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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 May 1, 1998
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 June 12, 1998:
Common stock, $.01 par value 30,347,550 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 May 1, 1998, and
May 2, 1997....................................... 3
Consolidated Balance Sheets at May 1, 1998,
January 30, 1998, and May 2, 1997................. 4
Consolidated Statements of Cash Flows for the
Three Months Ended May 1, 1998, and
May 2, 1997....................................... 5
Notes to Consolidated Financial Statements........... 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 10
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 10
Item 6. Exhibits and Reports on Form 8-K..................... 10
Signature..................................................... 11
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
May 1, May 2,
1998 1997
(Unaudited)
Net sales $268,587 $244,720
Cost of sales 143,847 131,988
Gross profit 124,740 112,732
Selling, general and
administrative expenses 116,283 102,165
Income from operations 8,457 10,567
Other income (expense):
Interest expense (1,006) (142)
Interest income 1 956
Gain on sale of subsidiary - 7,805
Other 814 (342)
Total other income
(expense), net (191) 8,277
Income before income taxes 8,266 18,844
Income tax provision 3,058 7,538
Net income $ 5,208 $ 11,306
Basic earnings per share $ 0.17 $ 0.35
Diluted earnings per share $ 0.17 $ 0.35
Basic weighted average shares
outstanding 30,950 32,391
Diluted weighted average shares
outstanding 31,346 32,617
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
3
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
May 1, Jan. 30, May 2,
1998 1998 1997
(unaudited) (audited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,485 $ 6,338 $ 56,906
Receivables 18,583 15,443 12,536
Inventory 265,958 241,154 157,970
Prepaid advertising 21,599 18,513 13,276
Other prepaid expenses 5,349 5,085 5,016
Deferred income tax benefits 12,613 12,613 11,522
Total current assets 329,587 299,146 257,226
Property, plant and equipment, at cost:
Land and buildings 81,590 81,781 71,726
Fixtures and equipment 121,243 118,190 100,376
Leasehold improvements 5,541 5,443 5,068
Construction in progress 20,099 12,222 4,717
Total property, plant and equipment 228,473 217,636 181,887
Less-accumulated depreciation
and amortization 88,639 84,227 75,915
Property, plant and equipment, net 139,834 133,409 105,972
Intangibles, net 938 917 930
Total assets $470,359 $433,472 $364,128
Liabilities and shareholders' investment
Current liabilities:
Lines of credit $110,229 $ 32,437 $ 18,715
Accounts payable 66,890 83,743 68,364
Reserve for returns 4,872 6,128 4,332
Accrued liabilities 26,152 34,942 23,384
Accrued profit sharing 263 4,286 507
Income taxes payable 4,794 20,477 10,012
Total current liabilities 213,200 182,013 125,314
Deferred income taxes 8,747 8,747 8,814
Shareholders' investment:
Common stock, 40,221 shares issued 402 402 402
Donated capital 8,400 8,400 8,400
Additional paid-in capital 26,661 26,457 26,274
Deferred compensation (979) (1,047) (1,300)
Currency translation adjustments 747 875 709
Retained earnings 380,419 375,211 322,367
Treasury stock, 9,259, 9,281 and
7,948 shares at cost, respectively (167,238) (167,586) (126,852)
Total shareholders' investment 248,412 242,712 230,000
Total liabilities and shareholders'
investment $470,359 $433,472 $364,128
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
4
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
May 1, May 2,
1998 1997
(unaudited)
Cash flows from (used for) operating activities:
Net income $ 5,208 $ 11,306
Adjustments to reconcile net income to net
cash flows from operating activities-
Depreciation and amortization 4,457 4,048
Deferred compensation expense 68 70
Pre-tax gain on sale of subsidiary - (7,805)
Loss on disposal of fixed assets - 558
Changes in current assets and liabilities
excluding the effects of acquisitions
and divestitures:
Receivables (3,140) (4,112)
Inventory (24,804) (21,361)
Prepaid advertising (3,086) (2,210)
Other prepaid expenses (264) (1,297)
Accounts payable (16,853) (3,763)
Reserve for returns (1,256) (852)
Accrued liabilities (8,965) (3,485)
Accrued profit sharing (4,023) (2,430)
Income taxes payable (15,683) (11,512)
Other 76 (285)
Net cash flows used for operating activities (68,265) (43,130)
Cash flows from (used for) investing activities:
Cash paid for capital additions (10,728) (7,905)
Proceeds from sale of subsidiary - 12,350
Net cash flows from (used for) investing activities (10,728) 4,445
Cash flows from (used for) financing activities:
Proceeds from short-term debt 77,792 7,520
Exercise of stock options 348 102
Purchases of treasury stock - (4,858)
Net cash flows from financing activities 78,140 2,764
Net decrease in cash and cash equivalents (853) (35,921)
Beginning cash and cash equivalents 6,338 92,827
Ending cash and cash equivalents $ 5,485 $ 56,906
Supplemental cash flow disclosures:
Interest paid $ 1,006 $ 142
Income taxes paid 18,135 19,572
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
5
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 30, 1998.
