December 12, 1994
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we
are transmitting herewith the attached Form 10-Q for the quarter ended
October 28, 1994.
Sincerely,
KATHY L. GIES
Lands' End, Inc.
One Lands' End Lane
Dodgeville, WI. 53556
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarter Ended October 28, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ...... to ......
Commission file number 1-9769
LANDS' END, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2512786
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lands' End Lane, Dodgeville, WI 53595
(Address of principal executive (Zip code)
offices)
Registrant's telephone number, 608-935-9341
including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of December 12, 1994:
Common stock, $.01 par value 34,887,356 shares outstanding
LANDS' END, INC. & SUBSIDIARIES
INDEX TO FORM 10-Q
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three Months Ended October 28, 1994, and
October 29, 1993 .................................. 3
Consolidated Statements of Operations for the
Nine Months Ended October 28, 1994, and
October 29, 1993 .................................. 4
Consolidated Balance Sheets, at October 28, 1994,
and January 28, 1994 .............................. 5
Consolidated Statements of Cash Flows for the
Nine Months Ended October 28, 1994, and
October 29, 1993 .................................. 6
Notes to Consolidated Financial Statements ......... 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..................................... 14-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................... 18
Item 4. Submission of Matters to a Vote of
Security Holders .................................. 18
Item 5. Other Information .................................... 18
Item 6. Exhibits and Reports on Form 8-K ..................... 18
Signature .................................................... 19
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
October 28, October 29,
1994 1993
(Unaudited)
Net Sales ..................................... $246,209 $215,133
Cost of sales ............................... 146,033 127,620
Gross profit .................................. 100,176 87,513
Selling, general and administrative
expenses .................................... 93,539 74,031
Income from operations ........................ 6,637 13,482
Other income (expense):
Interest expense ........................ (971) (228)
Interest income ......................... - -
Other ................................... 665 (137)
Total other expense, net..................... (306) (365)
Income before income taxes .................... 6,331 13,117
Income tax provision......................... 2,498 5,141
Net income .................................... $ 3,833 $ 7,976
Net income per share .......................... $ 0.11 $ 0.22
Note: Per share data reflects the two-for-one stock split declared
in May 1994.
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Nine Months Ended
October 28, October 29,
1994 1993
(Unaudited)
Net Sales ..................................... $613,053 $522,466
Cost of sales ............................... 355,836 308,091
Gross profit .................................. 257,217 214,375
Selling, general and administrative
expenses .................................... 237,053 188,320
Income from operations ........................ 20,164 26,055
Other income (expense):
Interest expense ........................ (1,285) (266)
Interest income ......................... 67 128
Other ................................... 1,102 (31)
Total other expense, net .................... (116) (169)
Income before income taxes and cumulative
effect of change in accounting............... 20,048 25,886
Income tax provision......................... 7,916 10,113
Net income before cumulative effect of
change in accounting......................... $ 12,132 $ 15,773
Cumulative effect of change in
accounting for income taxes.................. - 1,300
Net income .................................... $ 12,132 $ 17,073
Net income per share before cumulative
effect of change in accounting............. $ 0.34 $ 0.44
Cumulative effect of change in accounting ..... - 0.04
Net income per share .......................... $ 0.34 $ 0.48
Note: Per share data reflects the two-for-one stock split declared
in May 1994.
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
October 28, January 28,
1994 1994
Assets (Unaudited)
Current assets:
Cash and cash equivalents............ $ 1,020 $ 21,569
Receivables.......................... 3,304 3,644
Inventory............................ 254,516 149,688
Prepaid expenses..................... 16,826 11,787
Income taxes receivable.............. 417 -
Deferred income tax benefit.......... 5,588 5,588
Total current assets..................... 281,671 192,276
Property, plant and equipment, at cost:
Land and buildings................... 67,749 60,866
Fixtures and equipment............... 70,486 57,769
Leasehold improvements............... 1,922 1,346
Total property, plant and equipment...... 140,157 119,981
Less - accumulated depreciation
and amortization................... 47,261 40,290
Property, plant and equipment, net....... 92,896 79,691
Intangibles, net......................... 3,704 1,863
Total assets............................. $378,271 $273,830
Liabilities and shareholders' investment
Current liabilities:
Lines of credit...................... $106,252 $ -
Current maturities of long-term debt. 40 40
Accounts payable..................... 72,595 54,855
Reserve for returns.................. 4,643 3,907
Advance payment on orders............ 472 568
Accrued liabilities.................. 21,450 16,875
Accrued profit sharing............... 460 2,276
Income taxes payable................. - 12,528
Total current liabilities................ 205,912 91,049
Long-term debt, less current maturities.. 40 40
Deferred income taxes.................... 5,200 5,200
Long-term liabilities.................... 604 256
Shareholders' investment:
Common stock, 40,221 and 20,110
issued respectively................ 402 201
Donated capital...................... 8,400 8,400
Paid-in capital...................... 25,301 24,888
Deferred compensation................ (1,586) (2,001)
Currency translation adjustments..... 233 246
Retained earnings.................... 205,584 193,460
Treasury stock, 5,341 and 2,154
shares at cost, respectively....... (71,819) (47,909)
Total shareholders' investment........... 166,515 177,285
Total liabilities and shareholders'
investment............................. $378,271 $273,830
Note: Share data reflects the two-for-one stock split declared in
May 1994.
