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LANDS' END, INC. - Quarter Report: 2023 July (Form 10-Q)

10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 28, 2023

-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: 001-09769

 

Lands’ End, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

36-2512786

 

 

 

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

1 Lands’ End Lane

Dodgeville, Wisconsin

53595

 

 

 

(Address of principal executive offices)

(Zip Code)

 

(608) 935-9341

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

LE

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

As of August 28, 2023, the registrant had 31,926,226 shares of common stock, $0.01 par value, outstanding.


Table of Contents

 

LANDS’ END, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JULY 28, 2023

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

1

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Operations

 

2

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders' Equity

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

30

 

 

 

 

Item 4.

Controls and Procedures

 

31

 

 

 

 

 

PART II. OTHER INFORMATION

 

32

 

 

 

 

Item 1.

Legal Proceedings

 

32

 

 

 

 

Item 1A.

Risk Factors

 

32

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

 

Item 5.

Other Information

 

33

 

 

 

 

Item 6.

Exhibits

 

34

 

 

 

 

 

 

Signatures

 

35

 

 


Table of Contents

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LANDS’ END, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(in thousands, except per share data)

 

July 28,
2023

 

 

July 29,
2022

 

 

July 28,
2023

 

 

July 29, 2022

 

Net revenue

 

$

323,363

 

 

$

351,178

 

 

$

632,921

 

 

$

654,843

 

Cost of sales (excluding depreciation and amortization)

 

 

183,766

 

 

 

207,141

 

 

 

355,387

 

 

 

381,631

 

Gross profit

 

 

139,597

 

 

 

144,037

 

 

 

277,534

 

 

 

273,212

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

 

123,866

 

 

 

128,573

 

 

 

242,380

 

 

 

244,267

 

Depreciation and amortization

 

 

9,543

 

 

 

9,883

 

 

 

18,844

 

 

 

19,467

 

Other operating expense, net

 

 

390

 

 

 

39

 

 

 

592

 

 

 

39

 

Operating income

 

 

5,798

 

 

 

5,542

 

 

 

15,718

 

 

 

9,439

 

Interest expense

 

 

12,024

 

 

 

8,813

 

 

 

24,307

 

 

 

16,982

 

Other income, net

 

 

(169

)

 

 

(166

)

 

 

(356

)

 

 

(328

)

Loss before income taxes

 

 

(6,057

)

 

 

(3,105

)

 

 

(8,233

)

 

 

(7,215

)

Income tax expense (benefit)

 

 

1,961

 

 

 

(926

)

 

 

1,437

 

 

 

(2,665

)

NET LOSS

 

$

(8,018

)

 

$

(2,179

)

 

$

(9,670

)

 

$

(4,550

)

NET LOSS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

$

(0.25

)

 

$

(0.07

)

 

$

(0.30

)

 

$

(0.14

)

Diluted:

 

$

(0.25

)

 

$

(0.07

)

 

$

(0.30

)

 

$

(0.14

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

32,117

 

 

 

33,361

 

 

 

32,280

 

 

 

33,262

 

Diluted weighted average common shares outstanding

 

 

32,117

 

 

 

33,361

 

 

 

32,280

 

 

 

33,262

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

1


Table of Contents

 

 

LANDS’ END, INC.

Condensed Consolidated Statements of Comprehensive Operations

(Unaudited)

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

 

July 28, 2023

 

 

July 29, 2022

 

NET LOSS

 

$

(8,018

)

 

$

(2,179

)

 

$

(9,670

)

 

$

(4,550

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

700

 

 

 

(843

)

 

 

781

 

 

 

(3,937

)

COMPREHENSIVE LOSS

 

$

(7,318

)

 

$

(3,022

)

 

$

(8,889

)

 

$

(8,487

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2


Table of Contents

 

 

LANDS’ END, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

(in thousands, except per share data)

 

July 28, 2023

 

 

July 29, 2022

 

 

January 27, 2023*

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,610

 

 

$

23,505

 

 

$

39,557

 

Restricted cash

 

 

1,833

 

 

 

2,091

 

 

 

1,834

 

Accounts receivable, net

 

 

25,095

 

