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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 31, 1997
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, 1997:
Common stock, $.01 par value 31,030,750 shares outstanding
LANDS' END, INC. & SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three Months Ended October 31, 1997, and
November 1, 1996.................................. 3
Consolidated Statements of Operations for the
Nine Months Ended October 31, 1997, and
November 1, 1996.................................. 4
Consolidated Balance Sheets at October 31, 1997
January 31, 1997, and November 1, 1996............ 5
Consolidated Statements of Cash Flows for the
Nine Months Ended October 31, 1997, and
November 1, 1996.................................. 6
Notes to Consolidated Financial Statements........... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 8-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 12
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 12
Item 5. Other Information.................................... 12
Item 6. Exhibits and Reports on Form 8-K..................... 12
Signature..................................................... 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended
Oct. 31, Nov. 1,
1997 1996
(Unaudited)
Net sales $318,608 $287,420
Cost of sales 171,859 161,333
Gross profit 146,749 126,087
Selling, general and
administrative expenses 129,769 115,769
Income from operations 16,980 10,318
Other income (expense):
Interest expense (953) (235)
Interest income 3 4
Other (2,468) 232
Total other income
(expense), net (3,418) 1
Income before income taxes 13,562 10,319
Income tax provision 5,400 4,162
Net income $ 8,162 $ 6,157
Net income per share $ 0.26 $ 0.19
Weighted average shares outstanding 31,767 32,895
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
3
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Nine months ended
Oct. 31, Nov. 1,
1997 1996
(unaudited)
Net sales $783,211 $695,415
Cost of sales 421,197 385,122
Gross profit 362,014 310,293
Selling, general and
administrative expenses 328,714 287,369
Income from operations 33,300 22,924
Other income (expense):
Interest expense (1,299) (404)
Interest income 1,511 104
Gain on sale of subsidiary 7,805 -
Other (3,156) (31)
Total other income (expense), net 4,861 (331)
Income before income taxes 38,161 22,593
Income tax provision 15,265 9,077
Net income $ 22,896 $ 13,516
Net income per share $ 0.71 $ 0.41
Weighted average shares outstanding 32,123 33,255
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
4
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Oct. 31, Jan. 31, Nov. 1,
1997 1997 1996
(unaudited) (audited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,490 $ 92,827 $ 5,961
Receivables 20,746 8,739 10,892
Inventory 320,881 142,445 206,939
Prepaid advertising 27,260 11,066 18,423
Other prepaid expenses 6,335 5,440 4,735
Deferred income tax benefit 9,511 11,522 10,914
Total current assets 393,223 272,039 257,864
Property, plant and equipment, at cost:
Land and buildings 75,264 72,360 72,377
Fixtures and equipment 113,634 98,642 95,871
Leasehold improvements 5,430 4,291 3,919
Construction in progress 9,360 1,337 -
Total property, plant and equipment 203,688 176,630 172,167
Less-accumulated depreciation
and amortization 83,777 72,946 69,854
Property, plant and equipment, net 119,911 103,684 102,313
Intangibles, net 846 2,322 2,404
Total assets $513,980 $378,045 $362,581
Liabilities and shareholders' investment
Current liabilities:
Lines of credit $118,065 $ 11,195 $ 26,688
Accounts payable 135,129 76,585 92,649
Reserve for returns 6,328 5,184 5,132
Accrued liabilities 30,013 28,141 30,584
Accrued profit sharing 1,470 2,937 1,541
Income taxes payable 5,669 21,524 2,378
Total current liabilities 296,674 145,566 158,972
Deferred income taxes 8,122 8,814 7,212
Long-term liabilities - 660 473
Shareholders' investment:
Common stock, 40,221 shares issued 402 402 402
Donated capital 8,400 8,400 8,400
Additional paid-in capital 26,359 26,230 26,230
Deferred compensation (1,129) (1,370) (1,440)
Currency translation adjustments 1,041 378 665
Retained earnings 333,957 311,061 273,625
Treasury stock, 9,067, 7,778 and
7,417 shares at cost, respectively (159,846) (122,096) (111,958)
Total shareholders' investment 209,184 223,005 195,924
Total liabilities and shareholders'
investment $513,980 $378,045 $362,581
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
5
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
Oct. 31, Nov. 1,
1997 1996
(unaudited)
Cash flows from (used for) operating activities:
Net income $ 22,896 $ 13,516
Adjustments to reconcile net income to net
cash flows from operating activities-