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
October 28, October 29,
1994 1993
(Unaudited)
Cash flows (used for) from
operating activities:
Net income before cumulative effect.. $ 12,132 $ 15,773
Adjustments to reconcile net income
to net cash flows from operating
activities -
Depreciation and amortization.... 8,339 6,073
Deferred compensation expense.... 415 184
Loss on sales of fixed assets.... 96 285
Changes in current assets and
liabilities excluding the
effects of acquisitions:
Receivables.................. 891 (839)
Inventory.................... (102,408) (102,164)
Prepaid expenses............. (5,010) (16,880)
Income taxes receivable...... (417) -
Accounts payable............. 17,740 40,300
Reserve for returns.......... 736 289
Advance payment on orders.... (96) (492)
Accrued liabilities.......... 4,575 3,791
Accrued profit sharing....... (1,816) (702)
Income taxes payable......... (12,528) (8,053)
Other............................ 335 521
Net cash flows used for
operating activities............... (77,016) (61,914)
Cash flows (used for) from
investing activities:
Cash paid for capital additions and
businesses acquired................ (26,508) (11,780)
Proceeds from sales of fixed assets.. 19 4
Net cash flows used for
investing activities............. (26,489) (11,776)
Cash flows (used for) from
financing activities:
Proceeds from short-term borrowing... 106,252 54,000
Tax effect of exercise of stock
options............................ 614 -
Purchases of treasury stock.......... (23,910) (1,908)
Net cash flows from
financing activities............. 82,956 52,092
Net increase (decrease) in cash
and cash equivalents................... (20,549) (21,598)
Beginning cash and cash equivalents...... 21,569 22,754
Ending cash and cash equivalents......... $ 1,020 $ 1,156
Supplemental cash flow disclosures:
Interest paid........................ $ 902 $ 168
Income taxes paid.................... 20,107 18,140
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to October 28, 1994, and the three months
ended October 28, 1994, and October 29, 1993, is unaudited.)
The condensed consolidated financial statements included
herein have been prepared by Lands' End, Inc. (the company),
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, and in the opinion of
management contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the
company believes that the disclosures are adequate to make the
information presented not misleading. The results of operations
for the interim periods disclosed within this report are not
necessarily indicative of future financial results. It is
suggested that these condensed consolidated financial statements
be read in conjunction with the financial statements and the
notes thereto included in the company's latest annual report on
Form 10-K, and quarterly Form 10-Q's previously filed this year.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Lands' End, Inc., (the company) is a direct marketer of
traditionally styled apparel, domestics (primarily bedding and
bath items), soft luggage, and other products.
Principles of consolidation
The consolidated financial statements include the accounts
of the company and its subsidiaries after elimination of
intercompany accounts and transactions.
Fiscal year
The company utilizes a 52-53 week fiscal year ending on the
Friday nearest January 31.
Fair values of financial instruments
The fair value of financial instruments does not materially
differ from their carrying values.
Inventory
Inventory, primarily merchandise held for sale, is stated at
last-in, first-out (LIFO) cost, which is lower than market. If
the first-in, first-out (FIFO) method of accounting for inventory
had been used, inventory would have been approximately $19.9
million and $19.1 million higher than reported at October 28, and
January 28, 1994, respectively.
Catalog costs
Prepaid expenses primarily consist of catalog production and
mailing costs that have not yet been fully amortized over the
expected revenue stream, which is approximately three months from
the date catalogs are mailed.
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to October 28, 1994, and the three months
ended October 28, 1994, and October 29, 1993, is unaudited.)
Depreciation
Depreciation expense is calculated using the straight-line
method over the estimated useful lives of the assets, which are
20 to 30 years for buildings and land improvements and 5 to 10
years for leasehold improvements and furniture, fixtures,
equipment, and software. The company provides one-half year of
depreciation in the year of addition and retirement.