 

 

40,917

 

 

 

44,928

 

Inventories, net

 

 

396,087

 

 

 

569,174

 

 

 

425,513

 

Prepaid expenses and other current assets

 

 

43,195

 

 

 

39,267

 

 

 

44,894

 

Total current assets

 

 

492,820

 

 

 

674,954

 

 

 

556,726

 

Property and equipment, net

 

 

125,325

 

 

 

124,626

 

 

 

127,638

 

Operating lease right-of-use asset

 

 

29,685

 

 

 

32,115

 

 

 

30,325

 

Goodwill

 

 

106,700

 

 

 

106,700

 

 

 

106,700

 

Intangible asset

 

 

257,000

 

 

 

257,000

 

 

 

257,000

 

Other assets

 

 

2,949

 

 

 

3,760

 

 

 

3,759

 

TOTAL ASSETS

 

$

1,014,479

 

 

$

1,199,155

 

 

$

1,082,148

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

13,750

 

 

$

13,750

 

 

$

13,750

 

Accounts payable

 

 

156,342

 

 

 

236,015

 

 

 

171,557

 

Lease liability – current

 

 

5,643

 

 

 

6,720

 

 

 

5,414

 

Accrued expenses and other current liabilities

 

 

100,632

 

 

 

101,015

 

 

 

106,756

 

Total current liabilities

 

 

276,367

 

 

 

357,500

 

 

 

297,477

 

Long-term borrowings under ABL Facility

 

 

70,000

 

 

 

135,000

 

 

 

100,000

 

Long-term debt, net

 

 

218,022

 

 

 

228,948

 

 

 

223,506

 

Lease liability – long-term

 

 

29,973

 

 

 

32,333

 

 

 

31,095

 

Deferred tax liabilities

 

 

51,066

 

 

 

45,516

 

 

 

45,953

 

Other liabilities

 

 

3,283

 

 

 

4,913

 

 

 

3,365

 

TOTAL LIABILITIES

 

 

648,711

 

 

 

804,210

 

 

 

701,396

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Common stock, par value $0.01 authorized: 480,000 shares;
   issued and outstanding:
32,087, 33,202 and 32,626, respectively

 

 

321

 

 

 

332

 

 

 

326

 

Additional paid-in capital

 

 

360,091

 

 

 

371,245

 

 

 

366,181

 

Retained earnings

 

 

21,597

 

 

 

39,947

 

 

 

31,267

 

Accumulated other comprehensive loss

 

 

(16,241

)

 

 

(16,579

)

 

 

(17,022

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

365,768

 

 

 

394,945

 

 

 

380,752

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,014,479

 

 

$

1,199,155

 

 

$

1,082,148

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3


Table of Contents

 

 

LANDS’ END, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(9,670

)

 

$

(4,550

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

18,844

 

 

 

19,467

 

Amortization of debt issuance costs

 

 

1,634

 

 

 

1,546

 

Loss on disposal of property and equipment

 

 

100

 

 

 

39

 

Stock-based compensation

 

 

1,893

 

 

 

3,403

 

Deferred income taxes

 

 

4,905

 

 

 

372

 

Other

 

 

(255

)

 

 

(374

)

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

19,861

 

 

 

8,292

 

Inventories, net

 

 

30,427

 

 

 

(190,885

)

Accounts payable

 

 

(8,988

)

 

 

91,370

 

Other operating assets

 

 

2,354

 

 

 

(2,105

)

Other operating liabilities

 

 

(6,278

)

 

 

(44,100

)

Net cash provided by (used in) operating activities

 

 

54,827

 

 

 

(117,525

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Sales of property and equipment

 

 

 

 

 

87

 

Purchases of property and equipment

 

 

(22,862

)

 

 

(14,863

)

Net cash used in investing activities

 

 

(22,862

)

 

 

(14,776

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from borrowings under ABL Facility

 

 

118,000

 

 

 

141,000

 

Payments of borrowings under ABL Facility

 

 

(148,000

)

 

 

(6,000

)

Payments on term loan

 

 

(6,875

)

 

 

(6,875

)

Payments of debt issuance costs

 

 

(45

)

