wellness of employees in operations that have remained operational on its campus (primarily its distribution and customer care centers).
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MAY 1,JULY 31, 2020
|
|
| Page |
|
|
|
|
|
|
| |
|
|
|
|
Item 1. |
| 1 | |
|
|
|
|
|
| 1 | |
|
|
|
|
| Condensed Consolidated Statements of Comprehensive Operations |
| 2 |
|
|
|
|
|
| 3 | |
|
|
|
|
|
| 4 | |
|
|
|
|
| Condensed Consolidated Statements of Changes in Stockholders' Equity |
| 5 |
|
|
|
|
|
| 6 | |
|
|
|
|
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
|
|
|
Item 3. |
| ||
|
| ||
| 29 | ||
|
|
|
|
Item |
| ||
|
| ||
|
| 30 | |
|
|
|
|
|
| 31 | |
Item 1. | 31 | ||
Item 1A. | 31 | ||
Item 6. | 32 | ||
33 |
PART I. FINANCIALFINANCIAL INFORMATION
LANDS’ END, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
|
| 13 Weeks Ended |
|
| 13 Week Period Ended |
|
| 26 Week Period Ended |
| |||||||||||||||
(in thousands, except per share data) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||
Net revenue |
| $ | 217,008 |
|
| $ | 262,433 |
|
| $ | 312,083 |
|
| $ | 298,267 |
|
| $ | 529,091 |
|
| $ | 560,700 |
|
Cost of sales (excluding depreciation and amortization) |
|
| 122,853 |
|
|
| 142,559 |
|
|
| 176,661 |
|
|
| 169,182 |
|
|
| 299,514 |
|
|
| 311,741 |
|
Gross profit |
|
| 94,155 |
|
|
| 119,874 |
|
|
| 135,422 |
|
|
| 129,085 |
|
|
| 229,577 |
|
|
| 248,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative |
|
| 105,796 |
|
|
| 116,844 |
|
|
| 111,478 |
|
|
| 122,260 |
|
|
| 217,276 |
|
|
| 239,104 |
|
Depreciation and amortization |
|
| 8,786 |
|
|
| 7,618 |
|
|
| 9,378 |
|
|
| 7,408 |
|
|
| 18,164 |
|
|
| 15,026 |
|
Other operating expense, net |
|
| 4,285 |
|
|
| 148 |
| ||||||||||||||||
Operating loss |
|
| (24,712 | ) |
|
| (4,736 | ) | ||||||||||||||||
Other operating expense (income), net |
|
| 3,373 |
|
|
| (22 | ) |
|
| 7,656 |
|
|
| 126 |
| ||||||||
Operating income (loss) |
|
| 11,193 |
|
|
| (561 | ) |
|
| (13,519 | ) |
|
| (5,297 | ) | ||||||||
Interest expense |
|
| 5,311 |
|
|
| 7,834 |
|
|
| 4,916 |
|
|
| 6,235 |
|
|
| 10,227 |
|
|
| 14,069 |
|
Other income, net |
|
| (173 | ) |
|
| (867 | ) | ||||||||||||||||
Loss before income taxes |
|
| (29,850 | ) |
|
| (11,703 | ) | ||||||||||||||||
Income tax benefit |
|
| (9,207 | ) |
|
| (4,885 | ) | ||||||||||||||||
NET LOSS |
| $ | (20,643 | ) |
| $ | (6,818 | ) | ||||||||||||||||
NET LOSS PER COMMON SHARE |
|
|
|
|
|
|
|
| ||||||||||||||||
Other expense (income), net |
|
| 1,333 |
|
|
| (608 | ) |
|
| 1,160 |
|
|
| (1,475 | ) | ||||||||
Income (loss) before income taxes |
|
| 4,944 |
|
|
| (6,188 | ) |
|
| (24,906 | ) |
|
| (17,891 | ) | ||||||||
Income tax expense (benefit) |
|
| 568 |
|
|
| (3,174 | ) |
|
| (8,639 | ) |
|
| (8,059 | ) | ||||||||
NET INCOME (LOSS) |
| $ | 4,376 |
|
| $ | (3,014 | ) |
| $ | (16,267 | ) |
| $ | (9,832 | ) | ||||||||
NET INCOME (LOSS) PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic: |
| $ | (0.64 | ) |
| $ | (0.21 | ) |
| $ | 0.13 |
|
| $ | (0.09 | ) |
| $ | (0.50 | ) |
| $ | (0.30 | ) |
Diluted: |
| $ | (0.64 | ) |
| $ | (0.21 | ) |
| $ | 0.13 |
|
| $ | (0.09 | ) |
| $ | (0.50 | ) |
| $ | (0.30 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
| 32,448 |
|
|
| 32,261 |
|
|
| 32,600 |
|
|
| 32,368 |
|
|
| 32,524 |
|
|
| 32,314 |
|
Diluted weighted average common shares outstanding |
|
| 32,448 |
|
|
| 32,261 |
|
|
| 32,838 |
|
|
| 32,368 |
|
|
| 32,524 |
|
|
| 32,314 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
1
LANDS’ END, INC.
Condensed Consolidated Statements of Comprehensive Operations
(Unaudited)
|
| 13 Weeks Ended |
| |||||
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
| ||
NET LOSS |
| $ | (20,643 | ) |
| $ | (6,818 | ) |
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (1,259 | ) |
|
| (234 | ) |
COMPREHENSIVE LOSS |
| $ | (21,902 | ) |
| $ | (7,052 | ) |
|
| 13 Week Period Ended |
|
| 26 Week Period Ended |
| ||||||||||
(in thousands) |
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||
NET INCOME (LOSS) |
| $ | 4,376 |
|
| $ | (3,014 | ) |
| $ | (16,267 | ) |
| $ | (9,832 | ) |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 1,382 |
|
|
| (2,234 | ) |
|
| 123 |
|
|
| (2,468 | ) |
COMPREHENSIVE INCOME (LOSS) |
| $ | 5,758 |
|
| $ | (5,248 | ) |
| $ | (16,144 | ) |
| $ | (12,300 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements.
2
LANDS’ END, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) |
| July 31, 2020 |
|
| August 2, 2019 |
|
| January 31, 2020 |
| |||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 62,624 |
|
| $ | 82,616 |
|
| $ | 77,148 |
|
Restricted cash |
|
| 1,843 |
|
|
| 1,826 |
|
|
| 2,149 |
|
Accounts receivable, net |
|
| 24,367 |
|
|
| 24,632 |
|
|
| 50,953 |
|
Inventories, net |
|
| 441,510 |
|
|
| 405,793 |
|
|
| 375,670 |
|
Prepaid expenses and other current assets |
|
| 48,095 |
|
|
| 39,391 |
|
|
| 39,458 |
|
Total current assets |
|
| 578,439 |
|
|
| 554,258 |
|
|
| 545,378 |
|
Property and equipment, net |
|
| 153,003 |
|
|
| 153,933 |
|
|
| 157,665 |
|
Operating lease right-of-use asset |
|
| 37,882 |
|
|
| 28,980 |
|
|
| 38,665 |
|
Goodwill |
|
| 106,700 |
|
|
| 110,000 |
|
|
| 110,000 |
|
Intangible asset, net |
|
| 257,000 |
|
|
| 257,000 |
|
|
| 257,000 |
|
Other assets |
|
| 4,300 |
|
|
| 5,333 |
|
|
| 4,921 |
|
TOTAL ASSETS |
| $ | 1,137,324 |
|
| $ | 1,109,504 |
|
| $ | 1,113,629 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current borrowings on Term Loan |
| $ | — |
|
| $ | 5,150 |
|
| $ | 5,150 |
|
Accounts payable |
|
| 202,629 |
|
|
| 230,158 |
|
|
| 158,436 |
|
Lease liability - current |
|
| 5,676 |
|
|
| 6,997 |
|
|
| 5,864 |
|
Other current liabilities |
|
| 99,016 |
|
|
| 87,807 |
|
|
| 114,116 |
|
Total current liabilities |
|
| 307,321 |
|
|
| 330,112 |
|
|
| 283,566 |
|
Long-term debt, net |
|
| 381,909 |
|
|
| 380,555 |
|
|
| 378,657 |
|
Lease liability - long-term |
|
| 40,588 |
|
|
| 26,911 |
|
|
| 39,841 |
|
Deferred tax liabilities |
|
| 65,619 |
|
|
| 55,516 |
|
|
| 57,651 |
|
Other liabilities |
|
| 5,530 |
|
|
| 4,145 |
|
|
| 5,532 |
|
TOTAL LIABILITIES |
|
| 800,967 |
|
|
| 797,239 |
|
|
| 765,247 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 authorized: 480,000 shares; issued and outstanding: 32,604, 32,370 and 32,382, respectively |
|
| 326 |
|
|
| 324 |
|
|
| 324 |
|
Additional paid-in capital |
|
| 364,773 |
|
|
| 356,324 |
|
|
| 360,656 |
|
(Accumulated deficit) Retained earnings |
|
| (15,877 | ) |
|
| (28,732 | ) |
|
| 390 |
|
Accumulated other comprehensive loss |
|
| (12,865 | ) |
|
| (15,651 | ) |
|
| (12,988 | ) |
TOTAL STOCKHOLDERS' EQUITY |
|
| 336,357 |
|
|
| 312,265 |
|
|
| 348,382 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 1,137,324 |
|
| $ | 1,109,504 |
|
| $ | 1,113,629 |
|
(in thousands, except per share data) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| January 31, 2020 |
| |||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 59,134 |
|
| $ | 40,221 |
|
| $ | 77,148 |
|
Restricted cash |
|
| 1,953 |
|
|
| 1,821 |
|
|
| 2,149 |
|
Accounts receivable, net |
|
| 35,381 |
|
|
| 27,510 |
|
|
| 50,953 |
|
Inventories, net |
|
| 383,163 |
|
|
| 319,319 |
|
|
| 375,670 |
|
Prepaid expenses and other current assets |
|
| 46,221 |
|
|
| 35,304 |
|
|
| 39,458 |
|
Total current assets |
|
| 525,852 |
|
|
| 424,175 |
|
|
| 545,378 |
|
Property and equipment, net |
|
| 155,511 |
|
|
| 152,405 |
|
|
| 157,665 |
|
Operating lease right-of-use asset |
|
| 38,621 |
|
|
| 29,327 |
|
|
| 38,665 |
|
Goodwill |
|
| 106,700 |
|
|
| 110,000 |
|
|
| 110,000 |
|
Intangible asset, net |
|
| 257,000 |
|
|
| 257,000 |
|
|
| 257,000 |
|
Other assets |
|
| 4,651 |
|
|
| 5,473 |
|
|
| 4,921 |
|
TOTAL ASSETS |
| $ | 1,088,335 |
|
| $ | 978,380 |
|
| $ | 1,113,629 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current borrowings on ABL Facility |
| $ | 75,000 |
|
| $ | — |
|
| $ | — |
|
Current borrowings on Term Loan |
|
| 382,858 |
|
|
| 5,150 |
|
|
| 5,150 |
|
Accounts payable |
|
| 101,445 |
|
|
| 98,623 |
|
|
| 158,436 |
|
Lease liability - current |
|
| 5,867 |
|
|
| 8,786 |
|
|
| 5,864 |
|
Other current liabilities |
|
| 82,904 |
|
|
| 84,172 |
|
|
| 114,116 |
|
Total current liabilities |
|
| 648,074 |
|
|
| 196,731 |
|
|
| 283,566 |
|
Long-term debt, net |
|
| — |
|
|
| 381,504 |
|
|
| 378,657 |
|
Lease liability - long-term |
|
| 41,388 |
|
|
| 24,772 |
|
|
| 39,841 |
|
Deferred tax liabilities |
|
| 65,446 |
|
|
| 56,108 |
|
|
| 57,651 |
|
Other liabilities |
|
| 5,529 |
|
|
| 4,060 |
|
|
| 5,532 |
|
TOTAL LIABILITIES |
|
| 760,437 |
|
|
| 663,175 |
|
|
| 765,247 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 authorized: 480,000 shares; issued and outstanding: 32,596, 32,363 and 32,382, respectively |
|
| 326 |
|
|
| 324 |
|
|
| 324 |
|
Additional paid-in capital |
|
| 362,072 |
|
|
| 354,016 |
|
|
| 360,656 |
|
Accumulated deficit |
|
| (20,253 | ) |
|
| (25,718 | ) |
|
| 390 |
|
Accumulated other comprehensive loss |
|
| (14,247 | ) |
|
| (13,417 | ) |
|
| (12,988 | ) |
TOTAL STOCKHOLDERS' EQUITY |
|
| 327,898 |
|
|
| 315,205 |
|
|
| 348,382 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 1,088,335 |
|
| $ | 978,380 |
|
| $ | 1,113,629 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
LANDS’ END, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| 13 Weeks Ended |
|
| 26 Week Period Ended |
| ||||||||||
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (20,643 | ) |
| $ | (6,818 | ) |
| $ | (16,267 | ) |
| $ | (9,832 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
| ||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 8,786 |
|
|
| 7,618 |
|
|
| 18,164 |
|
|
| 15,026 |
|
Amortization of debt issuance costs |
|
| 429 |
|
|
| 434 |
|
|
| 858 |
|
|
| 864 |
|
Loss (gain) on property and equipment |
|
| 842 |
|
|
| (55 | ) |
|
| 887 |
|
|
| (141 | ) |
Stock-based compensation |
|
| 1,828 |
|
|
| 1,974 |
|
|
| 4,542 |
|
|
| 4,303 |
|
Deferred income taxes |
|
| 8,132 |
|
|
| (2,501 | ) |
|
| 7,936 |
|
|
| (1,877 | ) |
Goodwill impairment |
|
| 3,300 |
|
|
| — |
|
|
| 3,300 |
|
|
| — |
|
Other |
|
| 821 |
|
|
| (133 | ) |
|
| 1,115 |
|
|
| 830 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
| (8,502 | ) |
|
| 2,234 |
|
|
| (65,553 | ) |
|
| (86,350 | ) |
Accounts payable |
|
| (54,084 | ) |
|
| (20,205 | ) |
|
| 48,858 |
|
|
| 111,427 |
|
Other operating assets |
|
| 6,902 |
|
|
| 10,612 |
|
|
| 15,605 |
|
|
| 6,358 |
|
Other operating liabilities |
|
| (28,009 | ) |
|
| (29,450 | ) |
|
| (11,461 | ) |
|
| (23,570 | ) |
Net cash used in operating activities |
|
| (80,198 | ) |
|
| (36,290 | ) | ||||||||
Net cash provided by operating activities |
|
| 7,984 |
|
|
| 17,038 |
| ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (10,789 | ) |
|
| (15,042 | ) |
|
| (19,758 | ) |
|
| (24,843 | ) |
Net cash used in investing activities |
|
| (10,789 | ) |
|
| (15,042 | ) |
|
| (19,758 | ) |
|
| (24,843 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under ABL Facility |
|
| 75,000 |
|
|
| — |
| ||||||||
Proceeds from borrowing under ABL Facility |
|
| 75,000 |
|
|
| — |
| ||||||||
Payments of borrowings under ABL Facility |
|
| (75,000 | ) |
|
| — |
| ||||||||
Payments of term-loan |
|
| (1,288 | ) |
|
| (101,287 | ) |
|
| (2,575 | ) |
|
| (102,575 | ) |
Payments of employee withholding taxes on share-based compensation |
|
| (410 | ) |
|
| (687 | ) |
|
| (423 | ) |
|
| (708 | ) |
Net cash provided by (used in) financing activities |
|
| 73,302 |
|
|
| (101,974 | ) | ||||||||
Net cash used in financing activities |
|
| (2,998 | ) |
|
| (103,283 | ) | ||||||||
Effects of exchange rate changes on cash, cash equivalents and restricted cash |
|
| (525 | ) |
|
| (5 | ) |
|
| (58 | ) |
|
| 177 |
|
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
|
| (18,210 | ) |
|
| (153,311 | ) |
|
| (14,830 | ) |
|
| (110,911 | ) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD |
|
| 79,297 |
|
|
| 195,353 |
|
|
| 79,297 |
|
|
| 195,353 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD |
| $ | 61,087 |
|
| $ | 42,042 |
|
| $ | 64,467 |
|
| $ | 84,442 |
|
SUPPLEMENTAL CASH FLOW DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid liability to acquire property and equipment |
| $ | 4,707 |
|
| $ | 4,901 |
|
| $ | 2,303 |
|
| $ | 5,222 |
|
Income taxes paid, net of refunds |
| $ | (1,210 | ) |
| $ | 12 |
|
| $ | (47 | ) |
| $ | 3,036 |
|
Interest paid |
| $ | 4,667 |
|
| $ | 6,966 |
|
| $ | 9,087 |
|
| $ | 12,702 |
|
Lease liabilities arising from obtaining Operating lease right-of-use assets |
| $ | 3,074 |
|
| $ | 3,731 |
|
| $ | 3,525 |
|
| $ | 6,705 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
4
LANDS' END, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
|
| Common Stock Issued |
|
| Additional Paid-in |
|
| Retained Earnings/ (Accumulated |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders' |
| |||||||||
(in thousands) |
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit) |
|
| Loss |
|
| Equity |
| ||||||
Balance at January 31, 2020 |
|
| 32,382 |
|
| $ | 324 |
|
| $ | 360,656 |
|
| $ | 390 |
|
| $ | (12,988 | ) |
| $ | 348,382 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,643 | ) |
|
| — |
|
|
| (20,643 | ) |
Cumulative translation adjustment, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,259 | ) |
|
| (1,259 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,828 |
|
|
| — |
|
|
| — |
|
|
| 1,828 |
|
Vesting of restricted shares |
|
| 275 |
|
|
| 2 |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock shares surrendered for taxes |