Intangibles
Intangible assets consist primarily of goodwill, the excess
of cost over the fair market value of net assets of businesses
purchased. Goodwill is being amortized over 40 years on a
straight-line basis. Other intangibles are amortized over a
shorter life. Total accumulated amortization of all intangibles
was $254,000 as of October 28, 1994.
Net income per share
Net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during
each period. The weighted average common shares outstanding were
34.9 million and 35.9 million after the two-for-one stock split
(See Note 2) for the three-month periods ended October 28, 1994,
and October 29, 1993, respectively; and 35.3 million and 36.0
million for the nine-month periods ended October 28, 1994, and
October 29, 1993, respectively. Common stock equivalents
includes awards, grants and stock options which have been issued
by the company. The common stock equivalents do not
significantly dilute basic earnings per share.
Reserve for losses on customer returns
At the time of sale, the company provides a reserve equal to
the gross profit on projected merchandise returns, based on its
prior returns experience.
Forward exchange contracts and import letters of credit
1. Forward exchange contracts are for delivery or purchase of
foreign currencies at specified future dates. These
contracts are entered into by the company as a hedge against
foreign currency exposures. At October 28, 1994, the
company had forward exchange contracts maturing during
fiscal 1995 to sell approximately 1.6 million British pounds
and 167.9 million yen, and to purchase about 39.6 million
yen and 1.6 million Canadian dollars.
2. Import letters of credit are for commitments issued through
third parties to guarantee payments for merchandise within
specified time periods according to terms of the agreements.
Import letters of credit were approximately $15.7 million as
of October 28, 1994.
Foreign currency translation
Financial statements of the foreign subsidiaries are
translated into U.S. dollars in accordance with the provisions of
SFAS 52. Foreign currency translation gains were $233,000 and
$279,000 for the nine-month periods ended October 28, 1994, and
October 29, 1993, respectively.
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to October 28, 1994, and the three months
ended October 28, 1994, and October 29, 1993, is unaudited.)
Postretirement benefits
The company does not currently provide any postretirement
benefits for employees other than profit sharing.
Reclassification
Certain financial statement amounts have been reclassified
to be consistent with the fiscal 1995 presentation.
NOTE 2. SHAREHOLDERS' INVESTMENT
Capital stock
Upon shareholder approval, the company increased its
authorized shares from 30 million shares of $0.01 par value
common stock to 160 million in May 1994. The company has
authorized 5 million shares of preferred stock, $0.01 par value.
The company's board of directors has the authority to issue
shares and to fix dividends, voting and conversion rights,
redemption provisions, liquidation preferences, and other rights
and restrictions of the preferred stock.
Two-for-one stock split
In May 1994, the company declared a two-for-one split in the
company's common stock that was effected as a stock dividend
payable on June 15, 1994, to shareholders of record as of May 31,
1994. The stock split resulted in an increase in the stated
capital of the company from $201,103 to $402,206 with a
corresponding reduction in paid-in capital. This has been
reflected retroactively in the share presentation and earnings
per share calculations presented.
Treasury stock
The company's board of directors authorized the additional
purchase of 1.0 million shares of the company's common stock.
This increased the total shares authorized to be purchased from
3.1 million to 4.1 million. After the two-for-one stock split in
May 1994, this number increased from 4.1 million shares to 8.2
million. After the effect of the stock split, a total of 6.0
million and 4.8 million shares had been purchased as of October
28, and January 28, 1994, respectively.
Stock awards and grants
Shareholders of the company have approved the company's
restricted stock award plan. Under the provisions of the plan, a
committee of the company's board of directors may award shares of
the company's common stock to its officers and key employees.
Such shares generally vest over a ten-year period on a straight-
line basis from the date of the award.
In addition, the company has granted shares of its common
stock to individuals as an inducement to enter the employ of the
company. The shares granted are subject to vesting on a
straight-line basis over a ten-year period.
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Information pertaining to October 28, 1994, and the three months
ended October 28, 1994, and October 29, 1993, is unaudited.)
After the effect of the two-for-one stock split, the following
table reflects the activity under the stock award and stock grant
plans: Awards Grants
Balance at January 31, 1991 100,000 22,000
Granted -
Forfeited 2,880 -
Balance at January 31, 1992 97,120 22,000
Granted 74,000 -
Forfeited - -
Balance at January 29, 1993 171,120 22,000
Granted 27,200 -
Forfeited 3,600 -
Balance at January 28, 1994 194,720 22,000
Granted - -
Forfeited 6,000 10,000
Balance at October 28, 1994 188,720 12,000
A total of 67,320 shares awarded and granted have vested as
of October 28, 1994.
The granting of the above awards and grants has been
recorded as deferred compensation based on the fair market value
of the shares at the date of grant. Compensation expense under
these plans is recorded as shares vest.