 

 

 

Payments for taxes related to net share settlement of equity awards

 

 

(1,199

)

 

 

(4,310

)

Purchases and retirement of common stock

 

 

(6,789

)

 

 

(2,357

)

Net cash (used in) provided by financing activities

 

 

(44,908

)

 

 

121,458

 

Effects of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(5

)

 

 

304

 

NET DECREASE IN CASH, CASH EQUIVALENTS AND
      RESTRICTED CASH

 

 

(12,948

)

 

 

(10,539

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH,
      BEGINNING OF PERIOD

 

 

41,391

 

 

 

36,135

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD

 

$

28,443

 

 

$

25,596

 

SUPPLEMENTAL CASH FLOW DATA

 

 

 

 

 

 

Unpaid liability to acquire property and equipment

 

$

3,551

 

 

$

2,914

 

Income taxes paid (refunded)

 

$

(298

)

 

$

4,013

 

Interest paid

 

$

22,138

 

 

$

16,661

 

Operating lease right-of-use-assets obtained in exchange for lease liabilities

 

$

1,542

 

 

$

3,902

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


Table of Contents

 

 

LANDS’ END, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

 

 

Common Stock Issued

 

 

Additional
Paid-in

 

 

Retained

 

 

Accumulated
Other
Comprehensive

 

 

Total
Stockholders’

 

(in thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

(Loss)

 

 

Equity

 

Balance at January 27, 2023

 

 

32,626

 

 

$

326

 

 

$

366,181

 

 

$

31,267

 

 

$

(17,022

)

 

$

380,752

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,652

)

 

 

 

 

 

(1,652

)

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81

 

 

 

81

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,083

 

 

 

 

 

 

 

 

 

1,083

 

Vesting of restricted shares

 

 

408

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Common stock withheld related to net share
      settlement of equity awards

 

 

(144

)

 

 

 

 

 

(1,199

)

 

 

 

 

 

 

 

 

(1,199

)

Purchases and retirement of common stock

 

 

(430

)

 

 

(4

)

 

 

(3,777

)

 

 

 

 

 

 

 

 

(3,781

)

Balance at April 28, 2023

 

 

32,460

 

 

$

325

 

 

$

362,285

 

 

$

29,615

 

 

$

(16,941

)

 

$

375,284

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(8,018

)

 

 

 

 

 

(8,018

)

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

700

 

 

 

700

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

810

 

 

 

 

 

 

 

 

 

810

 

Vesting of restricted shares

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and retirement of common stock

 

 

(375

)

 

 

(4

)

 

 

(3,004

)

 

 

 

 

 

 

 

 

(3,008

)

Balance at July 28, 2023

 

 

32,087

 

 

$

321

 

 

$

360,091

 

 

$

21,597

 

 

$

(16,241

)

 

$

365,768

 

 

 

 

 

Common Stock Issued

 

 

Additional
Paid-in

 

 

Retained

 

 

Accumulated
Other
Comprehensive

 

 

Total
Stockholders’

 

(in thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

(Loss)

 

 

Equity

 

Balance at January 28, 2022

 

 

32,985

 

 

$

330

 

 

$

374,413

 

 

$

44,595

 

 

$

(12,642

)

 

$

406,696

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,371

)

 

 

 

 

 

(2,371

)

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,094

)

 

 

(3,094

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,484

 

 

 

 

 

 

 

 

 

1,484

 

Vesting of restricted shares

 

 

660

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Common stock withheld related to net share
      settlement of equity awards

 

 

(232

)

 

 

 

 

 

(4,310

)

 

 

 

 

 

 

 

 

(4,310

)

Balance at April 29, 2022

 

 

33,413

 

 

$

334

 

 

$

371,583

 

 

$

42,224

 

 

$

(15,736

)

 

$

398,405

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,179

)

 

 

 

 

 

(2,179

)

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(843

)

 

 

(843

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,919

 

 

 

 

 

 

 

 

 

1,919

 

Vesting of restricted shares

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and retirement of common stock

 

 

(212

)

 

 

(2

)

 

 

(2,257

)

 

 

(98

)

 

 

 

 

 

(2,357

)