|
| (61 | ) |
|
| — |
|
|
| (410 | ) |
|
| — |
|
|
| — |
|
|
| (410 | ) |
Balance at May 1, 2020 |
|
| 32,596 |
|
| $ | 326 |
|
| $ | 362,072 |
|
| $ | (20,253 | ) |
| $ | (14,247 | ) |
| $ | 327,898 |
|
|
| Common Stock Issued |
|
| Additional Paid-in |
|
| Accumulated |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders' |
|
| Common Stock Issued |
|
| Additional Paid-in |
|
| Retained Earnings/ (Accumulated |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders' |
| ||||||||||||||||||
(in thousands) |
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Loss |
|
| Equity |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit) |
|
| Loss |
|
| Equity |
| ||||||||||||
Balance at February 1, 2019 |
|
| 32,220 |
|
| $ | 320 |
|
| $ | 352,733 |
|
| $ | (17,159 | ) |
| $ | (13,183 | ) |
| $ | 322,711 |
| ||||||||||||||||||||||||
Balance at January 31, 2020 |
|
| 32,382 |
|
| $ | 324 |
|
| $ | 360,656 |
|
| $ | 390 |
|
| $ | (12,988 | ) |
| $ | 348,382 |
| ||||||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,818 | ) |
|
| — |
|
|
| (6,818 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,643 | ) |
|
| — |
|
|
| (20,643 | ) |
Cumulative translation adjustment, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (234 | ) |
|
| (234 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,259 | ) |
|
| (1,259 | ) |
Change in accounting principle related to lease accounting, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,741 | ) |
|
| — |
|
|
| (1,741 | ) | ||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,974 |
|
|
| — |
|
|
| — |
|
|
| 1,974 |
|
|
| — |
|
|
| — |
|
|
| 1,828 |
|
|
| — |
|
|
| — |
|
|
| 1,828 |
|
Vesting of restricted shares |
|
| 185 |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 275 |
|
|
| 2 |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock shares surrendered for taxes |
|
| (42 | ) |
|
| — |
|
|
| (687 | ) |
|
| — |
|
|
| — |
|
|
| (687 | ) |
|
| (61 | ) |
|
| — |
|
|
| (410 | ) |
|
| — |
|
|
| — |
|
|
| (410 | ) |
Balance at May 3, 2019 |
|
| 32,363 |
|
| $ | 324 |
|
| $ | 354,016 |
|
| $ | (25,718 | ) |
| $ | (13,417 | ) |
| $ | 315,205 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Balance at May 1, 2020 |
|
| 32,596 |
|
| $ | 326 |
|
| $ | 362,072 |
|
| $ | (20,253 | ) |
| $ | (14,247 | ) |
| $ | 327,898 |
| ||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,376 |
|
|
| — |
|
|
| 4,376 |
| ||||||||||||||||||||||||
Cumulative translation adjustment, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,382 |
|
|
| 1,382 |
| ||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 2,714 |
|
|
| — |
|
|
| — |
|
|
| 2,714 |
| ||||||||||||||||||||||||
Vesting of restricted shares |
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||
Restricted stock shares surrendered for taxes |
|
| (2 | ) |
|
| — |
|
|
| (13 | ) |
|
| — |
|
|
| — |
|
|
| (13 | ) | ||||||||||||||||||||||||
Balance at July 31, 2020 |
|
| 32,604 |
|
| $ | 326 |
|
| $ | 364,773 |
|
| $ | (15,877 | ) |
| $ | (12,865 | ) |
| $ | 336,357 |
|
|
| Common Stock Issued |
|
| Additional Paid-in |
|
| Accumulated |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders' |
| |||||||||
(in thousands) |
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Loss |
|
| Equity |
| ||||||
Balance at February 1, 2019 |
|
| 32,220 |
|
| $ | 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, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,741 | ) |
|
| — |
|
|
| (1,741 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,974 |
|
|
| — |
|
|
| — |
|
|
| 1,974 |
|
Vesting of restricted shares |
|
| 185 |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock shares surrendered for taxes |
|
| (42 | ) |
|
| — |
|
|
| (687 | ) |
|
| — |
|
|
| — |
|
|
| (687 | ) |
Balance at May 3, 2019 |
|
| 32,363 |
|
| $ | 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 shares |
|
| 9 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock shares surrendered for taxes |
|
| (2 | ) |
|
| — |
|
|
| (21 | ) |
|
| — |
|
|
| — |
|
|
| (21 | ) |
Balance at August 2, 2019 |
|
| 32,370 |
|
| $ | 324 |
|
| $ | 356,324 |
|
| $ | (28,732 | ) |
| $ | (15,651 | ) |
| $ | 312,265 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
LANDS’ END, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business
Lands' End, Inc. ("Lands' End" or the "Company") is a leading uni-channel retailer of casual clothing, accessories, footwear and home products. Lands’ End offers products online at www.landsend.com, on third party online marketplaces and through retail locations.
Terms that are commonly used in the Company's Notesnotes to Condensed Consolidated Financial Statements are defined as follows:
ABL Facility - Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders
• | 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 income (loss) net of Income tax benefit, Other income (expense), net, Interest expense, Depreciation and amortization and certain significant items
• | Adjusted EBITDA - Net income (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
• | 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
• | ASU - FASB Accounting Standards Update |
CARES Act – The Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020.
• | CARES Act – The Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020 |
Debt Facilities - Collectively, the ABL Facility and the Term Loan Facility
• | Debt Facilities - Collectively, the ABL Facility and the Term Loan Facility |
Deferred Awards - Time vesting stock awards
• | Deferred Awards - Time vesting stock awards |
EPS - Earnings per share
• | EPS - Earnings per share |
ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
• | ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert |
FASB - Financial Accounting Standards Board
• | FASB - Financial Accounting Standards Board |
First Quarter 2020 – The 13 weeks ended May 1, 2020
• | First Quarter 2020 – The 13 weeks ended May 1, 2020 |
First Quarter 2019 - The 13 weeks ended May 3, 2019
• | First Quarter 2019 - The 13 weeks ended May 3, 2019 |
Fiscal 2018 - The 52 weeks ended February 1, 2019
• | Fiscal 2020 – The 52 weeks ending January 29, 2021 |
Fiscal 2019 - The 52 weeks ended January 31, 2020
• | Fiscal 2019 - The 52 weeks ended January 31, 2020 |
GAAP - Accounting principles generally accepted in the United States
• | Fiscal 2018 – The 52 weeks ended February 1, 2019 |
LIBOR - London inter-bank offered rate
• | GAAP - Accounting principles generally accepted in the United States |
Option Awards - Stock option awards
• | LIBOR - London inter-bank offered rate |
Performance Awards - Performance-based stock awards
• | Option Awards - Stock option awards |
Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries
• | Performance Awards - Performance-based stock awards |
Second Quarter 2020 – the 13 weeks ending July 31, 2020
• | Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries |
• | SEC - United States Securities and Exchange Commission |
6
Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
• | Second Quarter 2020 – the 13 weeks ended July 31, 2020 |
Term Loan Facility - Term loan credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
• | Second Quarter 2019 – the 13 weeks ended August 2, 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
• | Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders |
Year-to-Date 2020 - The 13 weeks ended May 1, 2020
• | 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 2020 – the 13 weeks ending October 30, 2020 |
• | 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 2019 - The 13 weeks ended May 3, 2019
• | Year-to-Date 2020 - The 26 weeks ended July 31, 2020 |
• | Year-to-Date 2019 - The 26 weeks ended August 2, 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 23, 2020.
Pursuant to ASC 205, Presentation of Financial Statements, the Company is required to and does evaluate at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company’s Term Loan Facility matures on April 4, 2021, which is within one year after the date of the Condensed Consolidated Financial Statements issued with thisIn its Quarterly Report on Form 10-Q. As of10-Q for the quarter ended May 1, 2020, the remaining balance outstanding underCompany reported that due to the maturity date of its Term Loan Facility was $384.1 million. In addition, in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the Company’s ABL Facility would mature on January 4, 2021. Given the amount currently outstanding under the Term Loan Facility and its maturity date of April 4, 2021, and based on the definitions in the relevant accounting standards, management hashad determined that this condition raisesraised substantial doubt about the Company’s ability to continue as a going concern. This evaluation does not consider
On September 9, 2020, subsequent to the potential mitigating effectbalance sheet date of management’s plansJuly 31, 2020, the Company successfully refinanced its outstanding Term Loan Facility, with proceeds from a new term loan and borrowings on its ABL Facility. The refinancing provides the Company with sufficient liquidity to satisfy its obligations for at least twelve months following the issuance of the Condensed Consolidated Financial Statements. Accordingly, the Company has concluded that have not been fully implemented. When substantial doubtthere is deemed to exist, management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raiseno longer substantial doubt about the entity’sCompany’s ability to continue as a going concern.
The Company isSee Note 13, Subsequent Events in the process of seeking new financingNotes to replace the Term Loan Facility and, to the extent this can be successfully secured, is expected to alleviate the doubt raised by the application of ASC 205. Due to the Company’s recent trends of profitable growth, management believes that it will be able to refinance the Term Loan Facility on acceptable terms despite the challenging financial environment reflecting the COVID-19 pandemic. The Company currently has received non-binding term sheets from multiple investors for transactions which would allow it to refinance the Term Loan Facility debt and is in active discussions and negotiations regarding the refinancing. The Company’s financial forecasts indicate sufficient liquidity for at least the next twelve months under the terms of these proposals. However, as the ability to secure a refinancing is conditional upon the execution of agreements with new or existing investors, which is considered outside of the Company’s control, for an amount that allows the Company to meet its obligations as they become due within a period of at least one year from the date of issuance of its financial statements, the refinancing is not considered probable of occurring until such time as the refinancing is completed. The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. for additional information.
Impact of the COVID-19 Pandemic
COVID-19A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States. Inin March 2020, the World Health Organization declared COVID-19 a pandemic. During First Quarterthe first half of Fiscal 2020, the COVID-19 pandemic had a disruptive impact on the Company’s business operations and an unfavorable impact on the Company’s results of operations.
7
Health and Safety of Employees and Consumers
From the beginning of the COVID-19 pandemic, the Company’s priority has been the safety of employees and customers. On March 16, 2020, the Company temporarily closed its 26 U.S. stores. These stores remained closed atreopened during Second Quarter 2020. Additionally, the end of First Quarter 2020 with a phased reopeningCompany opened 4 new stores in Second Quarter 2020. Additionally,Due to the COVID-19 pandemic, the Company has implemented extra precautions in its officeoffices and distribution centers. These precautions were developed in line with guidance from
7
global, federal and state health authorities, including work-from-home policies, social distancing, thermal scanning and partitions in all facilities.
Customer Demand
In Second Quarter 2020, customer demand in the eCommerce channel rebounded from the decline experienced in First Quarter 2020. The eCommerce channel delivered a double-digit revenue increase and consequently, Year-to-Date 2020 eCommerce revenue has increased compared to prior year. Year-to-Date 2020 revenue in the Lands’ End Outfitters (“Outfitters”) and Retail channels is lower than Year-to-Date 2019 due to the reduction in customer demand across all operating segments decreased.caused by the COVID-19 pandemic. Retail revenue also declined due to lengthy store closures. The ultimate timing and impact of customer demand levels will depend on the duration and scope of the COVID-19 pandemic, overall economic conditions and consumer preferences.
Supply Chain
During First Quarter 2020,The Company has not experienced significant supply chain disruptions related to the Company did not experience any significant disruption of its supply chain. However, in response to decreased demand, future orders were reduced and some existing product was repurposed.COVID-19 pandemic. The Company continues to place a priority on business continuity and contingency planning. The Company may experience additional disruptions in the supply chain as the pandemic continues, though the Company cannot reasonably estimate the potential impact or timing of those events, and the Company may not be able to mitigate such impact.