2. Reclassification
Certain financial statement amounts have been reclassified to be consistent
with the current presentation.
3. Accounting standards
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires that entities
capitalize certain internal-use software costs once certain criteria are met.
The provisions of SOP 98-1 are effective for fiscal years beginning after
December 15, 1998. The company does not expect the adoption of SOP 98-1 will
have a material impact on the financial statements.
4. Earnings per share
In accordance with SFAS No. 128, "Earnings Per Share", the following table
discloses the computation of the diluted earnings per share and the basic
earnings per share. The common stock equivalents do not significantly dilute
earnings per share.
Three Months Ended
(In thousands, except per share data) May 1, 1998 May 2, 1997
Net income $ 5,208 $ 11,306
Average shares of common stock
outstanding 30,950 32,391
Incremental shares from assumed
exercise of stock options 396 226
31,346 32,617
Diluted earnings per share $ 0.17 $ 0.35
Basic earnings per share $ 0.17 $ 0.35
6
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Comprehensive income
In January 1998, the company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income
and its components. The following table presents the company's comprehensive
income (000's):
Three Months Ended
May 1, 1998 May 2, 1997
Net income $ 5,208 $ 11,306
Change in cumulative
translation adjustments, net (128) 331
Total comprehensive income $ 5,080 $ 11,637
7
Item 2. Management's Discussion
and Analysis
Results of Operations
Three Months Ended May 1, 1998, compared with
Three Months Ended May 2, 1997
The company's net sales in the first quarter of fiscal 1999 increased 9.8
percent to $268.6 million from $244.7 million in the same quarter last year.
The increase in sales for the quarter just ended was primarily due to an
increase in the number of catalogs and pages mailed. The growth in sales came
primarily from the company's specialty businesses. Sales from the core
business, represented by the company's regular monthly and prospecting
catalogs, were flat. Sales during the first two months of the quarter were
unexpectedly soft, and the majority of the sales gains were realized in the
last month of the quarter. Net sales for last year's first quarter included
$5.1 million from The Territory Ahead, in which the company had a majority
interest at that time. Excluding this amount from fiscal 1998's revenues, net
sales for the first quarter of fiscal 1999 increased 12.1 percent. Sales for
the first six weeks of the second quarter were not as strong as that 12.1
percent increase.
Gross profit in the quarter just ended was $124.7 million, or 46.4 percent of
net sales, compared with $112.7 million, or 46.1 percent of net sales, in the
first quarter of the prior year. The increase in gross profit margin was due
to higher initial margins. This was partially offset by higher sales of
liquidated merchandise due to a shift in timing of the company's liquidation
mailer which pushed more lower margin sales into the first quarter than in the
prior year. Liquidations of excess inventory were about 9 percent of net
sales in the quarter just ended, compared with about 7 percent in the prior
year.
For the first quarter this year, selling, general and administrative expenses
increased 14 percent to $116.3 million, compared with $102.2 million in the
similar quarter last year. As a percentage of net sales, SG&A was 43.3
percent, compared with 41.7 percent in the same period last year. The
increase in the SG&A ratio was mainly due to lower catalog productivity, or
sales per page. An additional factor contributing to the increased SG&A ratio
was higher costs primarily associated with the company's Year 2000 efforts.
During the quarter just ended, there was relatively lower profit sharing
costs, due to lower earnings for the period.
During the last half of the prior fiscal year, the company had increased
inventory to improve customer service. First quarter ending inventory was
$266 million, up 68 percent from $158 million in the prior year. The company
had about $110 million of short-term debt as of May 1, 1998, compared with $19
million at the same time last year. Interest expense in the quarter just
ended was $1.0 million, compared with $1.0 million of interest income in the
prior year. Higher inventory levels throughout the quarter contributed to
higher sales due to higher first-time order fulfillment. Higher inventory
levels may result in increased liquidations at greater markdowns in future
periods.