Balance at July 29, 2022

 

 

33,202

 

 

$

332

 

 

$

371,245

 

 

$

39,947

 

 

$

(16,579

)

 

$

394,945

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


Table of Contents

 

 

LANDS’ END, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. BACKGROUND AND BASIS OF PRESENTATION

 

Description of Business

 

Lands’ End, Inc. (“Lands’ End” or the “Company”) is a leading digital retailer of casual clothing, swimwear, outerwear, accessories, footwear, home products and uniform solutions. Lands’ End offers products online at www.landsend.com, through Company Operated stores and through third-party distribution channels. Lands’ End is a classic American lifestyle brand with a passion for quality, legendary service and real value and seeks to deliver timeless style for women, men, kids and the home. Lands’ End also offers products to businesses and schools, for their employees and students, through the Outfitters distribution channel. References to www.landsend.com do not constitute incorporation by reference of the information at www.landsend.com, and such information is not part of this Quarterly Report on Form 10-Q or any other filings with the SEC, unless otherwise explicitly stated.

 

Terms that are commonly used in the Company’s Notes to Condensed Consolidated Financial Statements are defined as follows:

 

ABL Facility – Asset-based senior secured credit agreement, providing for a revolving facility, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders, as amended to date

 

Adjusted EBITDA – Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit), Interest expense, Depreciation and amortization and certain significant items

 

ASC – Financial Accounting Standards Board Accounting Standards Codification, which serves as the source for authoritative GAAP, as supplemented by rules and interpretive releases by the SEC which are also sources of authoritative GAAP for SEC registrants

 

Company Operated stores – Lands’ End retail stores in the Retail distribution channel

 

Debt Facilities – Collectively, the Term Loan Facility and ABL Facility

 

Deferred Awards – Time vesting stock awards

 

EPS – Earnings per share

 

FASB – Financial Accounting Standards Board

 

First Quarter 2022 - The 13 weeks ended April 29, 2022

 

Fiscal 2022 – The 52 weeks ended January 27, 2023

 

GAAP – Accounting principles generally accepted in the United States

 

LIBOR – London inter-bank offered rate

 

Option Awards – Stock option awards

 

Performance Awards – Performance-based stock awards

 

SEC – United States Securities and Exchange Commission

 

Second Quarter 2023 - The 13 weeks ended July 28, 2023

 

SOFR – Secured Overnight Funding Rate

 

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Target Shares – Number of restricted stock units awarded to a recipient which reflects the number of shares to be delivered based on achievement of target performance goals

 

Term Loan Facility – Term loan credit agreement, dated as of September 9, 2020, among the Company, Fortress Credit Corp., as Administrative Agent and Collateral Agent, and the lenders party thereto, as amended to date

 

Third Quarter 2022 – The 13 weeks ended October 28, 2022

 

 

Basis of Presentation

 

The Condensed Consolidated Financial Statements include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands’ End Annual Report on Form 10-K filed with the SEC on April 10, 2023.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2020, the FASB issued ASU 2020-04, Reference Reform Rate (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference reform if certain criteria are met. These transactions include contract modifications, hedge relationships and sale or transfer of debt securities classified as held-to-maturity. This ASU, which was effective upon issuance and modified by ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of Sunset Date of Topic 848, may be applied through December 31, 2024, is applicable to all contracts and hedging relationships that reference the LIBOR or any other reference rate expected to be discontinued. The guidance in ASU 2020-04 may be implemented over time as reference rate reform activities occur.

 

As part of the response to the reference rate reform, during Second Quarter 2023, the Company amended the Debt Facilities to replace the interest rate based upon the LIBOR benchmark to the SOFR benchmark. See Note 5. Debt for additional details regarding these changes. Concurrent with the amendments, the Company adopted ASU 2020-04. The Company utilized optional practical expedients for contract modifications under ASC 848-20-358 Contracts within the Scope of Topic 470 and the adoption of ASU 2020-04 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

NOTE 3. LOSS PER SHARE

 

The numerator for both basic and diluted EPS is net loss. The denominator for basic EPS is based upon the number of weighted average shares of Lands’ End common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of Lands’ End common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with GAAP. Potentially dilutive securities for the diluted EPS calculations consist of non-vested equity shares of common stock and in-the-money outstanding options where the current stock price exceeds the option strike price.