Expense Reduction
Beginning in First Quarter 2020, the Company took the following actions to reduce overall expense as a response to decreased customer demand due to the COVID-19 pandemic:
• | Temporarily reduced base salaries, including a reduction of 50% in the base salary of its Chief Executive Officer and President, 20% reductions in the base salaries of the Company’s other senior management members and scaled salary reductions throughout the Company. |
• | Furlough of approximately 70% of corporate employees and nearly 100% of retail employees from March 28, 2020 to April 13, 2020, with approximately 49% of the workforce remaining furloughed at the end of First Quarter 2020. |
• | Permanent reduction of approximately 10% of corporate staff during Second Quarter 2020, with all remaining furloughed personnel returning to work by mid-Second Quarter 2020. The Company incurred total severance costs of approximately $3.0 million related to the reduction of corporate staff which was recorded in Other operating expense (income), net in the Condensed Consolidated Statements of Operations. As of July 31, 2020 approximately $1.2 million of the severance costs had yet to be paid. |
• | Fiscal 2020 merit increases were eliminated. |
• | The Board of Directors compensation was temporarily reduced. |
• | The Company's 401(k) match was temporarily suspended. |
• | Other discretionary operating expenses were significantly reduced. |
In response to the COVID-19 pandemic, the Company’s other senior management members and scaled salary reductions throughout the Company.
Furlough of approximately 70% of corporate employees and nearly 100% of retail employees beginning on March 28, 2020. Some personnel returned to work beginning on April 13, 2020, however approximately 49% of the workforce remained furloughed at the end of First Quarter 2020.
Fiscal 2020 merit increases were eliminated.
The Board of Directors compensation was temporarily reduced.
The Company's 401(k) match was temporarily suspended.
Planned capitalplanned capital expenditures for Fiscal 2020 were reduced by approximately 50%.
Other discretionary operating expenses were significantly reduced.
Liquidity and Capital Resources
The Term Loan Facility matures on April 4, 2021. The ABL Facility matures on November 16, 2022, however in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the ABL Facility would mature on January 4, 2021. During First Quarter 2020, the Company increased capacity under the ABL Facility by $25.0 million so that maximum borrowings are $200.0 million. The Company is in the process of seeking to refinance the Term Loan Facility however the timeline for this process has been increased due to the impact of the COVID-19 pandemic on the financial markets.
Goodwill and Indefinite-Lived Intangible Asset
The duration and severity of the COVID-19 pandemic could result in additional future impairment charges for goodwill and the trade name indefinite-lived intangible asset. The Company considered the COVID-19 pandemic to be a triggering event in First Quarter 2020 for the Outfitters and Japan eCommerce reporting units and therefore completed an interim test for impairment of goodwill for these reporting units as of May 1, 2020. The interim tests employed the assumption that revenue in the Outfitters and Japan eCommerce reporting units will return to Fiscal 2019 levels by Fiscal 2023 (the 53 weeks ending February 2, 2024). TheThis testing resulted in no0 impairment of the Outfitters reporting unit and full impairment of the $3.3 million of goodwill allocated to the Japan eCommerce reporting unit. unit, recorded during First Quarter 2020. There was 0t a triggering event or impairment charges for any reporting unit in Second Quarter 2020.
Lease Modifications
8
In April 2020, the FASB issued guidance indicating that entities may elect not to evaluate whether a concession provided by lessors is a lease modification. Under existing lease guidance, an entity would have to determine if a lease concession was the result of a new arrangement reached with the landlord, which would be accounted for under the lease modification framework, or if the concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. The FASB guidance provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease.
8
During the FirstSecond Quarter 2020, the Company did not modify any leases as a result of the COVID-19 pandemic, and as a result, the Company has not yet made a policy electionnegotiated certain lease concessions with respect to lease modifications.some of its Company Operated stores and continues to negotiate with landlords for other leased properties. The Company elected the FASB’s relief to not evaluate whether the enforceable rights and obligations existed in the original lease. The related impact of the concessions did not have a material impact on the Company’s Condensed Consolidated Financial Statements during the six months ended July 31, 2020.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Statements - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates relating to trade receivables, loans and other financial instruments. The standard is effective for fiscal years beginning after December 15, 2019. The Company adopted this accounting standard in First Quarter 2020. There was no material impact on the Company's Condensed Consolidated Financial Statements and related disclosures as a result of adoption.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance to improve consistent application. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. Certain amendments within this ASU are required to be applied on a retrospective basis, certain other amendments are required to be applied on a modified retrospective basis and all other amendments on a prospective basis. The Company is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements.
NOTE 3. LOSSEARNINGS (LOSS) PER SHARE
The numerator for both basic and diluted EPS is net loss.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 U.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 price exceeds the option strike price.price, if any, to purchase the Company’s common stock.
The following table summarizes the components of basic and diluted EPS:
|
| 13 Weeks Ended |
|
| 13 Weeks Ended |
|
| 26 Week Period Ended |
| |||||||||||||||
(in thousands, except per share amounts) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||
Net loss |
| $ | (20,643 | ) |
| $ | (6,818 | ) | ||||||||||||||||
Net income (loss) |
| $ | 4,376 |
|
| $ | (3,014 | ) |
| $ | (16,267 | ) |
| $ | (9,832 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
| 32,448 |
|
|
| 32,261 |
|
|
| 32,600 |
|
|
| 32,368 |
|
|
| 32,524 |
|
|
| 32,314 |
|
Dilutive effect of stock awards |
|
| — |
|
|
| — |
|
|
| 238 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Diluted weighted average common shares outstanding |
|
| 32,448 |
|
|
| 32,261 |
|
|
| 32,838 |
|
|
| 32,368 |
|
|
| 32,524 |
|
|
| 32,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share |
| $ | (0.64 | ) |
| $ | (0.21 | ) | ||||||||||||||||
Diluted loss per share |
| $ | (0.64 | ) |
| $ | (0.21 | ) | ||||||||||||||||
Basic income (loss) per share |
| $ | 0.13 |
|
| $ | (0.09 | ) |
| $ | (0.50 | ) |
| $ | (0.30 | ) | ||||||||
Diluted income (loss) per share |
| $ | 0.13 |
|
| $ | (0.09 | ) |
| $ | (0.50 | ) |
| $ | (0.30 | ) |
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 1,205,821978,983, 779,299, 1,216,830, and 796,269779,299 anti-dilutive shares excluded from the diluted weighted average shares outstanding for FirstSecond Quarter 2020, and FirstSecond Quarter 2019, Year-to-Date 2020 and Year-to-Date 2019, respectively.
NOTE 4. OTHER COMPREHENSIVE LOSS
Other comprehensive loss encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments.
9
|
| 13 Weeks Ended |
| |||||
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
| ||
Beginning balance: Accumulated other comprehensive loss (net of tax of $3,453 and $3,505 respectively) |
| $ | (12,988 | ) |
| $ | (13,183 | ) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (net of tax benefit of $337 and $61 respectively) |
|
| (1,259 | ) |
|
| (234 | ) |
Ending balance: Accumulated other comprehensive loss (net of tax of $3,790 and $3,566 respectively) |
| $ | (14,247 | ) |
| $ | (13,417 | ) |
|
| 13 Weeks Ended |
|
| 26 Week Period Ended |
| ||||||||||
(in thousands) |
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||
Beginning balance: Accumulated other comprehensive loss (net of tax of $3,790, $3,567, $3,453 and $3,505 respectively) |
| $ | (14,247 | ) |
| $ | (13,417 | ) |
| $ | (12,988 | ) |
| $ | (13,183 | ) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (net of tax of $(370), $598, $(33) and $660 respectively) |
|
| 1,382 |
|
|
| (2,234 | ) |
|
| 123 |
|
|
| (2,468 | ) |
Ending balance: Accumulated other comprehensive loss (net of tax of $3,420, $4,165, $3,420 and $4,165 respectively) |
| $ | (12,865 | ) |
| $ | (15,651 | ) |
| $ | (12,865 | ) |
| $ | (15,651 | ) |
NoNaN amounts were reclassified out of Accumulated other comprehensive loss during any of the periods presented.
NOTE 5. DEBT
The Company's debt consisted of the following:
|
|
| May 1, 2020 |
|
| May 3, 2019 |
|
| January 31, 2020 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| January 31, 2020 |
| |||||||||||||||||||||||||||||||||
(in thousands) |
|
| Amount |
|
|
| Rate |
|
| Amount |
|
|
| Rate |
|
| Amount |
|
|
| Rate |
|
| Amount |
|
| Rate |
|
| Amount |
|
| Rate |
|
| Amount |
|
| Rate |
| ||||||||||||
Term Loan Facility, maturing April 4, 2021 |
|
| $ | 384,100 |
|
|
|
| 4.25 | % |
| $ | 389,250 |
|
|
|
| 5.75 | % |
| $ | 385,388 |
|
|
|
| 5.05 | % |
| $ | 382,812 |
|
|
| 4.25% |
|
| $ | 387,963 |
|
|
| 5.65% |
|
| $ | 385,388 |
|
|
| 5.05% |
|
ABL Facility, maturing November 16, 2022 |
|
|
| 75,000 |
|
|
|
| 2.07 | % |
|
| — |
|
|
| —% |
|
|
| — |
|
|
| —% |
|
|
| — |
|
| —% |
|
|
| — |
|
| —% |
|
|
| — |
|
| —% |
| |||||
|
|
|
| 459,100 |
|
|
|
|
|
|
|
| 389,250 |
|
|
|
|
|
|
|
| 385,388 |
|
|
|
|
|
|
|
| 382,812 |
|
|
|
|
|
|
| 387,963 |
|
|
|
|
|
|
| 385,388 |
|
|
|
|
|
Less: Current maturities in Current liabilities |
|
|
| 457,858 |
|
|
|
|
|
|
|
| 5,150 |
|
|
|
|
|
|
|
| 5,150 |
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
| 5,150 |
|
|
|
|
|
|
| 5,150 |
|
|
|
|
|
Less: Unamortized debt issuance costs |
|
|
| 1,242 |
|
|
|
|
|
|
|
| 2,596 |
|
|
|
|
|
|
|
| 1,581 |
|
|
|
|
|
|
|
| 903 |
|
|
|
|
|
|
| 2,258 |
|
|
|
|
|
|
| 1,581 |
|
|
|
|
|
Long-term debt, net |
|
| $ | — |
|
|
|
|
|
|
| $ | 381,504 |
|
|
|
|
|
|
| $ | 378,657 |
|
|
|
|
|
|
| $ | 381,909 |
| * |
|
|
|
| $ | 380,555 |
|
|
|
|
|
| $ | 378,657 |
|
|
|
|
|
*Term Loan Facility is considered Long-term debt because it has been refinanced on a long-term basis through the proceeds of the new term loan and borrowings on the ABL Facility.
|
The following table summarizes the Company's borrowing availability under the ABL Facility:
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| January 31, 2020 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| January 31, 2020 |
| ||||||
ABL Facility maximum borrowing |
| $ | 200,000 |
|
| $ | 175,000 |
|
| $ | 175,000 |
|
| $ | 200,000 |
|
| $ | 175,000 |
|
| $ | 175,000 |
|
Current borrowings under ABL |
|
| 75,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Outstanding letters of credit |
|
| 8,656 |
|
|
| 11,203 |
|
|
| 23,299 |
|
|
| 12,020 |
|
|
| 9,456 |
|
|
| 23,299 |
|
Borrowing availability under ABL |
| $ | 116,344 |
|
| $ | 163,797 |
|
| $ | 151,701 |
|
| $ | 187,980 |
|
| $ | 165,544 |
|
| $ | 151,701 |
|
During First QuarterThe following information relates to the Term Loan Facility and ABL Facility as each was in effect on July 31, 2020. On September 9, 2020, the Company increased capacity underentered into a new Credit Agreement, which replaced the Term Loan Facility, and the Second Amendment to ABL Facility (the “Second Amendment to the ABL Facility by $25.0 million so that maximum borrowings are $200.0 million.Facility”), entered into on August 12, 2020, became effective. See Note 13, Subsequent Events in Notes to Condensed Consolidated Financial Statements for additional information.
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 Facility is subject to adjustment based on the average excess availability under the ABL Facility for the preceding fiscal quarter. LIBOR borrowings will range from 1.25% to 1.75% for the ABL Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facility.
Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees also include (i) commitment fees in an amount equal to 0.25% of the daily unused portions of the ABL Facility, and (ii) customary letter of credit fees. As of the end of FirstSecond Quarter 2020 the Company had 0 borrowings of $75.0 million on the ABL Facility.
10
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
10
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 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 May 1,July 31, 2020.
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 and Maturity
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. The Term Loan Facility will mature on April 4, 2021. The2021, and the ABL Facility matureswill mature on November 16, 2022, however in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the ABL Facility would mature on January 4, 2021.2022.
Pursuant to ASC 205, Presentation of Financial Statements, the Company is required to and does evaluate at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company’s Term Loan Facility matures on April 4, 2021, which is within one year after the date of the Condensed Consolidated Financial Statements issued with this Quarterly Report on Form 10-Q. As of May 1, 2020, the remaining balance outstanding under the Term Loan Facility was $384.1 million. Given the amount currently outstanding under the Term Loan Facility and its maturity date of April 4, 2021, and based on the definitions in the relevant accounting standards, management has determined that this condition raises substantial doubt about the Company’s ability to continue as a going concern. This evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt is deemed to exist, management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
The Company is in the process of seeking new financing to replace the Term Loan Facility and, to the extent this can be successfully secured, is expected to alleviate the doubt raised by the application of ASC 205. Due to the Company’s recent trends of profitable growth, management believes that it will be able to refinance the Term Loan Facility on acceptable terms despite the challenging financial environment reflecting the COVID-19 pandemic. The Company currently has received non-binding term sheets from multiple investors for transactions which would allow it to refinance the Term Loan Facility debt and is in active discussions and negotiations regarding the refinancing. The Company’s financial forecasts indicate sufficient liquidity for at least the next twelve months under the terms of these proposals. However, as the ability to secure a refinancing is conditional upon the execution of agreements with new or existing investors, which is considered outside of the Company’s control, for an amount that allows the Company to meet its obligations as they become due within a period of at least one year from the date of issuance of its financial statements, the refinancing is not considered probable of occurring until such time as the refinancing is completed. The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 award 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. |
11
| 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 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. The fair value of each Option Award is estimated on the grant date using the Black-Scholes option pricing model. |
11
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 |
|
| 13 Weeks Ended |
|
| 26 Week Period Ended |
| |||||||||||||||
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||
Deferred Awards |
| $ | 1,641 |
|
| $ | 1,365 |
|
| $ | 1,383 |
|
| $ | 1,531 |
|
| $ | 3,024 |
|
| $ | 2,896 |
|
Performance Awards |
|
| — |
|
|
| 422 |
|
|
| 1,144 |
|
|
| 611 |
|
|
| 1,144 |
|
|
| 1,033 |
|
Option Awards |
|
| 187 |
|
|
| 187 |
|
|
| 187 |
|
|
| 187 |
|
|
| 374 |
|
|
| 374 |
|
Total stock-based compensation expense |
| $ | 1,828 |
|
| $ | 1,974 |
|
| $ | 2,714 |
|
| $ | 2,329 |
|
| $ | 4,542 |
|
| $ | 4,303 |
|
The following table provides a summary of the Deferred Awards activity for Year-to-Date 2020:
|
| Deferred Awards |
|
| Deferred 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 |
| ||||
Unvested as of January 31, 2020 |
|
| 745 |
|
| $ | 18.49 |
|
|
| 745 |
|
| $ | 18.49 |
|
Granted |
|
| 753 |
|
|
| 6.85 |
|
|
| 757 |
|
|
| 6.85 |
|
Vested |
|
| (275 | ) |
|
| 19.87 |
|
|
| (285 | ) |
|
| 20.24 |
|
Forfeited or expired |
|
| (17 | ) |
|
| 17.21 |
|
|
| (98 | ) |
|
| 12.00 |
|
Unvested as of May 1, 2020 |
|
| 1,206 |
|
|
| 10.91 |
| ||||||||
Unvested as of July 31, 2020 |
|
| 1,119 |
|
|
| 10.86 |
|
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $9.7$8.3 million as of May 1,July 31, 2020, which is expected to be recognized ratably over a weighted average period of 2.11.9 years. Deferred Awards granted to employees during Fiscal 2020 vest ratably over a period of three years.
