| Summary of Significant Accounting Policies | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year The Company’s fiscal year end is on the Friday preceding the Saturday closest to January 31 each year. The fiscal periods in this report are presented as follows, unless the context otherwise requires:
Fiscal Year
Ended
Weeks
2021
January 28, 2022
52
2020
January 29, 2021
52
2019
January 31, 2020
52 Seasonality The Company’s operations have historically been seasonal, with a disproportionate amount of net revenue occurring in the fourth fiscal quarter, reflecting increased customer demand during the year-end holiday selling season. The impact of seasonality on results of operations is more pronounced since the level of certain fixed costs, such as occupancy and overhead expenses, do not vary with sales. The Company’s results of operations also may fluctuate based upon such factors as the timing of certain holiday season dates and promotions, the amount of net revenue contributed by new and existing stores, the timing and level of markdowns, competitive factors, weather and general economic conditions. 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. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reportable amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents consist of highly liquid temporary instruments purchased with original maturities of three months or less. It also includes deposits in-transit from banks for payments related to third-party credit card and debit card transactions. Restricted cash The Company classifies cash balances pledged as collateral as Restricted cash on the Consolidated Balance Sheets. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts based on historical loss experience, collection experience, delinquency trends, economic conditions and specific identification. The Accounts receivable balance on the Consolidated Balance Sheets is presented net of the Company’s allowance for doubtful accounts and is comprised of various customer-related accounts receivable. Changes in the balance of the allowance for doubtful accounts are as follows:
(in thousands)
Fiscal 2021
Fiscal 2020
Beginning balance
$
680
$
511
Provision
158
286
Write-offs
(213
)
(117
)
Ending balance
$
625
$
680
Inventory Inventories primarily consist of merchandise purchased for resale. For financial reporting and tax purposes, the Company’s United States inventory, primarily merchandise held for sale, is stated at last-in, first-out (“LIFO”) cost, which is lower than net realizable value. The Company accounts for its non-United States inventory on the first-in, first-out (“FIFO”) method. The United States inventory accounted for using the LIFO method was 86% of total inventory as of January 28, 2022 and 87% as of January 29, 2021. If the FIFO method of accounting for inventory had been used, the effect on inventory would have been an increase of $0.8 million and $0.2 million as of January 28, 2022 and January 29, 2021, respectively. The Company maintains a reserve for excess and obsolete inventory. The reserve is calculated based on historical experience related to liquidation/disposal of identified inventory. The excess and obsolescence reserve balances were $15.2 million and $22.8 million as of January 28, 2022 and January 29, 2021, respectively. The $7.6 million decrease in the excess and obsolescence reserve is primarily due to the Company’s ability to sell through returned embroidered, hemmed or damaged product compared to the prior year when the COVID pandemic limited the Company’s distribution options to sell this merchandise. Deferred Catalog Costs and Marketing Costs incurred for direct response marketing consist primarily of catalog production and mailing costs that are generally amortized within two months from the date catalogs are mailed. Unamortized marketing costs reported as prepaid assets were $10.8 million and $10.2 million as of January 28, 2022 and January 29, 2021, respectively. The Company expenses the costs of marketing for website, magazine, newspaper, radio and other general media when the marketing takes place. Marketing expenses, including catalog costs amortization, digital-related costs and other print media were $220.0 million, $195.4 million and $194.9 million for Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. These costs are included within Selling and administrative expenses in the accompanying Consolidated Statements of Operations. Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation. Additions and substantial improvements are capitalized and include expenditures that materially extend the useful lives of existing facilities and equipment. Maintenance and repairs that do not materially improve or extend the lives of the respective assets are expensed as incurred. As of the balance sheet dates, Property and equipment, net consisted of the following:
(in thousands)
Asset Lives (years)
January 28, 2022
January 29, 2021
Land
-
$
3,468
$
3,475
Buildings and improvements
15-30
102,077
101,421
Furniture, fixtures and equipment
3-10
61,751
61,807
Computer hardware and software
3-10
211,726
210,823
Leasehold improvements
3-7
12,818
12,941
Construction in progress
15,278
8,343
Gross property and equipment
407,118
398,810
Less: Accumulated depreciation
(277,327
)
(253,522
)
Total property and equipment, net
$
129,791
$
145,288