Stock options
Upon shareholder approval, the company increased its
reserved shares from 1.0 million to 1.3 million shares of common
stock, either authorized and unissued shares or treasury shares,
for use by the plan. After the two-for-one stock split in May
1994, the shares increased from 1.3 million to 2.5 million.
Options are granted at the discretion of a committee of the
company's board of directors to officers and key employees of the
company. No option may have an exercise price less than the fair
market value per share of the common stock at the date of grant.
After the effect of the two-for-one stock split, activity under
the stock option plan is as follows: Average
Exercise
Options Price
Balance at January 31, 1991 900,000 $ 6.38
Granted 480,000 $12.69
Exercised - -
Balance at January 31, 1992 1,380,000 $ 8.57
Granted 80,000 $13.96
Exercised 400,000 $ 6.38
Balance at January 29, 1993 1,060,000 $ 9.81
Granted 637,200 $19.12
Exercised 8,000 $12.69
Balance at January 28, 1994 1,689,200 $13.31
Granted - -
Exercised 129,000 $ 6.62
Forfeited 480,000 $14.99
Balance at October 28, 1994 1,080,200 $13.36
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Information pertaining to October 28, 1994, and the three months
ended October 28, 1994, and October 29, 1993, is unaudited.)
The above options outstanding vest ratably over a 5 year
period from the date of grant (760,200) or on the fifth
anniversary from the date of grant (320,000). A total of 259,000
options have vested as of October 28, 1994. The outstanding
options expire as follows:
1995 - 295,000
2001 - 272,000
2002 - 80,000
2003 - 433,200
1,080,200
NOTE 3. INCOME TAXES
In January 1993, the company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Under the liability method prescribed by SFAS 109, deferred taxes
are provided based upon enacted tax laws and rates applicable to
the periods in which taxes become payable.
A valuation allowance has been established for the
deferred income tax benefits related to certain subsidiary loss
carryforwards, which may not be realized.
In all periods presented, the differences between income
taxes at the statutory federal income tax rate of 35 percent, and
income taxes reported in the consolidated statements of
operations are due primarily to the effect of state income taxes.
NOTE 4. LINES OF CREDIT
On September 2, 1994, the company increased its unsecured
lines of credit from a total of $110 million to $130 million.
Borrowings bear interest at the banks' prime rates, or at the
company's option, LIBOR plus a fixed percentage, or Federal Funds
rate-based negotiated pricing or the banks' Wholesale Certificate
of Deposit rate plus a fixed percentage. There was $99 million
outstanding at October 28, 1994, at interest rates averaging
5.4%, compared to no outstanding amount on January 28, 1994.
In addition, the company has unsecured lines of credit with
foreign banks totaling the equivalent of $20 million for a wholly
owned foreign subsidiary. There was $7 million outstanding at
October 28, 1994, at interest rates averaging 3.0%, compared to
none as of January 28, 1994.
NOTE 5. LONG-TERM DEBT
Long-term debt was $40,000 as of October 28, 1994, and
January 28, 1994.
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Information pertaining to October 28, 1994, and the three months
ended October 28, 1994, and October 29, 1993, is unaudited.)
The company has an agreement which expires December 31,
1995, with a bank for a $20 million credit facility. As of
September 2, 1994, this facility has been temporarily converted
to unsecured lines of credit (see Note 4 above). Outstanding
balances will bear interest at the bank's prime rate or, at the
company's option, LIBOR plus a fixed percentage. The company is
currently in compliance with all lending conditions and covenants
related to this debt facility.
NOTE 6. LEASES AND PURCHASE COMMITMENTS
The company leases store and office space and equipment
under various leasing arrangements. The leases are accounted for
as operating leases. Total rental expense under these leases was
$1.8 million and $1.9 million for the three-month periods ended
October 28, 1994, and October 29, 1993, respectively. Rental
expense for the nine-month periods ended October 28, 1994, and
October 29, 1993, was $5.8 million and $5.2 million,
respectively.
Total future fiscal year commitments under these leases as
of October 28, 1994, are as follows (in thousands):
1995 (three months) $ 1,628
1996 5,697
1997 4,812
1998 2,747
1999 969
After 1999 2,467
$18,320
Purchase commitments as of October 28, 1994, for property, plant
and equipment were $5.7 million.
NOTE 7. RETIREMENT PLAN AND ACCRUED COMPENSATION
The company has a retirement plan which covers most regular
employees and provides for annual contributions at the discretion
of the board of directors. Also included in the plan is a 401(k)
feature which allows employees to make contributions and the
company to match a portion of those contributions. Total expense
provided under this plan was $669,000 and $832,000 for the three-
month periods ended October 28, 1994, and October 29, 1993,
respectively. Total expenses were $1.8 million and $1.9 million
for the nine-month periods ended October 28, 1994, and
October 29, 1993, respectively. Accrued liabilities include
accrued compensation of $1.7 million and $1.6 million at
October 28, 1994, and January 28, 1994, respectively.