The following table provides a summary of the Performance Awards activity for Year-to-Date 2020:
|
| 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 |
| ||||
Unvested as of January 31, 2020 |
|
| 412 |
|
| $ | 18.15 |
|
|
| 412 |
|
| $ | 18.15 |
|
Granted |
|
| — |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
Vested |
|
| — |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
| (28 | ) |
|
| 17.97 |
|
Unvested as of May 1, 2020 |
|
| 412 |
|
|
| 18.15 |
| ||||||||
Unvested as of July 31, 2020 |
|
| 384 |
|
|
| 18.15 |
|
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $3.2$2.6 million as of May 1,July 31, 2020, which is expected to be recognized ratably over a weighted average period of 1.61.4 years. Performance
12
Awards granted to employees during Fiscal 2019 and Fiscal 2018 vest, if earned, after completion of the applicable three-year performance period.
The following table provides a summary of the Options Award activity for Year-to-Date 2020:
|
| Option Awards |
|
| Option 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 |
| ||||
Unvested as of January 31, 2020 |
|
| 171 |
|
| $ | 8.73 |
|
|
| 171 |
|
| $ | 8.73 |
|
Granted |
|
| — |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
Vested |
|
| (74 | ) |
|
| 8.49 |
|
|
| (85 | ) |
|
| 7.36 |
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
Unvested as of May 1, 2020 |
|
| 97 |
|
|
| 8.92 |
| ||||||||
Unvested as of July 31, 2020 |
|
| 86 |
|
|
| 7.64 |
|
Total unrecognized stock-based compensation expense related to unvested Option Awards was approximately $0.7$0.5 million as of May 1,July 31, 2020, which is expected to be recognized ratably over a weighted average period of 0.90.6 years. The Option Awards have a
12
life of ten years and vest ratably over the first four years. As of May 1,July 31, 2020, 245,098257,352 shares related to Option Awards were exercisable. NoNaN options have been exercised as of May 1,July 31, 2020.
NOTE 7. FAIR VALUE MEASUREMENTS OF FINANCIAL ASSETS AND LIABILITIES
Restricted cash is reflected on the Condensed Consolidated Balance Sheets at fair value. The fair value of restricted cash was $2.0$1.8 million, $1.8 million and $2.1 million as of May 1,July 31, 2020, May 3,August 2, 2019 and January 31, 2020, 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 on ABL Facility, 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:
|
| May 1, 2020* |
|
| May 3, 2019 |
|
| January 31, 2020 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| January 31, 2020 |
| ||||||||||||||||||||||||||||||
(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 |
| $ | 384,100 |
|
| $ | 299,118 |
|
| $ | 389,250 |
|
| $ | 381,952 |
|
| $ | 385,388 |
|
| $ | 378,643 |
|
| $ | 382,812 |
|
| $ | 352,666 |
|
| $ | 387,963 |
|
| $ | 377,779 |
|
| $ | 385,388 |
|
| $ | 378,643 |
|
* At the end of First Quarter 2020 all debt is short- term.
Long-term debt, including short-term portion was valued utilizing Level 2 valuation techniques based on the closing inactive market bid price on May 1,July 31, 2020, May 3,August 2, 2019, and January 31, 2020. There were no0 nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of May 1,July 31, 2020, May 3,August 2, 2019, and January 31, 2020.
NOTE 8. INCOME TAXES
Provision for Income Taxes
AtIn response to the end of each quarter, the Company estimates its effective income tax rate pursuant to ASC 740. The rate for the period consists of the tax rate expected to be applied for the full year to ordinary income adjusted for any discrete items recorded in the period.
The Company recorded a tax benefit at an overall effective tax rate of 30.8% and 41.7% for First Quarter 2020 and First Quarter 2019, respectively. The First Quarter 2020 rate reflects the estimated tax benefits as a result ofCOVID-19 pandemic, the CARES Act. The First Quarter 2019 rate reflects the tax benefits resulting from the change in status of various foreign jurisdictions.
13
Act was signed into law on March 27, 2020. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of employer side social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.
At the end of each quarter, the Company estimates its effective income tax rate pursuant to ASC 740. The rate for the period consists of the tax rate expected to be applied for the full year to ordinary income adjusted for any discrete items recorded in the period.
Discrete items that were recognized during the threesix months ended May 1,July 31, 2020 included the vesting of certain share-based compensation awards and the technical corrections aspect of the CARES Act related to carryback of net operating losses (“NOLs”) in years beginning in 2017. The effective income tax rate for the full year is determined by the level and composition of income (loss) before income taxes, excluding discrete items as discussed above, which is subject to federal, state, local and foreign income taxes.
The Company recorded a tax expense at an overall effective tax rate of 11.5% for Second Quarter 2020 and a tax benefit of 34.7% for Year-to-Date 2020. Comparatively, the Company recorded an income tax benefit of 51.3% and 45.0% for Second Quarter 2019 and Year-to-Date 2019, respectively. The Second Quarter 2020 rate reflects the tax expense generated from changes in estimates related to improvement in Company performance and revised outlook for Fiscal 2020 as a result of the COVID-19 pandemic. The Year-to-Date 2020 rate reflects the estimated tax benefits as a result of the CARES Act. The Second Quarter 2019 and Year-to-Date 2019 rates reflect the tax benefits resulting from the change in status of various foreign jurisdictions.
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.
13
As disclosed in the Company’s Annual Report on Form 10-K for the year ended January 1,31, 2020, the Company is the defendant in three separate lawsuits, each of which seeks class certification and allege adverse health events and personal property damage as a result of wearing uniforms manufactured by Lands’ End: (1) Gilbert et al. v. Lands' End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-00823-JDP, complaint filed October 3, 2019; (2) Andrews et al. v. Lands' End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-01066-JDP, complaint filed on December 31, 2019, on behalf of 521 named plaintiffs, later amended to include 1,089 named plaintiffs; and (3) Davis et al. v. Lands' End, Inc. and Lands' End Business Outfitters, Inc., United States District Court for the Western District of Wisconsin, Case No. 3:20-cv-00195, complaint filed on March 4, 2020. Plaintiffs in Gilbert, Andrews, andDavis seek nationwide class certification on behalf of similarly situated Delta employees.
By order dated April 20, 2020, the Court consolidated the Gilbert and Andrews cases (the “Consolidated Wisconsin Action”), stayed the Davis case and denied Lands’ End’s motion to strike class allegations. A fourth case, DeCrescentis et al., v. Lands' End, Inc., United States District Court for the Southern District of New York, Civil Action No. l 9-cv- 4717-LJL, complaint filed May 22, 2019, was voluntarily dismissed, without prejudice, on May 15, 2020. The Consolidated Wisconsin Action is in discovery.
The Company is vigorously defending the Consolidated Wisconsin Action and believes it is without merit.
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.
14
Sourcing
The Company is party to a contractcontracts with a subsidiary of Sears Holdings to provide agreed upon buying agency services, on a non-exclusive basis, in foreign territories from where the Company purchases merchandise. These services, primarily based upon quantities purchased, include quality-control functions, regulatory compliance, product claims management and new vendor selection and setup assistance. Total expense from these services in First Quarterfor the 13 weeks ended July 31, 2020 and August 2, 2019 was $0.8 million and $1.4 million compared to $1.7respectively. Total expense from these services for the 26 weeks ended July 31, 2020 and August 2, 2019 was $2.2 million in First Quarter 2019.and $3.1 million respectively. These amounts are capitalized into inventory and are expensed through cost of goods sold over the course of inventory turns and included in Cost of sales in the Condensed Consolidated Statements of Operations.
The Company’s contract for these services expiresexpired on June 30, 2020 and services rendered to the Company under this contract ceased on April 20, 2020.
NOTE 11. SEGMENT REPORTING
The Company’s operating segments consist of U.S. eCommerce, Outfitters, Europe eCommerce, Japan eCommerce and Retail. The Company determined that each of the operating segments have similar economic and other qualitative characteristics thus the results of the operating segments are aggregated into one1 reportable external segment, consistent with the Company’s multi-channel business approach.
Net revenue is presented by product channel in the following table:
|
| 13 Weeks Ended |
|
| 13 Weeks Ended |
|
| 26 Week Period Ended |
| |||||||||||||||
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
eCommerce |
| $ | 181,541 |
|
| $ | 208,902 |
|
| $ | 270,201 |
|
| $ | 218,651 |
|
| $ | 451,743 |
|
| $ | 427,552 |
|
Outfitters |
|
| 31,799 |
|
|
| 43,083 |
|
|
| 37,416 |
|
|
| 65,452 |
|
|
| 69,215 |
|
|
| 108,536 |
|
Retail |
|
| 3,668 |
|
|
| 10,448 |
|
|
| 4,466 |
|
|
| 14,164 |
|
|
| 8,133 |
|
|
| 24,612 |
|
Total net revenue |
| $ | 217,008 |
|
| $ | 262,433 |
|
| $ | 312,083 |
|
| $ | 298,267 |
|
| $ | 529,091 |
|
| $ | 560,700 |
|
14
NOTE 12. 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 eCommerce and Outfitters channels is when the merchandise is expected to be received by the customer and for the Retail channel is at the time of sale in the store. The Company recognizes revenue, including shipping and handling fees billed to customers, in the amount expected to be received when control of the Company's products transfers to customers, and is presented net of various forms of promotions, which range from contractually-fixed percentage price reductions to sales returns, discounts, and other incentives that may vary in amount. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available.
The Company's revenue is disaggregated by product channel and geographic location. Revenue by product channel is presented in Note 11, Segment Reporting. Revenue by geographic location was:
|
| 13 Weeks Ended |
|
| 13 Weeks Ended |
|
| 26 Week Period Ended |
| |||||||||||||||
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 172,746 |
|
| $ | 216,873 |
|
| $ | 264,162 |
|
| $ | 252,975 |
|
| $ | 436,906 |
|
| $ | 469,944 |
|
Europe |
|
| 30,376 |
|
|
| 30,826 |
|
|
| 32,375 |
|
|
| 30,296 |
|
|
| 62,775 |
|
|
| 61,025 |
|
Asia |
|
| 11,348 |
|
|
| 11,844 |
|
|
| 12,304 |
|
|
| 11,794 |
|
|
| 23,653 |
|
|
| 23,638 |
|
Other |
|
| 2,538 |
|
|
| 2,890 |
|
|
| 3,242 |
|
|
| 3,202 |
|
|
| 5,757 |
|
|
| 6,093 |
|
Total Net revenue |
| $ | 217,008 |
|
| $ | 262,433 |
|
| $ | 312,083 |
|
| $ | 298,267 |
|
| $ | 529,091 |
|
| $ | 560,700 |
|
Contract Liabilities
Contract liabilities consist of payments received in advance of the transfer of control to the customer. As products are delivered and control transfers, the Company recognizes the deferred revenue in Net revenue in the Condensed Consolidated Statements of Operations. The following table summarizes the deferred revenue associated with payments received in advance of the transfer of control to the customer, which is reported in Other current liabilities in the Condensed Consolidated Balance Sheets, as
15
well as amounts recognized through Net revenue for each period presented. The remainder of deferred revenue as of May 1,July 31, 2020 is expected to be recognized in Net revenue in the fiscal quarter ending July 31,October 30, 2020, as products are delivered to customers.
|
| 13 Weeks Ended |
|
| 13 Weeks Ended |
|
| 26 Week Period Ended |
| |||||||||||||||
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||
Deferred Revenue Beginning of Period |
| $ | 8,096 |
|
| $ | 9,051 |
|
| $ | 15,896 |
|
| $ | 10,199 |
|
| $ | 8,096 |
|
| $ | 9,051 |
|
Deferred Revenue Recognized in Period |
|
| (8,096 | ) |
|
| (9,051 | ) |
|
| (15,896 | ) |
|
| (10,199 | ) |
|
| (8,096 | ) |
|
| (9,051 | ) |
Revenue Deferred in Period |
|
| 15,896 |
|
|
| 10,199 |
|
|
| 11,901 |
|
|
| 9,411 |
|
|
| 11,901 |
|
|
| 9,411 |
|
Deferred Revenue End of Period |
| $ | 15,896 |
|
| $ | 10,199 |
|
| $ | 11,901 |
|
| $ | 9,411 |
|
| $ | 11,901 |
|
| $ | 9,411 |
|
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 liability is estimated based on expected breakage that considers historical patterns of redemption. The following table provides the reconciliation of the contract liability related to gift cards:
|
| 13 Weeks Ended |
|
| 13 Weeks Ended |
|
| 26 Week Period Ended |
| |||||||||||||||
(in thousands) |
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||
Balance as of Beginning of Period |
| $ | 22,592 |
|
| $ | 18,191 |
|
| $ | 23,202 |
|
| $ | 20,010 |
|
| $ | 22,592 |
|
| $ | 18,191 |
|
Gift cards sold |
|
| 8,831 |
|
|
| 15,117 |
|
|
| 11,104 |
|
|
| 13,907 |
|
|
| 19,935 |
|
|
| 29,024 |
|
Gift cards redeemed |
|
| (8,127 | ) |
|
| (13,033 | ) |
|
| (10,587 | ) |
|
| (13,047 | ) |
|
| (18,714 | ) |
|
| (26,080 | ) |
Gift card breakage |
|
| (94 | ) |
|
| (265 | ) |
|
| (68 | ) |
|
| (427 | ) |
|
| (162 | ) |
|
| (692 | ) |
Balance as of End of Period |
| $ | 23,202 |
|
| $ | 20,010 |
|
| $ | 23,651 |
|
| $ | 20,443 |
|
| $ | 23,651 |
|
| $ | 20,443 |
|
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 May 1,July 31, 2020, May 3,August 2, 2019 and January 31, 2020, $16.7$23.2 million, $17.3$18.5 million and $21.6 million, respectively, of refund liabilities, primarily
15
associated with product returns, wereare reported in Other current liabilities in the Condensed Consolidated Balance Sheets. An asset for product returns is recorded in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.sheets.