 

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The following table summarizes the components of basic and diluted EPS:

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(in thousands, except per share amounts)

 

July 28, 2023

 

 

July 29, 2022

 

 

July 28, 2023

 

 

July 29, 2022

 

Net loss

 

$

(8,018

)

 

$

(2,179

)

 

$

(9,670

)

 

$

(4,550

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

32,117

 

 

 

33,361

 

 

 

32,280

 

 

 

33,262

 

Dilutive effect of stock awards

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

 

32,117

 

 

 

33,361

 

 

 

32,280

 

 

 

33,262

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share

 

$

(0.25

)

 

$

(0.07

)

 

$

(0.30

)

 

$

(0.14

)

Diluted loss per share

 

$

(0.25

)

 

$

(0.07

)

 

$

(0.30

)

 

$

(0.14

)

 

Stock awards are considered anti-dilutive based on the application of the treasury stock method or in the event of a net loss. Anti-dilutive shares excluded from the diluted weighted average shares outstanding were 1,617,940 anti-dilutive shares in the 13 weeks ended July 28, 2023, 1,098,859 anti-dilutive shares in the 13 weeks ended July 29, 2022, 1,411,376 anti-dilutive shares in the 26 weeks ended July 28, 2023 and 1,209,586 anti-dilutive shares in the 26 weeks ended July 29, 2022.

NOTE 4. 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.

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

 

July 28, 2023

 

 

July 29, 2022

 

Beginning balance: Accumulated other comprehensive loss
      (net of tax of $
4,503, $4,184, $4,525 and $3,361 respectively)

 

$

(16,941

)

 

$

(15,736

)

 

$

(17,022

)

 

$

(12,642

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (net of tax of ($186), $223, ($208) and $1,046 respectively)

 

 

700

 

 

 

(843

)

 

 

781

 

 

 

(3,937

)

Ending balance: Accumulated other comprehensive loss
      (net of tax of $
4,317, $4,407, $4,317 and $4,407 respectively)

 

$

(16,241

)

 

$

(16,579

)

 

$

(16,241

)

 

$

(16,579

)

 

No amounts were reclassified out of Accumulated other comprehensive (loss) during any of the periods presented.

NOTE 5. DEBT

 

ABL Facility

 

The Company’s $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs. The amount available to borrow is the lesser of (1) the Aggregate Commitments of $275.0 million (“ABL Facility Limit”) or (2) the Borrowing Base which is calculated from Eligible

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Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility.

The following table summarizes the Company’s ABL Facility borrowing availability:

 

 

 

July 28, 2023

 

July 29, 2022

 

January 27, 2023

(in thousands)

 

Amount

 

 

Interest Rate

 

Amount

 

 

Interest Rate

 

Amount

 

 

Interest Rate

ABL Facility Limit

 

$

275,000

 

 

 

 

$

275,000

 

 

 

 

$

275,000

 

 

 

Borrowing Base

 

 

207,326

 

 

 

 

 

288,498

 

 

 

 

 

274,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding borrowings

 

 

70,000

 

 

6.82%

 

 

135,000

 

 

3.51%

 

 

100,000

 

 

6.27%

Outstanding letters of credit

 

 

8,554

 

 

 

 

 

13,828

 

 

 

 

 

10,557

 

 

 

ABL Facility utilization at end of period

 

 

78,554

 

 

 

 

 

148,828

 

 

 

 

 

110,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABL Facility borrowing availability

 

$

128,772

 

 

 

 

$

126,172

 

 

 

 

$

163,797

 

 

 

 

Long-Term Debt

 

The Company’s September 9, 2020 Term Loan Facility provided borrowings of $275.0 million. Origination costs, including an Original Issue Discount (“OID”) of 3% and $5.1 million in debt origination fees, were paid in connection with entering into the Term Loan Facility. The OID and the debt origination fees are presented as a direct deduction from the carrying value of the Term Loan Facility and are amortized over the term of the loan to Interest expense in the Condensed Consolidated Statements of Operations.