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Information pertaining to October 28, 1994, and the three months
ended October 28, 1994, and October 29, 1993, is unaudited.)
NOTE 8. STATE SALES AND USE TAX
A Supreme Court decision confirmed in May 1992, that the
Commerce Clause of the United States Constitution prevents a
state from requiring the collection of its use tax by a mail
order company unless the company has a physical presence in the
state. The company believes that the decision invalidated laws
adopted by a number of states, including California and
Tennessee, which purported to require out-of-state mail order
companies to collect and remit sales and use taxes with respect
to mail order sales in such states. However, the decision also
established that Congress has the power to enact legislation
which would permit states to require such collection by mail
order companies. Congress is currently addressing a bill which
would require mail order companies to collect and remit sales and
use tax in all states. It is anticipated that the change, if
adopted, will be applied prospectively. Although such a change
would likely influence the buying decisions of some customers,
the company believes there would be no material adverse effect on
financial results.
NOTE 9. ACQUISITION
In July 1994, the company formed a wholly-owned subsidiary
that acquired the marketing rights and assets of MontBell
America, Inc., which designs, develops and distributes premier
technical outdoor clothing and equipment through the wholesale
channel to outdoor specialty stores, primarily in the United
States. MontBell America, Inc., had sales of $2.3 million in
1993.
In March 1993, the company purchased a majority interest in
a catalog company, The Territory Ahead. Merchandise offered in
the catalog consists of private label sportswear, accessories and
luggage. They design casual merchandise that is colorful and has
an outdoor flavor. The emphasis is on fine detailing, unique
fabrications, updated styling, and excellent quality. Beginning
in 2003, the minority shareholders have the option to require the
company to purchase their shares, and the company will have the
option to require the minority shareholders to sell their shares
in The Territory Ahead. The price per share would be based on
the fair market value of The Territory Ahead.
Results of operations of MontBell America, Inc., and The
Territory Ahead were not material to the company, and as a
result, no pro forma data is presented. The transactions were
accounted for using the purchase method. The excess of the
purchase price over the fair value of net assets was recorded as
goodwill. The operating results of MontBell America, Inc., and
The Territory Ahead are included in the consolidated financial
statements of the company from their respective dates of
acquisition.
Item 2. Management's Discussion
and Analysis
Results of Operations
Three Months Ended October 28, 1994, compared with
Three Months Ended October 29, 1993
The company's net sales in the third quarter of fiscal 1995
increased 14.0 percent to $246.2 million from $215.1 million in
the third quarter of fiscal 1994. Net sales for the quarter just
ended rose mainly due to a higher level of liquidation sales and
increased sales from specialty catalogs, as well as higher sales
from international and new business areas. During the third
quarter, circulation of all catalogs was increased over the prior
year. The company's major spring/summer clearance catalog
contained more pages and was mailed to a larger group of
customers than in the past. Higher sales from this catalog,
combined with the discontinuation of the October interim catalog,
contributed to flat sales for the full price primary issues
mailed during the quarter. Customer demand in response to
primary catalogs mailed continued to be below management's
expectations into the fourth quarter.
Gross profit in the quarter just ended was $100.2 million,
or 40.7 percent of net sales, compared with $87.5 million, also
40.7 percent of net sales, in the third quarter of the prior
year. The increase in gross profit dollars was due to the
overall volume increases mentioned above. While there was a
decrease in gross profit margin in the quarter just ended due to
steeper markdowns and a higher level of liquidated merchandise,
this was offset by higher initial markups on full-price
merchandise. Liquidations of excess inventory totaled about 15
percent of net sales during the quarter, compared to almost 12
percent in the same period last year.
Inventory at the end of the third quarter was $255 million,
up 21 percent from $210 million a year ago. The increase in
inventory levels has occurred in part to achieve higher order
fulfillment levels to service the growth in sales. Also, the
growth in the United Kingdom, The Territory Ahead and Japan, and
the addition of Montbell has contributed to the overall increase
in inventory. Primarily because of higher inventory levels
throughout the quarter just ended, the company had about $106
million of short-term debt outstanding as of October 28, 1994,
compared with $54 million at the end of the same quarter last
year. Higher inventory levels may result in greater product
liquidations in future periods.