As of both January 28, 2022 and January 29, 2021, construction in progress relates primarily to technological investments. Depreciation expense is recorded over the estimated useful lives of the respective assets using the straight-line method. Leasehold improvements are depreciated over the shorter of the associated lease term or the estimated useful life of the asset. Depreciation expense was $ 39.2 million, $ million and $ 31.1 million for Fiscal 2021 , Fiscal 2020 and Fiscal 2019 , respectively . Impairment of Property and Equipment Property and equipment are subject to a review for impairment if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Company Operated store long-lived assets, including right-of-use assets, are regularly reviewed for impairment indicators. Impairment is assessed at the individual store level which is the lowest level of identifiable cash flows and considers the estimated undiscounted cash flows over the asset’s remaining life. If estimated undiscounted cash flows are insufficient to recover the investment, an impairment loss is recognized equal to the difference between the estimated fair value of the asset and its carrying value, net of salvage, and any costs of disposition. The fair value estimate is generally the discounted amount of estimated store-specific cash flows. During Fiscal 2021 there was no impairment recognized for property and equipment. During Fiscal 2020 and Fiscal 2019 impairment of $0.4 million and $1.4 million, respectively, was recognized for property and equipment for Company Operated store locations. Goodwill and Indefinite-lived Intangible Asset Impairment Assessments Goodwill and the indefinite-lived trade name intangible asset are tested separately for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Frequently, impairment assessments contain multiple uncertainties because the calculation requires management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting cash flows under different scenarios. The Company performs goodwill and indefinite-lived intangible asset impairment tests on an annual basis and updates these annual impairment tests mid-year if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit or indefinite-lived intangible asset below its carrying amount. If actual results fall short of the Company’s estimates and assumptions used in estimating future cash flows and asset fair values, the Company may be exposed to future impairment losses that could be material. 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 is recorded for any excess carrying value above the reporting unit’s fair value, not to exceed the amount of goodwill. The Company estimates fair value of its reporting units using a discounted cash flow model, commonly referred to as the income approach. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions appropriate to the Company’s reporting unit. The discounted cash flow model uses management’s best estimates of economic and market conditions over the projected period using the best information available, including growth rates in revenues, costs and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, weighted average cost of capital and changes in future working capital requirements. In response to the COVID pandemic, during First Quarter 2020 the Company tested its Outfitters and Japan eCommerce reporting units for goodwill impairment. The testing resulted in no impairment of the Company’s Outfitters reporting unit and full impairment of the $3.3 million of goodwill allocated to the Company’s Japan eCommerce reporting unit. At the end of Fiscal 2021, the fair value of the U.S. eCommerce and Outfitters reporting units exceeded the carrying value by 91.2% and 65.5%, respectively and 61.7% and 108.8%, respectively at the end of Fiscal 2020. Goodwill impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur, including deterioration in the macroeconomic environment, retail industry or in the equity markets, deterioration in performance or future projections, or changes in plans for the reporting unit. Indefinite-lived intangible asset impairment assessments The Company’s indefinite-lived intangible asset is the Lands’ End trade name. The Company reviews the trade name for impairment on an annual basis during the fourth fiscal quarter, or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The fair value of the trade name indefinite-lived intangible asset is estimated using the relief from royalty method. The relief from royalty method is based on the assumption that, in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class. The relief from royalty method involves two steps: (1) estimation of reasonable royalty rates for the assets and (2) the application of these royalty rates to a forecasted net revenue stream and discounting the resulting cash flows to determine a present value. The Company multiplied the selected royalty rate by the forecasted net revenue stream to calculate the cost savings (relief from royalty payment) associated with the asset. The cash flows are then discounted to present value using the selected discount rate and compared to the carrying value of the asset. In Fiscal 2021, Fiscal 2020, and Fiscal 2019, the Company tested the indefinite-lived intangible asset as required resulting in the fair value exceeding the carrying value by 68.9%, 61.2% and 19.1% respectively. As such, no trade name impairment charges were recorded in any of the periods presented . Financial Instruments with Off-Balance-Sheet Risk The $275 million ABL Facility includes a $70.0 million sublimit for letters of credit and the Third Amendment to the ABL Facility extended the maturity from November 16, 2022 to the earlier of (a) July 29, 2026 or (b) June 9, 2025 if, on or prior to such date, the Term Loan Facility has not been refinanced, extended or repaid in full in accordance with the terms thereof and not replaced with other indebtedness. The ABL Facility is available for working capital and other general corporate liquidity needs. There was no balance outstanding as of January 28, 2022 and $25.0 million outstanding on January 29, 2021. The balance of outstanding letters of credit was $23.5 million and $27.1 million on January 28, 2022 and January 29, 2021, respectively. Fair Value of Financial Instruments The Company determines the fair value