NOTE 13. SUBSEQUENT EVENTS
Updates to Debt Obligations
On September 9, 2020, the Company entered into a Term Loan Credit Agreement by and among the Company, Fortress Credit Corp, as Administrative Agent and Collateral Agent and other Lender Parties thereto (the “Term Loan Credit Agreement”). Pursuant to the Term Loan Credit Agreement, the Company received a loan of $275.0 million. The proceeds from the Term Loan Credit Agreement, along with $125.0 million of borrowings under the ABL Facility, were used to repay all of the indebtedness under the Term Loan Facility, as well as fees and expenses associated with the financing. As such, the amounts previously outstanding under the Term Loan Facility as of July 31, 2020 have been classified as long-term on the Condensed Consolidated Balance Sheets since it has been refinanced on a long-term basis subsequent to the balance sheet date with proceeds from the Term Loan Credit Agreement and borrowings under the ABL Facility.
Also, on September 9, 2020, upon the repayment of all indebtedness under the Term Loan Facility, the Second Amendment to the ABL Facility, by and among Wells Fargo Bank, National Association (as Agent, L/C Issuer and Swing Line Lender) and each of the Company’s existing lenders under the ABL Facility, dated August 12, 2020, became effective. The Second Amendment to the ABL Facility amends the ABL Facility. Borrowings under the ABL Facility as of September 9, 2020 were $125.0 million.
Term Loan Credit Agreement
On September 9, 2020, the Company entered into the Term Loan Credit Agreement with Fortress Credit Corp. which provides a term loan facility of $275.0 million.
Maturity; Amortization and Prepayments
The Term Loan Credit Agreement will mature on September 9, 2025, will amortize at a rate equal to 1.25% per quarter, and is subject to mandatory prepayments in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 75% depending on the Company’s total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan may not be voluntarily prepaid during the first two years of its term. A prepayment premium is applicable to voluntary prepayments and certain mandatory prepayments made prior to the fourth anniversary of the closing date of the Term Loan Credit Agreement.
Guarantees; Security
Pursuant to a Term Loan Guaranty and Security Agreement, dated September 9, 2020, all obligations under the Term Loan Credit Agreement are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The Term Loan Credit Agreement is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The Term Loan Credit Agreement is also secured by a second priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory, with certain exceptions.
Interest; Fees
The interest rates per annum applicable to the loans under the Term Loan Credit Agreement are based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) an adjusted LIBOR (with a minimum rate of 1%) plus 9.75%, or (2) an alternative base rate plus 8.75%.
An upfront fee equal to 3.00% of the principal amount of the Term Loan Credit Agreement was paid upon funding of the Term Loan Credit Agreement. Customary agency fees are payable annually.
Representations and Warranties; Covenants
The Term Loan Credit Agreement contains various representations and warranties and restrictive covenants that, among other things and subject to specified exceptions, restricts the Company’s and its subsidiaries’ ability to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business.
16
The Term Loan Credit Agreement is subject to certain financial covenants, including a quarterly maximum total leverage ratio test, a weekly minimum liquidity test and an annual maximum capital expenditure amount.
16
The Term Loan Credit Agreement contains 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 Term Loan Credit Agreement includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross default to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.
Second Amendment to the ABL Facility
On August 12, 2020 Lands’ End entered into the Second Amendment to the ABL Facility which provides for an increase in the maximum borrowings under the ABL Facility by $75.0 million to $275.0 million. As noted above, the Second Amendment to the ABL Facility became effective on September 9, 2020.
As amended by the Second Amendment to the ABL Facility, the borrowing margin under the ABL Facility is subject to adjustment based on the average daily total loans outstanding under the ABL Facility for the preceding fiscal quarter. For LIBOR loans, the interest rate will be LIBOR (subject to an interest rate floor of 0.75%) plus a borrowing margin which will be, where the average daily total loans outstanding for the previous quarter are (i) less than $50.0 million, 1.75%, (ii) equal to or greater than $50.0 million but less than $100.0 million, 2.00%, (iii) equal to or greater than $100.0 million but less than $200.0 million, 2.25%, and (iv) greater than $200.0 million, 3.50%. For Base Rate loans, the borrowing margin will be, where the average daily total loans outstanding for the previous quarter are (i) less than $50.0 million for the previous quarter, 1.00%, (ii) equal to or greater than $50.0 million but less than $100.0 million, 1.25%, (iii) equal to or greater than $100.0 million but less than $200.0 million, 1.50%, and (iv) greater than $200.0 million, 2.75%.
Additionally, as amended by the Second Amendment to the ABL Facility, if average daily total loans outstanding for the previous quarter are (i) less than 50% of the lesser of (a) the aggregate commitments and (b) the borrowing base (the “Loan Cap”), the commitment fee percentage will equal 0.375% and (ii) equal to or greater than 50% of the Loan Cap, the commitment fee percentage will equal 0.25%. The commitment fee is computed as the applicable percentage multiplied by the actual daily amount by which the aggregate commitments exceed the total outstanding loans and letter of credit obligations in the preceding quarter.
The Second Amendment to the ABL Facility added a cash maintenance provision to the ABL Facility, which applies a limit of $75.0 million on the amount of cash and cash equivalents (subject to certain exceptions) that the Company may hold when outstanding loans under the ABL Facility are equal to or exceed $125.0 million.
17
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 January 31, 2020, the risk factors contained in our Current Report on Form 8-K dated June 2, 2020, 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 Facility -Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders
• | ABL Facility -Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders |
CARES Act – The Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020.
• | CARES Act – The Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020. |
Company Operated stores - Lands' End retail stores in the Retail channel
• | Company Operated stores - Lands' End retail stores in the Retail channel |
Debt Facilities - Collectively, the ABL Facility and the Term Loan Facility
• | Debt Facilities - Collectively, the ABL Facility and the Term Loan Facility |
EOM – Enterprise order management software solutions
• | EOM – Enterprise order management software solutions |
ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
• | ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert |
First Quarter 2020 – The 13 weeks ended May 1, 2020
• | First Quarter 2020 – The 13 weeks ended May 1, 2020 |
First Quarter 2019 - The 13 weeks ended May 3, 2019
• | First Quarter 2019 - The 13 weeks ended May 3, 2019 |
Fiscal 2020 – The 52 weeks ending January 29, 2021
• | Fiscal 2020 – The 52 weeks ending January 29, 2021 |
Fiscal 2019 - The 52 weeks ended January 31, 2020
• | Fiscal 2019 - The 52 weeks ended January 31, 2020 |
GAAP - Accounting principles generally accepted in the United States
• | Fiscal 2018 – The 52 weeks ended February 1, 2019 |
Lands' End Shops at Sears - Lands' End shops operated within Sears stores
• | GAAP - Accounting principles generally accepted in the United States |
LIBOR - London inter-bank offered rate
• | Lands' End Shops at Sears - Lands' End shops operated within Sears stores |
Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries
• | LIBOR - London inter-bank offered rate |
SEC - United States Securities and Exchange Commission
• | Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries |
Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
• | SEC - United States Securities and Exchange Commission |
Term Loan Facility - Term loan credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
• | Second Quarter 2020 – the 13 weeks ended July 31, 2020 |
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
• | Second Quarter 2019 – the 13 weeks ended August 2, 2019 |
Year-to-Date 2020 - The 13 weeks ended May 1, 2020
• | 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 |
Year-to-Date 2019 - The 13 weeks ended May 3, 2019
• | Third Quarter 2020 – the 13 weeks ending October 30, 2020 |
1718
• | 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 2020 - The 26 weeks ended July 31, 2020 |
• | Year-to-Date 2019 - The 26 weeks ended August 2, 2019 |
Executive Overview
Description of the Company
Lands' End is a leading uni-channel retailer of casual clothing, accessories, footwear and home products. Operating out of America’s heartland, we believe our vision and values make a strong connection with our core customers. We offer products online at www.landsend.com, 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 women, men, kids and the home.
Lands’ End was founded in 1963 by Gary Comer and his partners to sell sailboat hardware and equipment by catalog. While our product focus has shifted significantly over the years, we have continued to adhere to our founder’s motto as one of our guiding principles: "Take care of the customer, take care of the employee and the rest will take care of itself."
Lands’ End seeks to provide a common customer experience regardless of whether our customers are interacting with us on our company websites, on third party marketplaces, at Company Operated stores or through other distribution outlets. We have one external reportable segment and identify our operating segments according to how our business activities are managed and evaluated. Our operating segments consist of U.S. eCommerce, Retail, Lands' End Outfitters ("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 results of our operating segments are aggregated into one external reportable segment.
Lands' End's product channels are eCommerce, Retail and Outfitters. eCommerce offers products through the Company's eCommerce websites, third party online marketplaces and direct mail catalogs. Retail sells products and services through Company Operated stores. Outfitters sells products to end consumers, located primarily in the United States, through negotiated arrangements with client organizations to make specific styles or embroidered products available to members of client organizations, as well as through the Company's eCommerce websites and direct mail catalogs.
Impact of the COVID-19 Pandemic
Over the past few months, we have seen the profound impact that COVID-19 pandemic is having on human health, the global economy and society at large. Lands’ End has been actively addressing the COVID-19 pandemic and itsimpact globally, working to mitigate the potential impacts to our employees, customers and business. The impact of the COVID-19 pandemic and measures to prevent its spread are affecting our business in a number of ways.
We continue to believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of this global pandemic or its ultimate impact on the global economy and our business and results.
Health and Safety of our People and Consumers
From the beginning of the COVID-19 pandemic, our priority has been the safety of our employees and customers. On March 16, 2020, we temporarily closed our 26 U.S. stores. These stores remained closed atreopened during Second Quarter 2020. Additionally, the end of First Quarter 2020 with a phased reopeningCompany opened four new stores in Second Quarter 2020. Additionally,Due to the COVID-19 pandemic we have implemented extra precautions atin our offices and distribution centers. These precautions were developed in line with guidance from global, federal and state health authorities, including work-from-home policies, social distancing, thermal scanning and partitions in our facilities.
Customer Demand
In the Second Quarter 2020, customer demand in the eCommerce channel rebounded from the decline experienced in First Quarter 2020. The eCommerce channel delivered a double-digit revenue increase and consequently Year-to-Date 2020 eCommerce revenue has increased compared to prior year. Year-to-Date 2020 revenue in the Outfitters and Retail channels is lower than Year-to-Date 2019 due to the reduction in customer demand across all operating segments decreased.caused by the COVID-19 pandemic. Retail revenue also declined due to lengthy store closures. The ultimate timing and impact of customer demand levels will depend on the duration and scope of the COVID-19 pandemic, overall economic conditions and consumer preferences.
Supply Chain19
During First Quarter 2020, we didSupply Chain
We have not experience anyexperienced significant disruption of our supply chain. However, in responsechain disruptions related to decreased demand, future orders were reduced and some existing product was repurposed.the COVID-19 pandemic. We continue to place a priority on business continuity and contingency planning, including for potential extended closures of any key facilities or disruptions related to our key suppliers that might arise related to the COVID-19 pandemic.planning. We may experience additional disruptions in our supply chain as the pandemic continues, though we cannot reasonably estimate the potential impact or timing of those events, and we may not be able to mitigate such impact.
18
Expense Reduction
Beginning in First Quarter 2020, we took the following actions to reduce overall expense as a response to decreased customer demand due to the COVID-19 pandemic:
Temporarily reduced base salaries, including a reduction of 50% in the base salary of our Chief Executive Officer and President, 20% reductions in the base salaries of our other senior management members and scaled salary reductions throughout the Company.
• | Temporarily reduced base salaries, including a reduction of 50% in the base salary of our Chief Executive Officer and President, 20% reduction in the base salaries of our other senior management members and scaled salary reductions throughout the Company. |
Furlough of approximately 70% of corporate employees and nearly 100% of retail employees beginning on March 28, 2020. Some personnel returned to work beginning April 13, 2020, however approximately 49% of the workforce remained furloughed at the end of First Quarter 2020.
• | Furlough of approximately 70% of corporate employees and nearly 100% of retail employees from March 28, 2020 to April 13, 2020, with approximately 49% of the workforce remaining furloughed at the end of First Quarter 2020. |
Fiscal 2020 merit increases were eliminated.
• | Permanent reduction of approximately 10% of corporate staff during Second Quarter 2020, with all remaining furloughed personnel returning to work by mid-Second Quarter 2020. The Company incurred total severance costs of approximately $3.0 million related to the reduction of corporate staff which was recorded in Other operating expense (income), net in the Condensed Consolidated Statements of Operations. As of July 31, 2020 approximately $1.2 million of the severance costs had yet to be paid. |
The Board of Directors compensation was temporarily reduced.
• | Fiscal 2020 merit increases were eliminated. |
The Company's 401(k) match was temporarily suspended.
• | The Board of Directors compensation was temporarily reduced. |
Planned capital expenditures for Fiscal 2020 were reduced by approximately 50%.
• | The Company's 401(k) match was temporarily suspended. |
Other discretionary operating expenses were significantly reduced.
• | Other discretionary operating expenses were significantly reduced. |
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. The COVID-19 pandemic has had a materialan impact on our Year-to-Date 2020 results for First Quarter 2020 and we expect it to continue to have an adverse impact on our results. As such, this interim period, as well as upcoming periods, may not be comparable to past performance or indicative of future performance.performance
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 owned 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 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 revenue and earnings for the year during our fourth fiscal quarter. We generated 37.9% and 34.6% of our net revenue in the fourth fiscal quarter of Fiscal 2019 and Fiscal 2018 respectively. 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 quarters of the fiscal year as inventory builds to support peak shipping/selling periods and, accordingly, typically decrease during the fourth quarter of the fiscal year as inventory is shipped/sold. Cash provided by operating activities is typically higher in the fourth quarter of the fiscal year due to reduced working capital requirements during that period.
Results of Operations
We initially delivered strong performance across all segments with revenue increasing 11.1% in February 2020 as compared to the prior year. As the COVID-19 pandemic began to impact the consumer in mid-March 2020, all operating segments were challenged.
Global eCommerce saw a significant drop in revenue at the onset of the COVID-19 pandemic. However, revenue rebounded in April 2020 and continued to recover following First Quarter 2020, with May 2020 accelerating to double digit revenue growth versus prior year.
Within Outfitters, we successfully completed the American Airlines uniform launch during First Quarter 2020. Outfitters is expected to be slower to recover from the impacts of the COVID-19 pandemic. Outfitters is split approximately evenly among
1920
national accounts, small and mid-size businesses (“SMB”), and school uniforms. National accounts, with the majority in the travel industry, are expected to take longer to recover due to the decline in travel related to the COVID-19 pandemic. SMB is expected to recover at varying rates, depending on the industries served. Assuming the schools reopen in the fall, we would expect the school uniform business to recover to prior year levels.