Selling, general and administrative expenses increased 26
percent to $93.5 million in the quarter just ended, compared with
$74.0 million in the same period last year. As a percentage of
sales, SG&A was 38.0 percent, compared with 34.4 percent in the
third quarter last year. The rise in the SG&A ratio was mainly
due to the company's continued aggressive investment spending to
build its international and new businesses, to expand customer
acquisition programs in advance of next year's 15% postal rate
hike and anticipated paper price increases, to enhance its
customer service by offering two-day UPS delivery service, and to
continue to upgrade its information systems. Some examples of
projects completed during the quarter include the launch of the
Japanese catalog, mailings of three foreign language test
catalogs into Europe and the first mailing of the MontBell
catalog.
Net income in the third quarter of fiscal 1995 was $3.8
million or $0.11 per share compared with net income of $8.0
million, or $0.22 per share in the third quarter last year, a
decline of about 52 percent.
Nine Months Ended October 28, 1994, compared with Nine Months
Ended October 28, 1993
The company's net sales in the first nine months of fiscal
1995 increased 17 percent to $613.1 million from $522.5 million
in the same period last year. Net sales rose mainly due to
increased circulation of primary and specialty catalogs.
Additional benefit to net sales came from strong performances
from the company's international and new businesses, The
Territory Ahead and Corporate Sales.
Gross profit of $257.2 million for the first nine months of
fiscal 1995 increased 20 percent from $214.4 million in the same
nine-month period last year. The increase in gross profit was
due principally to the same factors disclosed above for the third
quarter ended October 28, 1994. As a percentage of net sales,
gross profit increased from 41.0 percent in fiscal 1994 to
42.0 percent in fiscal 1995. The percentage of increase was due
in part to reduced merchandise costs and increased margin through
better sourcing. Year-to-date liquidation sales of 12 percent is
about the same as last year.
Selling, general and administrative expenses increased 25.9
percent to $237.1 million in the first nine months of fiscal 1995
from $188.3 million in the same period last year. This increase
was due primarily to the increased sales volume, as well as the
investment spending previously mentioned. As a percentage of net
sales, selling, general and administrative expenses increased to
38.7 percent in fiscal 1995 from 36.0 percent in fiscal 1994.
The percentage increased as a result of increased catalog
advertising, greater fixed expenses related to the previously
mentioned increase in investment spending, and relatively higher
variable costs (due primarily to higher shipping and handling
costs).
Net income in the first nine months of fiscal 1995 was
$12.1 million, or 34 cents per share, compared with $15.8
million, or 44 cents per share, earned in the first nine months
of the prior year before the cumulative effect of an accounting
change. During the first quarter last year, the company adopted
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," as required. This added $1.3 million of net
income, or 4 cents per share, to the results for the first nine
months of fiscal 1994, bringing the total for that period to 48
cents per share. (All per share amounts have been adjusted to
reflect the two-for-one stock split declared in May 1994.)
The Financial Accounting Standards Board recently issued
Statement Nos. 112 and 115, "Employer's Accounting for Post-
employment Benefits" and "Accounting for Certain Investments in
Debt and Equity Securities," respectively. The company adopted
these standards in the first quarter of fiscal 1995, and no
amounts are disclosed due to no material amounts existing.
Seasonality
The company's business is highly seasonal. The fall/winter
season, which the company regards as a five-month period ending
in December, includes the peak selling season during the Thanks-
giving and Christmas holidays in the company's fourth quarter.
In the longer spring/summer season, orders are fewer and the
merchandise offered generally has lower unit selling prices than
products offered in the fall/winter season. As a result, net
sales are usually substantially greater in the fall/winter season
and SG&A as a percentage of net sales is usually higher in the
spring/summer season. In addition, as the company continues to
refine its marketing efforts by experimenting with the timing of
its catalog mailings, quarterly results may fluctuate.
Liquidity and Capital Resources
To date, the bulk of the company's working capital needs
have been met through funds generated from operations and from
short-term bank lines. The company's principal need for working
capital has been to meet peak inventory requirements associated
with its seasonal sales pattern. In addition, the company's
resources have been used to purchase treasury stock, to make
asset additions, pay cash dividends to shareholders, to acquire
the marketing rights and assets of MontBell America, Inc., and to
purchase a majority interest in a specialty catalog company, The
Territory Ahead.
The company could experience an adverse impact to expenses
if there is a legislated change in health care benefits provided
to temporary employees. Due to the seasonal nature of the
business, it is a necessity that the company utilize temporary
employees during the busy holiday season. During the peak winter
season of fiscal 1995, it is estimated that approximately 4,200
of the company's 7,400 employees will be temporary employees.
Currently, health care benefits are not provided to temporary
employees.
The company continues to explore investment opportunities
arising from the expansion of its international business, the
development of new businesses and the acquisition of existing
businesses. While this aggressive investment spending is having
a negative impact on earnings, it is not expected to have a
material effect on liquidity.