 

The Company’s long-term debt consisted of the following:

 

 

 

July 28, 2023

 

July 29, 2022

 

January 27, 2023

(in thousands)

 

Amount

 

 

Interest Rate

 

Amount

 

 

Interest Rate

 

Amount

 

 

Interest Rate

Term Loan Facility

 

$

237,188

 

 

14.97%

 

$

250,938

 

 

12.12%

 

$

244,063

 

 

14.13%

Less: Current portion of long-term debt

 

 

13,750

 

 

 

 

 

13,750

 

 

 

 

 

13,750

 

 

 

Less: Unamortized debt issuance costs

 

 

5,416

 

 

 

 

 

8,240

 

 

 

 

 

6,807

 

 

 

Long-term debt, net

 

$

218,022

 

 

 

 

$

228,948

 

 

 

 

$

223,506

 

 

 

 

Interest; Fees

 

Effective May 12, 2023, the Company executed the Fourth Amendment (the “Fourth Amendment”) to the ABL Facility which replaced the interest rate benchmark based on LIBOR with an interest rate benchmark based on SOFR plus an adjustment of 0.10% for all loans (“ABL Adjusted SOFR”). This transition resulted in no material interest rate impact. The ABL Adjusted SOFR rate is now available for all new loans after the effective date of the Fourth Amendment.

Effective with the Fourth Amendment, the ABL Facility interest rate, selected at the borrower’s election, is either (1) ABL Adjusted SOFR, or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month ABL Adjusted SOFR rate plus 1.00%, or (c) the Wells Fargo “prime rate”. The borrowing margin for ABL Adjusted SOFR loans is (i) less than $95.0 million, 1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For base rate loans, the borrowing margin is (i) less than $95.0 million, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00% (“Applicable Borrowing Margin”). The Applicable Borrowing Margin for all loans is based upon the average daily total loans outstanding for the previous quarter.

 

Prior to the Fourth Amendment to the ABL Facility, the interest rate, selected at the borrower’s election, was either (1) LIBOR (plus the Applicable Borrowing Margin), or (2) a base rate (plus the Applicable Borrowing Margin) which was the greater of (a) the federal funds rate plus 0.50%, (b) the one-month LIBOR rate plus 1.00%, or (c) the Wells Fargo “prime rate”.

Effective June 22, 2023, the Company entered into Amendment No. 1 (the “First Amendment”) to the Term Loan Facility which (subject to a 1% floor) replaced the interest rate benchmark based upon LIBOR with an interest rate benchmark based upon SOFR plus adjustments of either (a) 0.11448% for a one-month interest period, (b) 0.26161% for a three-month interest period, or (c) 0.42826% for a six-month interest period (“Term Loan Adjusted SOFR”). This transition resulted in no material interest rate impact.

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Effective with the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility is based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Adjusted Loan SOFR rate plus 9.75% or (2) an alternative base rate (which is the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which shall be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month Term Loan Adjusted SOFR rate plus 1.00% per annum) plus 8.75%.

Prior to the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a LIBOR rate (with a minimum rate of 1.00%) plus 9.75% or (2) an alternative base rate (which was the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which was to be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month LIBOR rate plus 1.00% per annum) plus 8.75%.

During Second Quarter 2023, the Company adopted ASU 2020-04, the optional practical expedient for Reference Rate Reform related to its Debt Facilities and as such, these amendments are treated as a continuation of the existing debt agreement and no gain or loss on these modifications were recorded in the Condensed Consolidated Statement of Operations.

Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees include (i) commitment fees of 0.25% based upon the average daily unused commitment (aggregate commitment less loans and letter of credit outstanding) under the ABL Facility for the preceding fiscal quarter and (ii) customary letter of credit fees. As of July 28, 2023, the Company had borrowings of $70.0 million under the ABL Facility.