Company Operated stores achieved comparable same store sales growthResults of 14.2% in February before temporarily closing all U.S. Company Operated stores on March 16, 2020 due to the COVID-19 pandemic. The Company initiated and completed a phased reopening of its stores in Second Quarter 2020. Operations
The following table sets forth, for the periods indicated, selected income statement data:
|
| 13 Weeks Ended |
|
| 13 Week Period Ended |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| May 1, 2020 |
|
| May 3, 2019 |
|
| July 31, 2020 |
|
| August 2, 2019 |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) |
|
Depreciation and amortization
Net
We recorded Net
21 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:
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in three channels: eCommerce, Outfitters, and Retail. A key measure in the evaluation of our business is revenue performance by 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 eCommerce and Outfitters channels we use Net revenue. For our Retail 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 when it has been open for at least 14 months and selling square footage has not changed by 15% or more within the past year. Online sales and sales generated through our in-store web portal are considered revenue in our eCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis
Net Revenue
Net revenue for
eCommerce Net revenue was Outfitters Net revenue was $37.4 million for Second Quarter 2020, a decrease of
Retail Net revenue was
Gross Profit
Gross profit
Selling and Administrative Expenses
Selling and administrative expenses decreased
Depreciation and Amortization
Depreciation and amortization expense was
Other Operating Expense
Other operating expense, net was
Operating Income/Loss
As a result of the above factors, Operating 23 Interest Expense Interest expense was $4.9 million in Second Quarter 2020 compared to $6.2 million in Second Quarter 2019, driven by lower interest rates. Other Expense/ Income Other expense was $1.3 million in Second Quarter 2020 compared to Other income of $0.6 million in Second Quarter 2019. Income Tax Benefit We recorded tax expense at an overall effective tax rate of 11.5% for Second Quarter 2020. This rate reflects the tax expense generated from changes in estimates related to improvement in Company performance and revised outlook for Fiscal 2020 as a result of the COVID-19 pandemic. We recorded an income tax benefit of 51.3% for Second Quarter 2019. This rate reflects the tax benefits resulting from the change in status of various foreign jurisdictions. Net Income/Loss As a result of the above factors, Net income was $4.4 million and diluted earnings per share was $0.13 in Second Quarter 2020 compared with a Net loss of $3.0 million and diluted loss per share of $0.09 in Second Quarter 2019. Adjusted EBITDA As a result of the above factors, Adjusted EBITDA increased $17.1 million to $23.9 million in Second Quarter 2020 as compared to $6.8 million in Second Quarter 2019. Year-to-Date 2020 compared with Year-to-Date 2019 Net Revenue Net revenue for Year-to-Date 2020 was $529.1 million, compared with $560.7 million in the comparable period of the prior year, a decrease of $31.6 million, or 5.6%. eCommerce Net revenue was $451.7 million for Year-to-Date 2020, an increase of $24.2 million or 5.7%, from the comparable period of the prior year. The increase was primarily driven by customer demand for key items and strong new customer acquisition both of which benefitted from the more prevalent work from home lifestyle. Outfitters Net revenue was $69.2 million for Year-to-Date 2020 a decrease of $39.3 million or 36.2%, from the comparable period of the prior year. The decrease in Retail Net revenue was $8.1 million in Year-to-Date 2020, a decrease of $16.5 million or 67.0%, from the comparable period of the prior year. This decrease was driven by the closure of all Lands' End Shops at Sears locations and, due to the COVID-19 pandemic, the temporary closure of U.S. retail stores on March 16, 2020. As of July 31, 2020 all 26 U.S. retail stores had reopened. On July 31, 2020, the Company had 30 U.S. Company Operated stores, which includes four new stores opened within the Second Quarter 2020, compared with 21 U.S. Company Operated stores on August 2, 2019. Gross Profit Gross profit decreased $19.4 million to $229.6 million primarily due to the COVID-19 pandemic. Gross margin decreased approximately 100 basis points to 43.4%, for Year-to-Date 2020, compared with 44.4%, for Year-to-Date 2019, primarily driven by promotional activity throughout the industry and liquidation of seasonal inventory as retail stores reopened, partially offset by more disciplined promotional strategies and continued use of data analytics. Selling and Administrative Expenses Selling and administrative expenses decreased $21.8 million to $217.3 million, or 41.1% of total Net revenue, in Year-to-Date 2020, compared with $239.1 million, or 42.6% of Net revenue, in Year-to-Date 2019. This 150 basis point decrease was primarily due to strong controls to manage non-essential operating expenses and structural costs in response to the COVID-19 pandemic. 24 Depreciation and Amortization Depreciation and amortization expense was $18.2 million in Year-to-Date 2020, an increase of $3.1 million, compared with $15.0 million in Year-to-Date 2019. The increase was primarily attributable to depreciation associated with our EOM system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores. Other Operating Expense Other operating expense was $7.7 million in Year-to-Date 2020 compared to $0.1 million in Year-to-Date 2019. This increase was due to impairment of goodwill and long-lived assets as well as the Operating Loss As a result of the
Interest Expense
Interest expense was
Other Expense/Income, Net
Other
Income Tax
We recorded
Net Loss
As a result of the above factors, Net loss was
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. As of
The following information relates to the Term Loan Facility and ABL Facility as each was in effect at July 31, 2020. 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. The Term Loan Facility
25
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. During First Quarter 2020, the Company increased capacity under the ABL Facility by $25.0 million, so that maximum borrowings
On April 4, 2014, Lands’ End entered into the Term Loan Facility of $515.0 million, the proceeds of which 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
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. The ABL Facility matures on November 16,
Guarantees; Security
All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility is also 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 ABL Facility is also secured by a second priority security interest in the same collateral.
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 Facility is subject to adjustment based on the average excess availability under the ABL Facility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% for the ABL Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facility.
Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees also include (i) commitment fees in an amount equal to 0.25% of the daily unused portions of the ABL Facility 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 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 26 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
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
Cash Flows from Investing Activities
Net cash used in investing activities was
Cash Flows from Financing Activities
Contractual Obligations and Off-Balance-Sheet Arrangements
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into the ABL Facility, which
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Goodwill and Trade Name Impairment Analysis
The duration and severity of the COVID-19 pandemic could result in additional future impairment charges for goodwill and the trade name indefinite-lived intangible asset. We considered the COVID-19 pandemic to be a triggering event for goodwill in First Quarter 2020 for the Outfitters and Japan eCommerce reporting units,
The Company concluded that recent events did not result in a triggering event for trade name
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended January 31,
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.
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,
ITEM 3. QUANTITATIVE AND
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
We are subject to interest rate risk with the Term Loan Facility and the ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $3.8 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn (as of July 31, 2020) to a principal amount equal to $200.0 million, each one percentage point change in interest rates would result in a $2.0 million change in our annual cash interest expense.
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
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
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
For a description of our legal proceedings, see Note 9, Commitments and Contingencies in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Other than as set forth in the Company’s Current Report on Form 8-K dated June 2, 2020, there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020, filed with the SEC on March 23, 2020. 31
The following documents are filed as exhibits to this report:
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:
33
|
|
| % of Net revenue |
|
| $’s |
|
| % of Net revenue |
|
|
Depreciation and amortization
Net
We recorded Net
21 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:
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in three channels: eCommerce, Outfitters, and Retail. A key measure in the evaluation of our business is revenue performance by 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 eCommerce and Outfitters channels we use Net revenue. For our Retail 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 when it has been open for at least 14 months and selling square footage has not changed by 15% or more within the past year. Online sales and sales generated through our in-store web portal are considered revenue in our eCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis
Net Revenue
Net revenue for
eCommerce Net revenue was Outfitters Net revenue was $37.4 million for Second Quarter 2020, a decrease of
Retail Net revenue was
Gross Profit
Gross profit
Selling and Administrative Expenses
Selling and administrative expenses decreased
Depreciation and Amortization
Depreciation and amortization expense was
Other Operating Expense
Other operating expense, net was
Operating Income/Loss
As a result of the above factors, Operating 23 Interest Expense Interest expense was $4.9 million in Second Quarter 2020 compared to $6.2 million in Second Quarter 2019, driven by lower interest rates. Other Expense/ Income Other expense was $1.3 million in Second Quarter 2020 compared to Other income of $0.6 million in Second Quarter 2019. Income Tax Benefit We recorded tax expense at an overall effective tax rate of 11.5% for Second Quarter 2020. This rate reflects the tax expense generated from changes in estimates related to improvement in Company performance and revised outlook for Fiscal 2020 as a result of the COVID-19 pandemic. We recorded an income tax benefit of 51.3% for Second Quarter 2019. This rate reflects the tax benefits resulting from the change in status of various foreign jurisdictions. Net Income/Loss As a result of the above factors, Net income was $4.4 million and diluted earnings per share was $0.13 in Second Quarter 2020 compared with a Net loss of $3.0 million and diluted loss per share of $0.09 in Second Quarter 2019. Adjusted EBITDA As a result of the above factors, Adjusted EBITDA increased $17.1 million to $23.9 million in Second Quarter 2020 as compared to $6.8 million in Second Quarter 2019. Year-to-Date 2020 compared with Year-to-Date 2019 Net Revenue Net revenue for Year-to-Date 2020 was $529.1 million, compared with $560.7 million in the comparable period of the prior year, a decrease of $31.6 million, or 5.6%. eCommerce Net revenue was $451.7 million for Year-to-Date 2020, an increase of $24.2 million or 5.7%, from the comparable period of the prior year. The increase was primarily driven by customer demand for key items and strong new customer acquisition both of which benefitted from the more prevalent work from home lifestyle. Outfitters Net revenue was $69.2 million for Year-to-Date 2020 a decrease of $39.3 million or 36.2%, from the comparable period of the prior year. The decrease in Retail Net revenue was $8.1 million in Year-to-Date 2020, a decrease of $16.5 million or 67.0%, from the comparable period of the prior year. This decrease was driven by the closure of all Lands' End Shops at Sears locations and, due to the COVID-19 pandemic, the temporary closure of U.S. retail stores on March 16, 2020. As of July 31, 2020 all 26 U.S. retail stores had reopened. On July 31, 2020, the Company had 30 U.S. Company Operated stores, which includes four new stores opened within the Second Quarter 2020, compared with 21 U.S. Company Operated stores on August 2, 2019. Gross Profit Gross profit decreased $19.4 million to $229.6 million primarily due to the COVID-19 pandemic. Gross margin decreased approximately 100 basis points to 43.4%, for Year-to-Date 2020, compared with 44.4%, for Year-to-Date 2019, primarily driven by promotional activity throughout the industry and liquidation of seasonal inventory as retail stores reopened, partially offset by more disciplined promotional strategies and continued use of data analytics. Selling and Administrative Expenses Selling and administrative expenses decreased $21.8 million to $217.3 million, or 41.1% of total Net revenue, in Year-to-Date 2020, compared with $239.1 million, or 42.6% of Net revenue, in Year-to-Date 2019. This 150 basis point decrease was primarily due to strong controls to manage non-essential operating expenses and structural costs in response to the COVID-19 pandemic. 24 Depreciation and Amortization Depreciation and amortization expense was $18.2 million in Year-to-Date 2020, an increase of $3.1 million, compared with $15.0 million in Year-to-Date 2019. The increase was primarily attributable to depreciation associated with our EOM system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores. Other Operating Expense Other operating expense was $7.7 million in Year-to-Date 2020 compared to $0.1 million in Year-to-Date 2019. This increase was due to impairment of goodwill and long-lived assets as well as the Operating Loss As a result of the
Interest Expense
Interest expense was
Other Expense/Income, Net
Other
Income Tax
We recorded
Net Loss
As a result of the above factors, Net loss was
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. As of
The following information relates to the Term Loan Facility and ABL Facility as each was in effect at July 31, 2020. 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. The Term Loan Facility
25
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. During First Quarter 2020, the Company increased capacity under the ABL Facility by $25.0 million, so that maximum borrowings
On April 4, 2014, Lands’ End entered into the Term Loan Facility of $515.0 million, the proceeds of which 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
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. The ABL Facility matures on November 16,
Guarantees; Security
All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility is also 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 ABL Facility is also secured by a second priority security interest in the same collateral.
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 Facility is subject to adjustment based on the average excess availability under the ABL Facility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% for the ABL Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facility.
Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees also include (i) commitment fees in an amount equal to 0.25% of the daily unused portions of the ABL Facility 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 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 26 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
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
Cash Flows from Investing Activities
Net cash used in investing activities was
Cash Flows from Financing Activities
Contractual Obligations and Off-Balance-Sheet Arrangements
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into the ABL Facility, which
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Goodwill and Trade Name Impairment Analysis
The duration and severity of the COVID-19 pandemic could result in additional future impairment charges for goodwill and the trade name indefinite-lived intangible asset. We considered the COVID-19 pandemic to be a triggering event for goodwill in First Quarter 2020 for the Outfitters and Japan eCommerce reporting units,
The Company concluded that recent events did not result in a triggering event for trade name
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended January 31,
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.
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,
ITEM 3. QUANTITATIVE AND
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
We are subject to interest rate risk with the Term Loan Facility and the ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $3.8 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn (as of July 31, 2020) to a principal amount equal to $200.0 million, each one percentage point change in interest rates would result in a $2.0 million change in our annual cash interest expense.