Net income for the quarter just ended was $5.2 million, and diluted earnings
per share were $0.17. Last year's first quarter earnings of $11.3 million, or
$0.35 per share, included 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 for the prior year's
first quarter was $6.6 million or $0.20 per share.
8
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 May 1, 1998, the company had unsecured domestic credit facilities totaling
$110 million, of which about $75 million had been used. The company also
maintains foreign credit lines for use in foreign operations totaling the
equivalent of approximately $49 million as of May 1, 1998, of which $35
million was used. The company has a separate $20 million bank facility, which
runs through May 31, 1999, 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 12.7 million shares of treasury
stock. As of June 12, 1998, 10.9 million shares have been purchased, and
there is a balance of 1.8 million shares available to the company. The
company did not purchase any treasury stock during the quarter ended May 1,
1998.
Capital expenditures for fiscal 1999 are currently planned to be about $55
million, of which about $11 million had been expended through May 1, 1998.
Major projects to date as of May 1, 1998, include a new distribution and phone
center in Oakham, England, expansion of distribution facilities in Reedsburg,
Wisconsin, completion of office facilities in Dodgeville, Wisconsin, and new
computer hardware and software. 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.
9
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
At the Annual Meeting of Shareholders held on May 13, 1998, pursuant
to the Notice of Annual Meeting of Shareholders and Proxy Statement
dated April 13, 1998, the voting results were as follows:
(a) Each of the three nominees (John N. Latter, Daniel Okrent and
Michael J. Smith) were elected to the Board of Directors. John
N. Latter had holders of 28,611,007 shares voted FOR and
259,261 shares WITHHELD. Daniel Okrent had holders of
28,624,899 shares voted FOR and 245,369 shares WITHHELD.
Michael J. Smith had holders of 28,598,131 shares voted FOR and
272,137 shares WITHHELD.
(b) The appointment of Arthur Andersen LLP as independent public
accountants for the company for the fiscal year ending January
29, 1999, was approved (28,731,786 shares voted FOR; 16,858
shares voted AGAINST; and 121,624 shares ABSTAINED).
Item 5. is not applicable and has been omitted
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
(10) Ninth Amendment to Loan Agreement
between the company and the American
National Bank and Trust Company of
Chicago, dated May 31, 1998 1
(b) Reports on Form 8-K
There were no reports filed on Form 8-K
during the three-month period ended
May 1, 1998.
10
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: June 12, 1998 By /s/ BRADLEY K. JOHNSON
Bradley K. Johnson
Senior Vice President,
Chief Administrative Officer
and Chief Financial Officer
11
Exhibit 10.1
NINTH AMENDMENT TO LOAN AGREEMENT
THIS NINTH AMENDMENT ("Amendment") is entered into as of this 31st day
of May, 1998, by and between LANDS' END, INC., a Delaware corporation
("Borrower"), and AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
("Bank").
WHEREAS, Borrower executed in favor of Bank a Loan Agreement dated July
19, 1990, as amended from time to time, in exchange for Bank's agreement to
lend monies to Borrower (the "Loan Agreement"); and
WHEREAS, the Bank and Borrower wish to extend the time within which
disbursement of the Term Loan may be made; and
WHEREAS, the parties hereto desire and have agreed to enter into this
Amendment in order to amend certain terms of the Loan Agreement; and
NOW, THEREFORE, in consideration of the above recitals, the mutual
promises and agreements of the parties set forth herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the Loan Agreement as follows:
1. Extension of Final Disbursement Date. The Final Disbursement Date under
the Loan Agreement is hereby extended to May 31, 1999.
2. This Amendment shall be incorporated into and made a part of the Loan
Agreement and all other related loan documents executed by Borrower.
3. All terms and provisions of the Loan Agreement and all other related loan
documents between Borrower and Bank, except as expressly modified herein,
shall continue in full force and effect, and Borrower hereby confirms each
and every one of its obligations under the Loan Agreement as amended
herein.
4. This Amendment shall be governed by, and construed in accordance with, the
internal laws of the State of Illinois.
5. This Amendment shall inure to the benefit of Bank's successors and
assigns, and shall be binding upon Borrower's successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
LANDS' END, INC.
a Delaware corporation
By: TERRY R. JANES
Terry R. Janes, Treasurer
ACCEPTED BY:
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By: PETER B. HARRISON, JR.
Peter B. Harrison, Jr.
Its: Commercial Banking Officer