of financial instruments in accordance with accounting standards pertaining to fair value measurements. Such standards define fair value and establish a framework for measuring fair value in accordance with GAAP. Under fair value measurement accounting standards, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The Company reports or discloses the fair value of financial assets and liabilities based on the fair value hierarchy prescribed by accounting standards for fair value measurements, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. Total accounts receivable was $49.7 million and $37.6 million as of January 28, 2022 and January 29, 2021, respectively. Cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are reflected in the Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments. Long-term debt, net is reflected in the Consolidated Balance Sheets at amortized cost. The fair value of debt was determined utilizing Level 3 valuation techniques based on observed market data on January 28, 2022 and January 29, 2021. See Note 7, Fair Value of Financial Assets and Liabilities Foreign Currency Translations and Transactions The Company translates the assets and liabilities of foreign subsidiaries from their respective functional currencies to United States dollars at the appropriate spot rates as of the balance sheet date. Revenue and expenses of operations are translated to United States dollars using weighted average exchange rates during the year. The foreign subsidiaries use the local currency as their functional currency. The effects of foreign currency translation adjustments are included as a component of Accumulated other comprehensive loss in the accompanying Consolidated Statements of Changes in Stockholders’ Equity. The Company recognized a foreign exchange transaction gain of $0.8 million in Fiscal 2021, a gain of $3.4 million in Fiscal 2020 and a loss of $3.4 million in Fiscal 2019. These are recorded in either Cost of sales (excluding depreciation and amortization) or Selling and administrative in the accompanying Consolidated Statements of Operations based on the underlying nature of the transactions giving rise to the gain or loss. Revenue Recognition Revenue includes sales of merchandise and delivery revenue related to merchandise sold. Substantially all of the Company’s revenue is recognized when control of product passes to customers, which for the U.S. eCommerce, International, Outfitters and Third Party distribution channels is when the merchandise is expected to be received by the customer and for the Retail distribution channel is at the time of sale in the store. The Company recognizes revenue, including shipping and handling fees billed to customers, in the amount expected to be received when control of the Company’s products transfers to customers, and is presented net of various forms of promotions, which range from contractually-fixed percentage price reductions to sales returns, discounts, and other incentives that may vary in amount. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available. The Company’s revenue is disaggregated by distribution channel and geographic location. The Company excludes from revenue, taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities. 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 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 reported in Other current liabilities in the Consolidated Balance Sheets and amounts recognized through Net revenue for each period presented. The majority of deferred revenue as of January 28, 2022 is expected to be recognized in Net revenue in the fiscal quarter ending April 29, 2022, as products are delivered to customers.
(in thousands)
Fiscal 2021
Fiscal 2020
Deferred revenue beginning of period
$
17,187
$
8,096
Deferred revenue recognized in period
(16,973
)
(7,882
)
Revenue deferred in period
8,346
16,973
Deferred revenue end of period
$
8,560
$
17,187
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 Consolidated Statements of Operations. Prior to their redemption, gift cards are recorded as a liability, included within Other current liabilities in the 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:
(in thousands)
Fiscal 2021
Fiscal 2020
Balance as of beginning of period
$
26,798
$
22,592
Gift cards sold
55,107
52,315
Gift cards redeemed
(44,391
)
(47,061
)
Gift card breakage
(4,444
)
(1,048
)
Balance as of end of period
$
33,070
$
26,798
The increase in gift card breakage in Fiscal 2021 was attributed to a change in accounting estimate resulting from an assessment of, and ultimately an increase in, the gift card breakage rate, creating a more appropriate rate for the various gift card programs. 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 January 28, 2022 and January 29, 2021, $23.4 million and $25.7 million, respectively, of refund liabilities, primarily associated with estimated product returns, were reported in Other current liabilities in the Consolidated Balance Sheets. Cost of Sales Cost of sales are comprised principally of the costs of merchandise, in-bound freight and handling, duty, warehousing and distribution (including receiving, picking, packing, store delivery and value-added costs), customer shipping and handling costs and physical inventory losses. Depreciation and amortization are not included in the Company’s Cost of sales. Selling and Administrative Expenses Selling and administrative expenses are comprised principally of payroll and benefits costs, marketing, information technology expenses, third-party services, occupancy costs of Company Operated stores and corporate facilities, and other administrative expenses. All stock-based compensation is recorded in Selling and administrative expenses. See Note 5, Stock-Based Compensation Income Taxes Deferred income tax assets and liabilities are