 

Maturity; Amortization and Prepayments

The ABL Facility maturity date is the earlier of (a) July 29, 2026 and (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 Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to 1.25% per quarter. It is subject to mandatory prepayments in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 75% depending on the Company’s total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan could not be voluntarily prepaid during the first two years of its term without significant penalties. A prepayment premium of 3% applies to voluntary prepayments and certain mandatory prepayments made after September 9, 2022 and on or prior to September 9, 2023, 1% for such prepayments made after September 9, 2023 and on or prior to September 9, 2024 and no premium on such prepayments thereafter.

 

Guarantees; Security

 

All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.

 

The Term Loan Facility is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is secured by a second priority interest in the same collateral, with certain exceptions.

 

Representations and Warranties; Covenants

 

Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business.

 

The Term Loan Facility contains certain financial covenants, including a quarterly maximum total leverage ratio test, a weekly minimum liquidity test and an annual maximum capital expenditure amount.

 

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Under the ABL Facility, if excess availability falls below the greater of 10% of the Loan Cap amount or $15.0 million, the Company will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0.

 

The Debt Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.

As of July 28, 2023, the Company was in compliance with its financial covenants in the Debt Facilities.

Events of Default

 

The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.

NOTE 6. STOCK-BASED COMPENSATION

 

The Company expenses the fair value of all stock awards over their requisite service period, ensuring that the amount of cumulative stock-based compensation expense recognized at any date is at least equal to the portion of the grant-date fair value of the award that is vested at that date. The Company has elected to adjust stock-based compensation expense for an estimated forfeiture rate for those shares not expected to vest and to recognize stock-based compensation expense on a straight-line basis for awards that only have a service requirement with multiple vest dates.

 

The Company has granted the following types of stock awards to employees at management levels and above, each of which are granted under the Company’s stockholder approved stock plans, other than inducement grants outside of the Company’s stockholder approved stock plans in accordance with Nasdaq Listing Rule 5635(c)(4):

 

Deferred Awards are in the form of restricted stock units and only require each recipient to complete a service period for the awards to be earned. Deferred Awards generally vest over three years. The fair value of Deferred Awards is based on the closing price of the Company’s common stock on the grant date. Stock-based compensation expense is recognized ratably over the service period and is reduced for estimated forfeitures of those awards not expected to vest due to employee turnover.
Performance Awards are in the form of restricted stock units and have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. In addition, beginning with awards granted in 2023, Performance Awards are subject to a relative total shareholder return (”TSR”) modifier which is based on the Company’s total return to stockholders over the measurement period relative to a custom peer group. For Performance Awards granted, the Target Shares earned can range from 50% to 200% (such result, the “Earned Shares”) once minimum thresholds have been reached and depend on the achievement of Adjusted EBITDA and revenue performance measures, for the cumulative period comprised of three-consecutive fiscal years beginning with the fiscal year of the grant date. The TSR modifier can result in an adjustment of 75% to 125% of the Earned Shares, subject to an overall cap of 200% and a modifier limitation to 100% in the event TSR is negative. Performance Awards are also subject to limitations under the Company’s stockholder approved stock plans. The applicable percentage of the Target Shares, as determined by performance, vest after the completion of the applicable three-year performance period and upon determination of achievement of the performance measures by the Compensation Committee of the Board of Directors, and unearned Target Shares are forfeited. The fair value of the Performance Awards granted before 2023 are based on the closing price of the Company’s common stock on the grant date. For awards with market conditions, the grant date fair value is based on the Monte Carlo simulation model. Stock-based compensation expense, including awards with market conditions, is recognized ratably over the related service period, reduced for estimated forfeitures of those awards not expected to vest due to employee turnover and adjusted based on the Company’s estimate of the percentage of the aggregate Target Shares expected to be earned. The Company accrues for Performance Awards on a 100% payout unless it becomes probable that the outcome will be significantly different, or the performance can be accurately measured.

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 over the requisite service period of the award. The fair value of each Option Award is estimated on the grant date using the Black-Scholes option pricing model.