Depreciation and amortization 12,050 10,054
Deferred compensation expense 241 (247)
Deferred income taxes 1,319 -
Pre-tax gain on sale of subsidiary (7,805) -
Loss on disposal of fixed assets 718 125
Changes in current assets and liabilities
excluding the effects of acquisitions
and divestitures:
Receivables (12,322) (2,828)
Inventory (184,272) (42,123)
Prepaid advertising (16,194) (2,599)
Other prepaid expenses (2,616) 560
Accounts payable 63,002 30,269
Reserve for returns 1,144 577
Accrued liabilities 3,727 6,833
Accrued profit sharing (1,467) 58
Income taxes payable (15,855) (10,878)
Other 132 494
Net cash flows (used for) from operating activities (135,302) 3,811
Cash flows from investing activities:
Cash paid for capital additions (30,505) (13,488)
Proceeds from sale of subsidiary 12,350 -
Net cash flows used for investing activities (18,155) (13,488)
Cash flows from financing activities:
Proceeds from short-term debt 106,870 17,369
Purchases of treasury stock (37,750) (18,907)
Net cash flows from (used for) financing activities 69,120 (1,538)
Net decrease in cash and cash equivalents (84,337) (11,215)
Beginning cash and cash equivalents 92,827 17,176
Ending cash and cash equivalents $ 8,490 $ 5,961
Supplemental cash flow disclosures:
Interest paid $ 1,087 $ 372
Income taxes paid 31,900 19,876
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
6
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim financial statements
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. These consolidated financial
statements are condensed and should be read in conjunction with the financial
statements and the notes thereto included in the company's latest Annual
Report on Form 10-K, which includes financial statements for the year ended
January 31, 1997.
2. Reclassification
Certain financial statement amounts have been reclassified to be consistent
with the current presentation.
7
Item 2. Management's Discussion
and Analysis
Results of Operations
Three Months Ended October 31, 1997, compared with
Three Months Ended November 1, 1996
The company's net sales in the third quarter of fiscal 1998 increased 10.9
percent to $318.6 million from $287.4 million in the same quarter last year.
The increase in sales during the quarter just ended was mainly due to
additional catalogs and pages mailed. Increased sales came mainly from
specialty businesses and foreign-based operations, as well as from the core
business, represented by the regular monthly and prospecting catalogs. During
the quarter, pages mailed in the U.S. were higher than in the prior year, and
productivity, or sales per page, in the core catalogs was down from the prior
year. Net sales for last year's third quarter included $7.7 million from The
Territory Ahead, in which the company had a majority interest at that time.
Excluding this amount from the prior year's fiscal 1997 revenues, net sales
for the third quarter of fiscal 1998 increased 13.9 percent. During the first
five weeks of the fourth quarter of fiscal 1998, the year-over-year sales
increase trend has been somewhat weaker than in the third quarter.
Gross profit in the quarter just ended was $146.7 million, or 46.1 percent of
net sales, compared with $126.1 million, or 43.9 percent of net sales, in the
similar quarter last year. The increase in gross profit margin was primarily
due to higher initial markups and less steep markdowns on fewer sales of
liquidated merchandise. Liquidations of excess inventory were about 10
percent of net sales in the quarter just ended, compared with about 13 percent
in the similar period a year ago.
For the third quarter this year, selling, general and administrative expenses
increased 12 percent to $129.8 million, compared with $115.8 million for last
year's third quarter. As a percentage of net sales, SG&A was 40.7 percent,
compared with 40.3 percent in the similar period last year. The increase in
the SG&A ratio was primarily the result of lower productivity in the core
catalogs, partially offset by favorable paper prices.
The company had about $118 million of short-term debt as of October 31, 1997,
compared with $27 million at the end of last year's third quarter. Third
quarter ending inventory was $321 million, compared with $207 million a year
ago and $260 million two years ago. Last year many customers were
disappointed when their orders could not be filled during the late fall and
holiday seasons. This year the company has increased inventory in its efforts
to provide an annualized first-time fulfillment rate of at least 90 percent
for all items ordered by customers. Higher inventory levels may result in
greater product liquidations at lower margins in future periods.