As of September 2, 1994, the company increased its unsecured
bank credit lines from a total of $110 million to $130 million,
which is the amount available as of the date of filing. At
October 28, 1994, the company had $99 million outstanding on its
short-term lines of credit compared to $54 million as of
October 29, 1993. The company has a separate $20 million bank
facility available to fund treasury stock purchases and capital
expenditures. This agreement has been temporarily converted to
an unsecured line of credit and is included in the $130 million
above. The facility runs through December 31, 1995.
In addition, the company obtained lines of credit with
foreign banks totaling the equivalent of $20 million for a wholly
owned foreign subsidiary. The company had about $7 million
outstanding on these short-term lines of credit as of
October 28, 1994.
The company purchased 6.0 million shares of its common stock
from February 1, 1990, through December 12, 1994. As of
December 12, 1994, the company was authorized to purchase up to an
additional 2.2 million shares. For further information, see note
2 to the consolidated financial statements.
Capital expenditures for fiscal 1995 are currently planned
to be about $25 million, of which $20.6 million had been expended
through October 28, 1994. Major projects include constructing a
second distribution center in Reedsburg, Wisconsin, new computer
hardware and software, new material handling equipment, and
furniture and fixtures. The company believes that its cash flow
from operations and borrowings under its credit facilities will
be adequate to meet its capital requirements and operational
needs for the foreseeable future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings presently
pending, except for routine litigation incidental to
the business, to which Lands' End, Inc., is a party or
of which any of its property is the subject.
Items 2 and 3 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security
holders for the quarter ended October 28, 1994.
Item 5. Other Information
On August 17, 1994, David F. Dyer, vice chairman of
merchandising and sales resigned to accept the position
of chief operating officer with Home Shopping Network in
Florida. Dyer had been a member of the company's board
of directors since 1991.
On December 2, 1994, William T. End, Chief Executive
Officer and President resigned due to differences in
management style with the board of directors. End had
been a member of the board of directors since 1991.
Michael J. Smith has been named as Chief Executive
Officer and President effective December 2, 1994.
Smith was also appointed as a member of the board
of directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as a part of this
report:
Table Exhibit
Number Description Number
(10) Fifth Amendment to Loan Agreement between
the company and the American National Bank
and Trust Company of Chicago, dated
November 22, 1994. 2
(11) Statement of recomputation of earnings per
share 1
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
three-month period ended October 28, 1994.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, its duly authorized officer and
chief financial officer.
LANDS' END, INC.
Date: December 12, 1994 By: STEPHEN A. ORUM
Stephen A. Orum
Executive Vice President and
Chief Operating Officer
(Chief Financial Officer)
LIST OF DOCUMENTS INCORPORATED BY REFERENCE
In addition to the exhibits filed with this report, the exhibits
listed below have been heretofore filed with the Securities and
Exchange Commission as exhibits to the company's registration
statement on Form S-8 (File No. 33-46133) and on Form S-1 (File No.
33-08217) or to other filings with the Commission and are
incorporated herein as exhibits by reference, pursuant to Rule 24 of
the SEC Rules of Practice. The exhibit number of each document so
filed is stated next to the description of such exhibit. The file
number for all other documents is 1-9769.
Table Exhibit Document
Number Description of Item Number Description
(3) Articles of Incorporation and By-laws:
Certificate of Incorporation of the
company, as amended through
October 3, 1986. 1 S-1
Amendment to Certificate of 3 10-Q
Incorporation of the company, October 1987
dated August 10, 1987.
Amendment to Certificate of Incorporation 4 10-Q
of the company, dated May 20, 1994. July 1994
Amended and Restated By-Laws of 2 10-K 1993
the company.
(4) Equity Instrument and Agreements
relating to Debt Obligations:
Form of Certificate to evidence 1 10-Q
the Common stock. August 1990
(10) Material Contracts:
Form of letter from bank approving 7 10-K 1992
the company's unsecured line of
credit and corresponding note.
Term Loan Note and Loan Agreement 11 10-Q
between the company and the August 1990
American National Bank and Trust
Company of Chicago.
First Amendment to Loan Agreement 13 10-Q
between the company and the August 1991
American National Bank and Trust
Company of Chicago, dated
June 1, 1991.
Second Amendment to Loan Agreement 15 10-K 1992
between the company and the
American National Bank and Trust
Company of Chicago, dated
January 27, 1992.
Table Exhibit Document
Number Description of Item Number Description
(10) Third Amendment to Loan Agreement 16 10-K 1993
between the company and the
American National Bank and Trust
Company of Chicago, dated
December 11, 1992.