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
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
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
For a description of our legal proceedings, see Note 9, Commitments and Contingencies in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Other than as set forth in the Company’s Current Report on Form 8-K dated June 2, 2020, there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020, filed with the SEC on March 23, 2020. 31
The following documents are filed as exhibits to this report:
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:
33
|
|
| % of Net revenue |
|
| $’s |
|
| % of Net revenue |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net revenue |
| $ | 217,008 |
|
|
| 100.0 | % |
| $ | 262,433 |
|
|
| 100.0 | % |
| $ | 312,083 |
|
|
| 100.0 | % |
| $ | 298,267 |
|
|
| 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of sales (excluding depreciation and amortization) |
|
| 122,853 |
|
|
| 56.6 | % |
|
| 142,559 |
|
|
| 54.3 | % |
|
| 176,661 |
|
|
| 56.6 | % |
|
| 169,182 |
|
|
| 56.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross profit |
|
| 94,155 |
|
|
| 43.4 | % |
|
| 119,874 |
|
|
| 45.7 | % |
|
| 135,422 |
|
|
| 43.4 | % |
|
| 129,085 |
|
|
| 43.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Selling and administrative |
|
| 105,796 |
|
|
| 48.8 | % |
|
| 116,844 |
|
|
| 44.5 | % |
|
| 111,478 |
|
|
| 35.7 | % |
|
| 122,260 |
|
|
| 41.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
|
| 8,786 |
|
|
| 4.0 | % |
|
| 7,618 |
|
|
| 2.9 | % |
|
| 9,378 |
|
|
| 3.0 | % |
|
| 7,408 |
|
|
| 2.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other operating expense, net |
|
| 4,285 |
|
|
| 2.0 | % |
|
| 148 |
|
|
| 0.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating loss |
|
| (24,712 | ) |
|
| (11.4 | )% |
|
| (4,736 | ) |
|
| (1.8 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other operating expense (income), net |
|
| 3,373 |
|
|
| 1.1 | % |
|
| (22 | ) |
|
| (0.0 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating income (loss) |
|
| 11,193 |
|
|
| 3.6 | % |
|
| (561 | ) |
|
| (0.2 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense |
|
| 5,311 |
|
|
| 2.4 | % |
|
| 7,834 |
|
|
| 3.0 | % |
|
| 4,916 |
|
|
| 1.6 | % |
|
| 6,235 |
|
|
| 2.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income, net |
|
| (173 | ) |
|
| (0.1 | )% |
|
| (867 | ) |
|
| (0.3 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss before income taxes |
|
| (29,850 | ) |
|
| (13.8 | )% |
|
| (11,703 | ) |
|
| (4.5 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax benefit |
|
| (9,207 | ) |
|
| (4.2 | )% |
|
| (4,885 | ) |
|
| (1.9 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NET LOSS |
| $ | (20,643 | ) |
|
| (9.5 | )% |
| $ | (6,818 | ) |
|
| (2.6 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other expense (income), net |
|
| 1,333 |
|
|
| 0.4 | % |
|
| (608 | ) |
|
| (0.2 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes |
|
| 4,944 |
|
|
| 1.6 | % |
|
| (6,188 | ) |
|
| (2.1 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) |
|
| 568 |
|
|
| 0.2 | % |
|
| (3,174 | ) |
|
| (1.1 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NET INCOME (LOSS) |
| $ | 4,376 |
|
|
| 1.4 | % |
| $ | (3,014 | ) |
|
| (1.0 | )% |
|
| 26 Week Period Ended |
| |||||||||||||
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||||||
(in thousands) |
| $'s |
|
| % of Net revenue |
|
| $’s |
|
| % of Net revenue |
| ||||
Net revenue |
| $ | 529,091 |
|
|
| 100.0 | % |
| $ | 560,700 |
|
|
| 100.0 | % |
Cost of sales (excluding depreciation and amortization) |
|
| 299,514 |
|
|
| 56.6 | % |
|
| 311,741 |
|
|
| 55.6 | % |
Gross profit |
|
| 229,577 |
|
|
| 43.4 | % |
|
| 248,959 |
|
|
| 44.4 | % |
Selling and administrative |
|
| 217,276 |
|
|
| 41.1 | % |
|
| 239,104 |
|
|
| 42.6 | % |
Depreciation and amortization |
|
| 18,164 |
|
|
| 3.4 | % |
|
| 15,026 |
|
|
| 2.7 | % |
Other operating expense, net |
|
| 7,656 |
|
|
| 1.4 | % |
|
| 126 |
|
|
| 0.0 | % |
Operating loss |
|
| (13,519 | ) |
|
| (2.6 | )% |
|
| (5,297 | ) |
|
| (0.9 | )% |
Interest expense |
|
| 10,227 |
|
|
| 1.9 | % |
|
| 14,069 |
|
|
| 2.5 | % |
Other expense (income), net |
|
| 1,160 |
|
|
| 0.2 | % |
|
| (1,475 | ) |
|
| (0.3 | )% |
Loss before income taxes |
|
| (24,906 | ) |
|
| (4.7 | )% |
|
| (17,891 | ) |
|
| (3.2 | )% |
Income tax benefit |
|
| (8,639 | ) |
|
| (1.6 | )% |
|
| (8,059 | ) |
|
| (1.4 | )% |
NET LOSS |
| $ | (16,267 | ) |
|
| (3.1 | )% |
| $ | (9,832 | ) |
|
| (1.8 | )% |
Depreciation and amortization isare 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 LossIncome (Loss) and Adjusted EBITDA
We recorded Net lossincome of $20.6$4.4 million in FirstSecond Quarter 2020 compared to Net loss of $6.8$3.0 million in the FirstSecond Quarter 2019. In addition to our Net income and Net 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 or Net loss appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit),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 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 ofseveral important cash and non-cash recurring items.
21
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
• | EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax. |
• | Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations. |
Other 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.
• | Corporate restructuring – corporate restructuring actions and activities including severance for the reduction in corporate staff, in the 13 weeks ended July 31, 2020 and the 26 weeks ended July 31, 2020 and August 2, 2019. |
• | Long-lived asset impairment – charge associated with the non-cash write-down of certain long-lived assets in the 13 weeks ended July 31, 2020. |
• | Goodwill and long-lived asset impairment - charge associated with the non-cash write-down of certain long-lived assets and goodwill in the 26 weeks ended July 31, 2020. |
• | Loss or gain on property and equipment - management considers the losses or gains on asset valuation to result from investing decisions rather than ongoing operations for the 13 weeks and 26 weeks ended July 31, 2020 and August 2, 2019. |
Corporate restructuring – exit costs associated with retail operations and other corporate restructuring actions and activities in Fiscal 2019.
20
Goodwill and long-lived asset impairment – charge associated with the non-cash write-down of certain long-lived assets and goodwill in Fiscal 2020.
|
| 13 Weeks Ended |
| |||||||||||||
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||||||
(in thousands) |
| $’s |
|
| % of Net revenue |
|
| $’s |
|
| % of Net revenue |
| ||||
Net income (loss) |
| $ | 4,376 |
|
|
| 1.4 | % |
| $ | (3,014 | ) |
|
| (1.0 | )% |
Income tax expense (benefit) |
|
| 568 |
|
|
| 0.2 | % |
|
| (3,174 | ) |
|
| (1.1 | )% |
Other expense (income), net |
|
| 1,333 |
|
|
| 0.4 | % |
|
| (608 | ) |
|
| (0.2 | )% |
Interest expense |
|
| 4,916 |
|
|
| 1.6 | % |
|
| 6,235 |
|
|
| 2.1 | % |
Operating income (loss) |
|
| 11,193 |
|
|
| 3.6 | % |
|
| (561 | ) |
|
| (0.2 | )% |
Depreciation and amortization |
|
| 9,378 |
|
|
| 3.0 | % |
|
| 7,408 |
|
|
| 2.5 | % |
Corporate restructuring |
|
| 2,925 |
|
|
| 0.9 | % |
|
| — |
|
|
| 0.0 | % |
Long-lived asset impairment |
|
| 400 |
|
|
| 0.1 | % |
|
| — |
|
|
| 0.0 | % |
Loss (gain) on property and equipment |
|
| 48 |
|
|
| 0.0 | % |
|
| (22 | ) |
|
| (0.0 | )% |
Adjusted EBITDA |
| $ | 23,944 |
|
|
| 7.7 | % |
| $ | 6,825 |
|
|
| 2.3 | % |
Loss (gain) on property and equipment - management considers the gains or losses on asset valuation to result from investing decisions rather than ongoing operations in Fiscal 2020 and Fiscal 2019.
|
| 13 Weeks Ended |
| |||||||||||||
|
| May 1, 2020 |
|
| May 3, 2019 |
| ||||||||||
(in thousands) |
| $’s |
|
| % of Net revenue |
|
| $’s |
|
| % of Net revenue |
| ||||
Net loss |
| $ | (20,643 | ) |
|
| (9.5 | )% |
| $ | (6,818 | ) |
|
| (2.6 | )% |
Income tax benefit |
|
| (9,207 | ) |
|
| (4.2 | )% |
|
| (4,885 | ) |
|
| (1.9 | )% |
Other income, net |
|
| (173 | ) |
|
| (0.1 | )% |
|
| (867 | ) |
|
| (0.3 | )% |
Interest expense |
|
| 5,311 |
|
|
| 2.4 | % |
|
| 7,834 |
|
|
| 3.0 | % |
Operating loss |
|
| (24,712 | ) |
|
| (11.4 | )% |
|
| (4,736 | ) |
|
| (1.8 | )% |
Depreciation and amortization |
|
| 8,786 |
|
|
| 4.0 | % |
|
| 7,618 |
|
|
| 2.9 | % |
Corporate restructuring |
|
| — |
|
|
| 0.0 | % |
|
| 203 |
|
|
| 0.1 | % |
Goodwill and long-lived asset impairment |
|
| 3,444 |
|
|
| 1.6 | % |
|
| — |
|
|
| 0.0 | % |
Loss (gain) on property and equipment |
|
| 842 |
|
|
| 0.4 | % |
|
| (55 | ) |
|
| (0.0 | )% |
Adjusted EBITDA |
| $ | (11,640 | ) |
|
| (5.4 | )% |
| $ | 3,030 |
|
|
| 1.2 | % |
|
| 26 Week Period Ended |
| |||||||||||||
|
| July 31, 2020 |
|
| August 2, 2019 |
| ||||||||||
(in thousands) |
| $’s |
|
| % of Net revenue |
|
| $’s |
|
| % of Net revenue |
| ||||
Net loss |
| $ | (16,267 | ) |
|
| (3.1 | )% |
| $ | (9,832 | ) |
|
| (1.8 | )% |
Income tax benefit |
|
| (8,639 | ) |
|
| (1.6 | )% |
|
| (8,059 | ) |
|
| (1.4 | )% |
Other income (loss), net |
|
| 1,160 |
|
|
| 0.2 | % |
|
| (1,475 | ) |
|
| (0.3 | )% |
Interest expense |
|
| 10,227 |
|
|
| 1.9 | % |
|
| 14,069 |
|
|
| 2.5 | % |
Operating loss |
|
| (13,519 | ) |
|
| (2.6 | )% |
|
| (5,297 | ) |
|
| (0.9 | )% |
Depreciation and amortization |
|
| 18,164 |
|
|
| 3.4 | % |
|
| 15,026 |
|
|
| 2.7 | % |
Corporate restructuring |
|
| 2,925 |
|
|
| 0.6 | % |
|
| 207 |
|
|
| 0.0 | % |
Goodwill and long-lived asset impairment |
|
| 3,844 |
|
|
| 0.7 | % |
|
| — |
|
|
| 0.0 | % |
Loss (gain) on property and equipment |
|
| 887 |
|
|
| 0.2 | % |
|
| (81 | ) |
|
| (0.0 | )% |
Adjusted EBITDA |
| $ | 12,301 |
|
|
| 2.3 | % |
| $ | 9,855 |
|
|
| 1.8 | % |
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in three channels: eCommerce, Outfitters, and Retail. A key measure in the evaluation of our business is revenue performance by 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 eCommerce and Outfitters channels we use Net revenue. For our Retail 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 when it has been open for at least 14 months and selling square footage has not changed by 15% or more within the past year. Online sales and sales generated through our in-store web portal are considered revenue in our eCommerce channel and are excluded from Same Store Sales.
Discussion and Analysis
FirstSecond Quarter 2020 compared with FirstSecond Quarter 2019
Net Revenue
Net revenue for FirstSecond Quarter 2020 was $217.0$312.1 million, compared with $262.4$298.3 million in the comparable period of the prior year, a decreasean increase of $45.4$13.8 million, or 17.3%4.6%.
eCommerce Net revenue was $181.5$270.2 million for FirstSecond Quarter 2020 an increase of $51.6 million or 23.6%, from the comparable period of the prior year. The increase was primarily driven by customer demand for key items and strong new customer acquisition both of which benefitted from the more prevalent work from home lifestyle.
Outfitters Net revenue was $37.4 million for Second Quarter 2020, a decrease of $27.4$28.0 million or 13.1%42.8%, from the comparable period of the prior year. The decrease was due to lower demand due to the COVID-19 pandemic.
Outfitters Net revenue was $31.8 million for First Quarter 2020, a decrease of $11.3 million or 26.2%, from the comparable period of the prior year. The decrease was due to lowercustomer demand due to the COVID-19 pandemic.
Retail Net revenue was $3.7$4.5 million in FirstSecond Quarter 2020, a decrease of $6.8$9.7 million or 64.9%68.5%, from the comparable period of the prior year. This decrease was driven by the exitclosure of all Lands' End Shops at Sears locations as of January 31, 2020 and, due to the COVID-19 pandemic, the temporary closure of U.S. Company Operatedretail stores on March 16, 2020. As of July 31, 2020 due to the COVID-19 pandemic. Ourall 26 U.S retail stores had reopened. On July 31, 2020 we had 30 U.S. Company Operated stores, experienced a decrease of 57.3% in Same Store Sales due towhich includes four new stores opened within the store closures driven by the COVID-19 pandemic. On May 1,Second Quarter 2020, we had 26 U.S. Company Operated stores compared with 21 U.S. Company Operated stores on May 3,August 2, 2019.
Gross Profit
Gross profit decreased $25.7was $135.4 million to $94.2in Second Quarter 2020, an increase of $6.3 million primarily driven by lower demand.from the comparable period of the prior year. Gross margin decreasedincreased approximately 10 basis points to 43.4%, in FirstSecond Quarter 2020, compared with 45.7%43.3%, in FirstSecond Quarter 2019, due to a more aggressiveprimarily driven by improved promotional environment throughoutstrategies and continued use of analytics, partially offset by the industry due to the COVID-19 pandemic and additionalliquidation of seasonal inventory reserves.
21
Table of Contentsas retail stores reopened.
Selling and Administrative Expenses
Selling and administrative expenses decreased $11.0$10.8 million to $105.8$111.5 million or 48.8%35.7% of total Net revenue, in FirstSecond Quarter 2020, compared with $116.8$122.3 million or 44.5%41.0% of Net revenue, in FirstSecond Quarter 2019. This 530 basis point decrease was primarily due to actions takenstrong controls to reducemanage non-essential operating expenses and structural costs including employee furloughs and temporary tiered salary reductions for the Company’s executive management and corporate employees in response to the COVID-19 pandemic.
Depreciation and Amortization
Depreciation and amortization expense was $8.8$9.4 million in FirstSecond Quarter 2020, an increase of $1.2$2.0 million or 15.3%, compared with $7.6$7.4 million in FirstSecond Quarter 2019. This increase was primarily attributable to depreciation associated with the Company’sour EOM system implementation, continued investment in theour digital infrastructure and an increased number of U.S. Company Operated stores.
Other Operating Expense
Other operating expense, net was $4.3$3.4 million in FirstSecond Quarter 2020 and wascompared to an insignificant amount in FirstSecond Quarter 2019. This increase was2019 due to the $3.3 million impairmentimpact of goodwill.corporate restructuring which includes severance for the reduction in corporate staff in Second Quarter 2020.
Operating Income/Loss
As a result of the above factors, Operating lossincome was $24.7$11.2 million in FirstSecond Quarter 2020 compared to Operating loss of $4.7$0.6 million in FirstSecond Quarter 2019.
23
Interest Expense
Interest expense was $4.9 million in Second Quarter 2020 compared to $6.2 million in Second Quarter 2019, driven by lower interest rates.
Other Expense/ Income
Other expense was $1.3 million in Second Quarter 2020 compared to Other income of $0.6 million in Second Quarter 2019.
Income Tax Benefit
We recorded tax expense at an overall effective tax rate of 11.5% for Second Quarter 2020. This rate reflects the tax expense generated from changes in estimates related to improvement in Company performance and revised outlook for Fiscal 2020 as a result of the COVID-19 pandemic. We recorded an income tax benefit of 51.3% for Second Quarter 2019. This rate reflects the tax benefits resulting from the change in status of various foreign jurisdictions.
Net Income/Loss
As a result of the above factors, Net income was $4.4 million and diluted earnings per share was $0.13 in Second Quarter 2020 compared with a Net loss of $3.0 million and diluted loss per share of $0.09 in Second Quarter 2019.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased $17.1 million to $23.9 million in Second Quarter 2020 as compared to $6.8 million in Second Quarter 2019.