Net income for the quarter just ended was $8.2 million, up 32.6 percent from
earnings of $6.2 million in the same quarter last year. Per share earnings
for the quarter just ended were $0.26, compared with $0.19 in the prior year.
Net income for the quarter just ended includes a foreign currency exchange
after-tax loss of $1.2 million, recorded as other expense. Foreign currency
exchange gains or losses will occur in response to currency market movements
and the company's hedging strategy. Last year's third quarter includes an
after-tax charge to earnings of $840,000, or a reduction of 3 cents per share,
in connection with the prior sale of the company's then wholly owned
subsidiary, MontBell America, Inc.
8
UPDATE ON THE EFFECT OF THE UPS STRIKE
The Lands' End normal service standard is to ship all in-stock items from its
distribution center within one business day of receiving the customer's order.
Nearly all packages are then delivered to customers in the United States via
UPS within two business days after they leave the distribution center. During
the 15-day UPS strike, all packages were shipped out of Dodgeville within one
business day and were mailed to customers via Priority Mail through the United
States Postal Service. From our tracking, we know that most customers
received their shipments within 2 to 4 business days.
As soon as the strike began, directly after the close of the second quarter,
there was a decline in the number of customer calls. As a result, the year-
over-year trend in sales in the beginning of the third quarter was below that
of the preceding quarter. Additional costs, included in SG&A, of about $1.3
million were incurred during the strike for shipping packages via Priority
Mail and for advertising to encourage customers to call. Although it is
difficult to estimate the amount of sales recovered after the strike ended,
the company believes the total impact on earnings from the UPS strike for the
third quarter was between $0.04 and $0.08 per share.
Nine Months Ended October 31, 1997, compared with
Nine Months Ended November 1, 1996
The company's net sales in the first nine months of fiscal 1998 increased 12.6
percent to $783.2 million from $695.4 million in the same period last year.
The increase in net sales was due primarily to the same factors disclosed
above for the three months ended October 31, 1997. Net sales from The
Territory Ahead for the first nine months in fiscal 1998 and 1997 were $5.1
million and $19.3 million, respectively. Excluding these amounts, net sales
for the first nine months of fiscal 1998 increased 15.1 percent.
Gross profit of $362.0 million for the first nine months of fiscal 1998
increased 16.7 percent from $310.3 million in the same nine-month period last
year. As a percentage of net sales, gross profit increased from 44.6 percent
in fiscal 1997 to 46.2 percent in fiscal 1998. The improvement in gross
profit margin was the result of the same factors disclosed above for the three
months ended October 31, 1997. Year-to-date liquidation sales were about nine
percent, compared with ten percent during the same period last year.
Selling, general and administrative expenses increased 14.4 percent to $328.7
million in the first nine months of fiscal 1998 from $287.4 million in the
same period last year. As a percentage of net sales, selling, general and
administrative expenses increased to 42.0 percent in fiscal 1998 from 41.3
percent in fiscal 1997. The increase in the SG&A ratio was primarily the
result of relatively higher order fulfillment and shipping expenses due to a
higher level of backorders, especially in the first six months.
Net income for the first nine months of fiscal 1998 was $22.9 million, or
$0.71 per share. This includes an after-tax gain of $4.7 million, or $0.15
per share, from the sale of the company's majority interest in The Territory
Ahead. Excluding this non-recurring gain, net income in the first nine months
of fiscal 1998 was $18.2 million, or $0.56 per share, compared with $13.5
million, or $0.41 per share, earned in the first nine months of the prior
year. In addition, year-to-date net income includes a foreign currency
exchange after-tax loss of $1.7 million, compared to an after-tax loss of $0.3
million in the prior year. These foreign currency exchange losses were
recorded as other expense.
9
Year 2000
Like most companies, Lands' End is addressing the Year 2000 problem. We are
continuing our comprehensive evaluation of all our computer systems and
microprocessors and are in the process of replacing, modifying and/or
converting those systems that are not Year 2000 compliant. The incremental
expenses over the next two fiscal years associated with our efforts to become
Year 2000 compliant are being determined as part of our continuing evaluation
and are expected to be significant. The company anticipates that it will be
able to provide additional information regarding the scope and anticipated
costs associated with Year 2000 compliance in its upcoming Form 10-K filing.