Fourth Amendment to Loan Agreement 1 10-K 1994
between the company and the
American National Bank and Trust
Company of Chicago, dated
December 1, 1993.
Buying Agreement between the company 7 10-Q
and European Buying Agency, Ltd. November 1990
Salaried Incentive Bonus Plan. 9 S-1
Second Amended and Restated 1989 12 10-Q
Restricted Stock Plan of the November 1991
company.
Amended and Restated Additional 17 10-Q
Incentive Bonus Plan of the November 1991
company.
Stock Option Plan of the company. 2 10-K 1994
Amended and Restated Retirement Plan, 3 10-K 1994
dated February 1, 1992.
(13) Annual Report to Shareholders for the 10-K 1994
fiscal year ended January 28, 1994.
Exhibit 10.2
FIFTH AMENDMENT TO LOAN AGREEMENT
This Fifth Amendment to Loan Agreement (this "Fifth Amendment") dated
as of November 22, 1994 by and between LANDS' END, INC., a Delaware
corporation (the "Borrower"), and AMERICAN NATIONAL BANK AND TRUST COMPANY
OF CHICAGO, a national banking association (the "Bank").
WITNESSETH:
WHEREAS, the Borrower and the Bank are parties to a certain Loan
Agreement dated as of July 19, 1990 (the "Loan Agreement") executed and
delivered in connection with a $20,000,000 Term Loan which the Bank agreed
to make to the Borrower, which Loan Agreement has been amended by a First
Amendment to Loan Agreement dated as of June, 1991, a Second Amendment to
Loan Agreement dated as of January 27, 1992, a Third Amendment to Loan
Agreement dated as of December 11, 1992, and by a Fourth Amendment to Loan
Agreement dated December 1, 1993 (said Loan Agreements and Amendments
herein referred to as the "Loan Agreement"); and
WHEREAS, the Bank and the Borrower wish to replace the Master Draw
Note with the previous Term Loan Note:
WHEREAS, the Bank and the Borrower wish to extend the time within
which disbursement of said Term Loan may be made; and
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, the Borrower and the Bank agree as follows:
1. Replace Master Draw Note with Term Loan Note. The Master Draw
Note in the amount of $20,000,000 dated August 24, 1994 that temporarily
replaced the $20,000,000 Term Loan Note dated July 19, 1990, shall be
terminated on December 31, 1994, and the Term Loan Note shall be reinstated
on December 31, 1994.
2. Extension of Final Disbursement Date. The Final Disbursement Date
under the Loan Agreement is hereby extended to December 31, 1995.
3. Representations and Warranties. Each of the representations and
warranties of the Borrower set forth in Section 4.1 of the Loan Agreement
is hereby remade and is on the date of this Fifth Amendment true and
correct.
4. Agreement in Full Force and Effect. Except as expressly modified
hereby, the Loan Agreement is and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Fifth Amendment to be
duly executed and delivered by their respective officers as of the date
first written above.
LANDS' END, INC. AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: MICHAEL L. KRENTZ By: AMY L. ALBER
Title: Treasurer Title: Second Vice President
Exhibit 11.1: Computation of Earnings Per Share
LANDS' END, INC. & SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
10/28/94 10/29/93 10/28/94 10/29/93
Net income before cumulative effect
of change in accounting............ $ 3,833 $ 7,976 $12,132 $15,773
Cumulative effect of change in
accounting for income taxes........ - - - 1,300
Net income .......................... $ 3,833 7,976 12,132 17,073
Average shares of common stock
outstanding during the period...... 34,872 35,923 35,252 35,951
Incremental shares from
assumed exercise of stock
options (primary).................. 353 556 407 426
35,225 36,479 35,659 36,377
Net income per share before cumulative
effect of change in accounting..... $ 0.11 $ 0.22 $ 0.34 $ 0.43
Cumulative effect of change
in accounting...................... - - - 0.04
Primary earnings per share........... $ 0.11 $ 0.22 $ 0.34 $ 0.47
Average shares of common stock
outstanding during the period...... 34,872 35,923 35,252 35,951
Incremental shares from assumed
exercise of stock options
(fully diluted).................... 353 601 407 602
35,225 36,524 35,659 36,553
Net income per share before cumulative
effect of accounting change........ $ 0.11 $ 0.22 $ 0.34 $ 0.43
Cumulative effect of change
in accounting...................... - - - 0.04
Fully diluted earnings per share..... $ 0.11 $ 0.22 $ 0.34 $ 0.47
Average shares of common stock
outstanding during the period...... 34,872 35,923 35,252 35,951
Basic earnings per share............. $ 0.11 $ 0.22 $ 0.34 $ 0.48