Year-to-Date 2020 compared with Year-to-Date 2019
Net Revenue
Net revenue for Year-to-Date 2020 was $529.1 million, compared with $560.7 million in the comparable period of the prior year, a decrease of $31.6 million, or 5.6%.
eCommerce Net revenue was $451.7 million for Year-to-Date 2020, an increase of $24.2 million or 5.7%, from the comparable period of the prior year. The increase was primarily driven by customer demand for key items and strong new customer acquisition both of which benefitted from the more prevalent work from home lifestyle.
Outfitters Net revenue was $69.2 million for Year-to-Date 2020 a decrease of $39.3 million or 36.2%, from the comparable period of the prior year. The decrease in lossrevenue was primarily attributable to the COVID-19 pandemic.
Retail Net revenue was $8.1 million in Year-to-Date 2020, a decrease of $16.5 million or 67.0%, from the comparable period of the prior year. This decrease was driven by the closure of all Lands' End Shops at Sears locations and, due to the COVID-19 pandemic, the temporary closure of U.S. retail stores on March 16, 2020. As of July 31, 2020 all 26 U.S. retail stores had reopened. On July 31, 2020, the Company had 30 U.S. Company Operated stores, which includes four new stores opened within the Second Quarter 2020, compared with 21 U.S. Company Operated stores on August 2, 2019.
Gross Profit
Gross profit decreased $19.4 million to $229.6 million primarily due to the COVID-19 pandemic. Gross margin decreased approximately 100 basis points to 43.4%, for Year-to-Date 2020, compared with 44.4%, for Year-to-Date 2019, primarily driven by promotional activity throughout the industry and liquidation of seasonal inventory as retail stores reopened, partially offset by more disciplined promotional strategies and continued use of data analytics.
Selling and Administrative Expenses
Selling and administrative expenses decreased $21.8 million to $217.3 million, or 41.1% of total Net revenue, in Year-to-Date 2020, compared with $239.1 million, or 42.6% of Net revenue, in Year-to-Date 2019. This 150 basis point decrease was primarily due to strong controls to manage non-essential operating expenses and structural costs in response to the COVID-19 pandemic.
24
Depreciation and Amortization
Depreciation and amortization expense was $18.2 million in Year-to-Date 2020, an increase of $3.1 million, compared with $15.0 million in Year-to-Date 2019. The increase was primarily attributable to depreciation associated with our EOM system implementation, continued investment in our digital infrastructure and an increased number of U.S. Company Operated stores.
Other Operating Expense
Other operating expense was $7.7 million in Year-to-Date 2020 compared to $0.1 million in Year-to-Date 2019. This increase was due to impairment of goodwill and long-lived assets as well as the impactimpacts of corporate restructuring which include severance for the reduction in corporate staff in Second Quarter 2020.
Operating Loss
As a result of the COVID-19 pandemic on the Company’s business.above factors, Operating loss was $13.5 million in Year-to-Date 2020 compared to $5.3 million in Year-to-Date 2019.
Interest Expense
Interest expense was $5.3$10.2 million in First QuarterYear-to-Date 2020 compared to $7.8$14.1 million in First QuarterYear-to-Date 2019, reflective of the $100$100.0 million voluntary prepayment on the term loanTerm Loan in First Quarter 2019 and lower interest rates during First Quarter 2020, partially offset by increased borrowings under the ABL Facility in the First Quarter 2020.rates.
Other Expense/Income, Net
Other incomeexpense, net was $0.2$1.2 million in First QuarterYear-to-Date 2020 compared to Other income, net of $0.9$1.5 million in First QuarterYear-to-Date 2019.
Income Tax ExpenseBenefit
We recorded a tax benefit at an overall effective tax rate of 30.8%34.7% for First QuarterYear-to-Date 2020. The First Quarter 2020This rate reflects the estimated tax benefits as a result of the CARES Act. We recorded aan income tax benefit at an overall effective tax rate of 41.7%45.0% for First QuarterYear-to-Date 2019. The First Quarter 2019This rate reflects the tax benefits resulting from the change in status of various foreign jurisdictions.
Net Loss
As a result of the above factors, Net loss was $20.6$16.3 million and diluted loss per share was $0.64$0.50 in First QuarterYear-to-Date 2020 compared with a Net loss of $6.8$9.8 million and diluted loss per share of $0.21$0.30 in First QuarterYear-to-Date 2019.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA was a loss of $11.6increased $2.4 million to $12.3 million in First QuarterYear-to-Date 2020 as compared to $3.0$9.9 million in First QuarterYear-to-Date 2019.
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. As of May 1,July 31, 2020 we had zero borrowings of $75.0 million on the ABL Facility, all of which was repaid by the end of June 2020.Facility. Cash generated from our net revenue and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a significant amount of net revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year.
22
The following information relates to the Term Loan Facility and ABL Facility as each was in effect at July 31, 2020.
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. The Term Loan Facility willwas scheduled to mature on April 4, 2021.2021, and on September 9, 2020 was replaced by the new Term Loan Credit Agreement. The ABL Facility was amended on August 12, 2020 and matures on November 16, 2022, however2022. See Note 13, Subsequent Events in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the ABL Facility would mature on January 4, 2021.
PursuantNotes to ASC 205, Presentation of Financial Statements, the Company is required to and does evaluate at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company’s Term Loan Facility matures on April 4, 2021, which is within one year after the date of the Condensed Consolidated Financial Statements issued withfor additional information. As a result of this Quarterly Report on Form 10-Q. Asrefinancing, we believe we have sufficient liquidity to satisfy our obligations for the foreseeable future.
25
The Company is in the process of seeking new financing to replace the Term Loan Facility and, to the extent this can be successfully secured, is expected to alleviate the doubt raised by the application of ASC 205. Due to the Company’s recent trends of profitable growth, management believes that it will be able to refinance the Term Loan Facility on acceptable terms despite the challenging financial environment reflecting the COVID-19 pandemic. The Company currently has received non-binding term sheets from multiple investors for transactions which would allow it to refinance the Term Loan Facility debt and is in active discussions and negotiations regarding the refinancing. The Company’s financial forecasts indicate sufficient liquidity for at least the next twelve months under the terms of these proposals. However, as the ability to secure a refinancing is conditional upon the execution of agreements with new or existing investors, which is considered outside of the Company’s control, for an amount that allows the Company to meet its obligations as they become due within a period of at least one year from the date of issuance of its financial statements, the refinancing is not considered probable of occurring until such time as the refinancing is completed. The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. During First Quarter 2020, the Company increased capacity under the ABL Facility by $25.0 million, so that maximum borrowings arewere $200.0 million.million at the end of First Quarter 2020. The ABL Facility has a letter of credit sub-limit of $70.0 million. The ABL Facility is available for working capital and other general corporate purposes. As of May 1,July 31, 2020, the Company had outstandingzero borrowings, of $75.0 million, outstanding letters of credit of $8.7$12.0 million and $116.3$188.0 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company incurred $1.5 million in debt origination fees. 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.
On April 4, 2014, Lands’ End entered into the Term Loan Facility of $515.0 million, the proceeds of which 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$100.0 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. The ABL Facility matures on November 16, 2022, however in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the ABL
23
Facility would mature on January 4, 2021. The Company is in the process of seeking to refinance the Term Loan Facility. See Item IA, Risk Factors, included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2020, and the Risk Factors included in the Company’s Current Report on Form 8-K dated June 2, 2020.2022.
Guarantees; Security
All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility is also 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 ABL Facility is also secured by a second priority security interest in the same collateral.
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 Facility is subject to adjustment based on the average excess availability under the ABL Facility for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% for the ABL Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facility.
Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees also include (i) commitment fees in an amount equal to 0.25% of the daily unused portions of the ABL Facility 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 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
26
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 May 1,July 31, 2020.
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. The Term Loan Facility matures on April 4, 2021. The ABL Facility matures on November 16, 2022, however, in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the ABL Facility would mature on January 4, 2021. The Company is in the process of seeking to refinance the Term Loan Facility however the timeline for this process has been increased due to the impact of the COVID-19 pandemic on the financial markets.
Cash Flows from Operating Activities
Net cash used inprovided by operating activities increaseddecreased to $80.2$8.0 million in Year-to-Date 2020 from $36.3$17.0 million in Year-to-Date 2019 primarily driven by a reduction in inventory related payables.
24
Cash Flows from Investing Activities
Net cash used in investing activities was $10.8$19.8 million and $15.0$24.8 million for Year-to-Date 2020 and Year-to-Date 2019, respectively. Cash used in investing activities for both periods was primarily used for investments to update our information technology infrastructure and property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities was $73.3 million for Year-to-Date 2020, primarily resulting from $75.0 million of borrowings from the ABL. Net cash used in financing activities was $3.0 million for Year-to-Date 2020 and $103.3 million for Year-to-Date 2019 was $102.0 million consisting primarily of a $100$100.0 million voluntary prepayment of our Term Loan Facility in First Quarter 2019.
Contractual Obligations and Off-Balance-Sheet Arrangements
There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
Financial Instruments with Off-Balance-Sheet Risk
On November 16, 2017, the Company entered into the ABL Facility, which initially providedprovides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. During First Quarter 2020, the Company increased capacity under the ABL Facility by $25.0 million, so that maximum borrowings are $200.0 million. The ABL Facility has a letter of credit sub-limit of $70.0 million. The ABL Facilitymillion and matures on November 16, 2022, however, in the event the Term Loan Facility debt is not extended, repaid, or otherwise refinanced at least six months before its maturity date, the ABL Facility would mature on January 4, 2021.2022. The ABL Facility is available for working capital and other general corporate purposes. As of May 1,July 31, 2020, the Company had zero outstanding borrowings, of $75.0 million, outstanding letters of credit of $8.7$12.0 million and $116.3$188.0 million in availability under the ABL Facility. The ABL Facility was amended on August 12, 2020. See Note 13, Subsequent Events in Notes to Condensed Consolidated Financial Statements for additional information.
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Goodwill and Trade Name Impairment Analysis
The duration and severity of the COVID-19 pandemic could result in additional future impairment charges for goodwill and the trade name indefinite-lived intangible asset. We considered the COVID-19 pandemic to be a triggering event for goodwill in First Quarter 2020 for the Outfitters and Japan eCommerce reporting units, and therefore completed an interim test for impairment of goodwill for these reporting units as of May 1, 2020. The interim tests employed the assumption that revenueresulting in the Outfitters and Japan eCommerce reporting units will return to Fiscal 2019 levels by Fiscal 2023 (the 53 weeks ending February 2, 2024). The testing resulted in no impairment of the Outfitters reporting unit and full impairment of the $3.3 million of goodwill allocated to Japan eCommerce reporting unit.
Goodwill impairment assessments
The Company tests goodwill for impairment using a one-step quantitative test. The quantitative test compares the reporting unit's fair value to its carrying value. An impairment isunit, recorded for any excess carrying value above the reporting unit's fair value, not to exceed the amount of goodwill. The Company estimates fair value using a discounted cash flow model, commonly referred to as the income approach. The income approach uses a reporting unit's projection of estimated operating results and cash flows that is discounted using a weighted average cost of capital that reflects current market conditions appropriate to the Company's reporting unit. The projection uses management's best estimates of economic and market conditions over the projected period using the best information available, including growth rates in revenues, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.
The Outfitters and Japan eCommerce reporting units have been negatively impacted by decreased demand during First Quarter 2020 due to the impacts of the COVID-19 pandemic on its customers. Accordingly, the Company has performed an interim2020. There was not a triggering event or impairment testcharges for these reporting units using scenarios that factor in different durations of the pandemic, the possibility of future declines in revenue and assumptions of the business returning to normal levels of operations in future years. Based on the weighted evaluation of these different scenarios, which included adjusted risk profiles, the Company believes that the fair value of the Outfittersany reporting unit is greater than the carrying value resulting in no impairment of the Outfitters reporting unit. Based on the weighted evaluation of these different scenarios, the Company believes that the fair value of the Japan eCommerce reporting unit is less than the carrying value and therefore, the entirety of the goodwill allocated to Japan is impaired. Accordingly, in FirstSecond Quarter 2020 the
25
Company recorded a non-cash pretax trade name impairment charge to the Japan eCommerce reporting unit of approximately $3.3 million. This charge is recorded in the Other operating expense, net line in the Condensed Consolidated Statements of Operations.
Indefinite-lived intangible asset impairment assessments2020.
The Company concluded that recent events did not result in a triggering event for trade name and therefore did not complete testing of the trade name for impairment. As such, no trade name impairment charges were recorded in First Quarter 2020 or Second Quarter 2020.
As the pandemic continues, Lands’ End will continue to evaluate goodwill and trade name indefinite-lived intangible asset for impairment. A prolonged pandemic could impact the results27
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended January 31, 2020.2020, and Note 2, Recent Accounting Pronouncements. There have been no significant changes in our critical accounting policies or their application since January 31, 2020.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross margin, operating expenses, operating income, net income, adjusted EBITDA, cash flow, financial condition, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, financing activities, liquidity, the impact of the COVID-19 pandemic, 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"“could have,” "likely," “targeting” or the negative version of these words or comparable words. Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, as supplemented by the risk factors contained in the Company’s Current Report on Form 8-K dated June 2, 2020 and as modified by "Part“Part II, Item 1A Risk Factors"Factors” of this Quarterly Report on FormFrom 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.
2628
ITEM 3. QUANTITATIVE AND QUALITATIVEQUALITATIVE 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 May 1,July 31, 2020, we had $8.4$19.6 million of cash denominated in foreign currencies, principally in British Pound Sterling, Euros, Yen and 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 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 $3.8 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn (as of July 31, 2020) to a principal amount equal to $200.0 million, each one percentage point change in interest rates would result in a $2.0 million change in our annual cash interest expense.
2729
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 May 1,July 31, 2020, 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 FirstSecond Fiscal Quarter Ended May 1,July 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
2830
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.
For a description of our legal proceedings, see Note 9, Commitments and Contingencies in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Other than as set forth in the Company’s Current Report on Form 8-K dated June 2, 2020, there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020, filed with the SEC on March 23, 2020.
31
29
TableIndex of ContentsExhibits
The following documents are filed as exhibits to this report:
| 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)). | |
|
|
|
| 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)). | |
|
|
|
Second Amendment to ABL Credit Agreement, dated August 12, 2020, by and among Lands’ End, Inc. (as the Lead Borrower), the guarantors party thereto, the lenders party thereto and Wells Fargo Bank, National Association (as Agent, L/C Issuer and Swing Line Lender).* | ||
| Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.* | |
|
|
|
| Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.* | |
|
|
|
| Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
|
|
|
101.INS |
| Inline XBRL Instance |
|
|
|
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document* |
|
|
|
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
|
|
|
101.DEF |
| Inline XBRL Taxonomy Extension Definition Document* |
|
|
|
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document* |
|
|
|
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document* |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | Furnished herewith. |
3032
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: July 22,September 9, 2020
By: | /s/ James Gooch |
| James Gooch |
| Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) |
33
31