based on the estimated future tax effects of differences between the financial and tax basis of assets and liabilities based on currently enacted tax laws. The tax balances and income tax expense recognized are based on management’s interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects best estimates and assumptions regarding, among other things, the level of future taxable income and tax planning. Future changes in tax laws, changes in projected levels of taxable income, tax planning and adoption and implementation of new accounting standards could impact the effective tax rate and tax balances recorded. Tax positions are recognized when they are more likely than not to be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon settlement. The Company is subject to periodic audits by the United States Internal Revenue Service and other state and local taxing authorities. These audits may challenge certain of the Company ’ s tax positions such as the timing and amount of income and deductions and the allocation of taxable income to various tax jurisdictions. The Company evaluates its tax positions and establishes liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. These tax uncertainties are reviewed as facts and circumstances change and are adjusted accordingly. This requires significant management judgment in estimating final outcomes. Interest and penalties are classified as Income tax expense in the Consolidated Statements of Operations. See Note 9, Income Taxes , for further details. The Company performed an evaluation over its deferred tax assets and determined that a valuation allowance is considered necessary for certain jurisdictions. See Note 9, Income Taxes Self-Insurance The Company has a self-insured plan for health and welfare benefits and provides an accrual to cover the obligation. The accrual for the self-insured liability is based on claims filed and an estimate of claims incurred but not yet reported. The Company considers a number of factors, including historical claims information, when determining the amount of the accrual. Costs related to the administration of the plan and related claims are expensed as incurred. Total expenses, net of employee contributions, were $17.3 million, $17.1 million and $17.4 million for Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. The Company also has a self-insured plan for certain costs related to workers’ compensation. The Company obtains third-party insurance coverage to limit exposure to this self-insured risk. Retirement Benefit Plan The Company has a 401(k) retirement plan, which covers most regular employees and allows them to make contributions. The Company also provides a matching contribution on a portion of the employee contributions. Total expenses incurred under this plan were $3.9 million, $0.7 million and $3.6 million for Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. The increase in Fiscal 2021 and was attributed to the resumption of the Company’s 401(k) matching contribution in Fiscal 2021 after its temporary suspension in Fiscal 2020. Other Comprehensive Income (Loss) Other comprehensive income (loss) encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments and net income (loss).
Fiscal 2021
Fiscal 2020
Fiscal 2019
Beginning balance: Accumulated other comprehensive loss (net of tax of $2,987, $3,453 and $3,505, respectively)
$
(11,221
)
$
(12,988
)
$
(13,183
)
Other comprehensive (loss) income
Foreign currency translation adjustments (net of tax of $374, $(466) and $(52), respectively)
(1,421
)
1,767
195
Ending balance: Accumulated other comprehensive loss (net of tax of $3,361, $2,987 and $3,453, respectively)
$
(12,642
)
$
(11,221
)
$
(12,988
) Stock-Based Compensation Stock-based compensation expense for restricted stock units is determined based on the grant date fair value. The fair value is determined based on the Company’s stock price on the date of the grant. The Company recognizes stock-based compensation cost net of estimated forfeitures and revises the estimates in subsequent periods if actual forfeitures differ from the estimates. The Company estimates the forfeiture rate based on historical data as well as expected future behavior. 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 Stock-based compensation is recorded in Selling and administrative expense in the Consolidated Statements of Operations over the period in which the employee is required to provide service in exchange for the restricted stock units and stock option awards. Earnings per Share The numerator for both basic and diluted EPS is net income attributable to the Company. The denominator for basic EPS is based upon the number of weighted average shares of the Company’s common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of the Company’s common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with ASC 260, Earnings Per Share The following table summarizes the components of basic and diluted EPS:
(in thousands)
Fiscal 2021
Fiscal 2020
Fiscal 2019
Net income
$
33,369
$
10,836
$
19,290
Basic weighted average shares outstanding
32,929
32,566
32,343
Dilutive impact of stock awards
752
86
2
Diluted weighted average shares outstanding
33,681
32,652
32,345
Basic earnings per share
$
1.01
$
0.33
$
0.60
Diluted earnings per share
$
0.99
$
0.33
$
0.60
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 93, 1,093,274 and 745,575 anti-dilutive shares excluded from the diluted weighted average shares outstanding in Fiscal 2021, Fiscal 2020 and Fiscal 2019, respectively. Recently Adopted Accounting Pronouncements 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. 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 this standard in First Quarter 2021 and the adoption did have a material impact on the Company’s Consolidated Financial Statements and related disclosures. |