Seasonality of business
The company's business is highly seasonal. Historically, a disproportionate
amount of the company's net sales and a majority of its profits have been
realized during the fourth quarter. If the company's sales were materially
different from seasonal norms during the fourth quarter, the company's annual
operating results could be materially affected. In addition, as the company
continues to refine its marketing efforts by experimenting with the timing of
its catalog mailings, quarter results may fluctuate. Accordingly, results for
the individual quarters are not necessarily indicative of the results to be
expected for the entire year.
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 loans. 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 and make asset
additions.
The company will continue to explore investment opportunities arising from the
expansion of its international businesses and the development of new
businesses. While this investment spending has had some negative short term
impact on earnings, it is not expected to have a material effect on liquidity.
At October 31, 1997, the company had unsecured domestic credit facilities
totaling $110 million, of which about $85 million had been used. The company
also maintains foreign credit lines for use in foreign operations totaling the
equivalent of approximately $52 million as of October 31, 1997, of which $33
million was used. The company has a separate $20 million bank facility, which
runs through May 31, 1998, available to fund treasury stock purchases and
capital expenditures, all of which was unused.
Since fiscal 1990, the company's board of directors has authorized the company
from time to time to purchase a total of 10.7 million shares of treasury
stock. As of December 12, 1997, 10.2 million shares have been purchased, and
there is a balance of 0.5 million shares available to the company. The
company had used short-term borrowings under its existing bank facilities to
fund a portion of the $38 million of treasury stock purchased through October
31, 1997.
10
Capital expenditures for fiscal 1998 are currently planned to be about $50
million, of which about $31 million had been expended through October 31,
1997. Major projects to date as of October 31, 1997, included expansion of
distribution and office facilities in Dodgeville, WI, and in Oakham in the
United Kingdom, new computer hardware and software and replacement of a
corporate aircraft. The company believes that its cash flow from operations
and borrowings under its current credit facilities will provide adequate
resources to meet its capital requirements, treasury stock purchases and
operational needs for the foreseeable future.
11
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 31, 1997.
Item 5. Other Information
In October 1997, the company's board of directors elected Daniel
Okrent as a director of the company. Okrent has been editor of new
media for Time, Inc., New York, since December 1996, after serving
four years as managing editor of Life. Prior to 1991, he was editor
at Alfred A. Knopf, Inc. and Viking Press, and editor-in-chief at
Harcourt Brace Jovanovich, Inc. Okrent, 49, was founding editor of
New England Monthly, president of Texas Monthly Press and also
appeared as a featured commentator on Ken Burns' PBS series,
Baseball. Okrent has published four books, and his articles have
appeared in Esquire, Sports Illustrated, Travel & Leisure, and many
other magazines. He was co-creative director of Our Times, an
illustrated encyclopedia of the twentieth century, published in 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed as part of this report:
Table Exhibit
Number Description Number
(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 31, 1997.
12
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, 1997 By /s/ BRADLEY K. JOHNSON
Bradley K. Johnson
Senior Vice President,
Chief Administrative Officer
and Chief Financial Officer
13
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
10/31/97 11/01/96 10/31/97 11/01/96
Net income............................. $ 8,162 $ 6,157 $ 22,896 $ 13,516
Average shares of common stock
outstanding during the period.......... 31,767 32,895 32,123 33,255
Incremental shares from assumed
exercise of stock options (primary).... 344 193 346 130
32,111 33,088 32,469 33,385
Primary earnings per share............. $ 0.25 $ 0.19 $ 0.71 $ 0.40
Average shares of common stock
outstanding during the period.......... 31,767 32,895 32,123 33,255
Incremental shares from assumed exercise
of stock options (fully diluted)....... 432 208 432 208
32,199 33,103 32,555 33,463
Fully diluted earnings per share....... $ 0.25 $ 0.19 $ 0.70 $ 0.40
Average shares of common stock
outstanding during the period.......... 31,767 32,895 32,123 33,255
Basic earnings per share............... $ 0.26 $ 0.19 $ 0.71 $ 0.41