 

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The following table provides a summary of the Company’s stock-based compensation expense, which is included in Selling and administrative expense in the Condensed Consolidated Statements of Operations:

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

 

July 28, 2023

 

 

July 29, 2022

 

Deferred awards

 

$

1,242

 

 

$

1,350

 

 

$

2,221

 

 

$

2,905

 

Performance awards

 

 

(536

)

 

 

569

 

 

 

(536

)

 

 

498

 

Option awards

 

 

104

 

 

 

 

 

 

208

 

 

 

 

Total stock-based compensation expense

 

$

810

 

 

$

1,919

 

 

$

1,893

 

 

$

3,403

 

 

Deferred Awards

 

The following table provides a summary of the Deferred Awards activity for the 26 weeks ended July 28, 2023:

 

 

 

Deferred Awards

 

(in thousands, except per share amounts)

 

Number of
Shares

 

 

Weighted Average
Grant Date Fair Value
per Share

 

Unvested deferred awards as of January 27, 2023

 

 

906

 

 

$

16.46

 

Granted

 

 

836

 

 

 

8.54

 

Vested

 

 

(410

)

 

 

12.35

 

Forfeited or expired

 

 

(74

)

 

 

20.68

 

Unvested deferred awards as of July 28, 2023

 

 

1,258

 

 

$

12.28

 

 

Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $10.8 million as of July 28, 2023, which is expected to be recognized ratably over a weighted average period of 2.3 years. The total fair value of Deferred Awards vested during the 26 weeks ended July 28, 2023 was $5.1 million. The Deferred Awards granted to employees during the 26 weeks ended July 28, 2023 vest over a period of three years.

 

Performance Awards

 

The following table provides a summary of the Performance Awards activity for the 26 weeks ended July 28, 2023:

 

 

 

Performance Awards

 

(in thousands, except per share amounts)

 

Number of
Shares

 

 

Weighted Average
Grant Date Fair Value
per Share

 

Unvested performance awards as of January 27, 2023

 

 

355

 

 

$

24.39

 

Granted

 

 

567

 

 

 

9.74

 

Vested

 

 

 

 

 

 

Forfeited or expired

 

 

(55

)

 

 

24.33

 

Unvested performance awards as of July 28, 2023

 

 

867

 

 

$

14.81

 

 

Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $4.4 million as of July 28, 2023 which is expected to be recognized ratably over a weighted average period of 2.7 years. The Performance Awards granted to employees during the 26 weeks ended July 28, 2023 vest, if earned, after completion of the applicable three-year performance period. The fair value for the Performance Awards granted during the 26 weeks ended July 28, 2023, which includes a relative TSR modifier, was estimated on the grant date using a Monte Carlo simulation with the below noted assumptions:

 

Monte Carlo Simulation Assumptions

 

 

 

Risk-free interest rate (1)

 

 

4.46

%

Expected dividend yield

 

 

0.00

%

Expected volatility (2)

 

 

78.04

%

Expected term (in years) (3)

 

 

2.63

 

Grant date fair value per share

$

 

9.74

 

 

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(1)
The risk-free interest is based on the continuously compounded yield on a zero-coupon U.S. Treasury STRIPS as of the grant date for a period equal to the expected term.
(2)
The expected volatility is estimated based on the historical volatility of the Company’s common stock with a term consistent with the expected term of the performance award.
(3)
The expected term (in years) of the performance award represents the estimated period of time from the grant date to the end of the performance period.

 

Option Awards

 

During the 26 weeks ended July 28, 2023 there was no Option Awards activity. The following table provides a summary of information about the Option Awards vested and expected to vest during the contractual term, as well as Option Awards exercisable as of July 28, 2023:

 

(in thousands, except contractual life and exercise price amounts)

 

Option Awards

 

 

Weighted
Average
Remaining Contractual Life (Years)

 

 

Weighted
Average
Exercise Price

 

 

Aggregate Intrinsic Value

 

Option Awards vested and expected to vest

 

 

511

 

 

 

5.49

 

 

$

16.08

 

 

 

 

Option Awards exercisable

 

 

343

 

 

 

3.63

 

 

$

18.66

 

 

 

 

 

Total unrecognized stock-based compensation expense related to Option Awards was approximately $0.9 million as of July 28, 2023, which is expected to be recognized over a weighted average period of 2.3 years.

NOTE 7. STOCKHOLDERS’ EQUITY

 

Share Repurchase Program

 

On June 28, 2022, the Company announced that its Board of Directors authorized the Company to repurchase up to $50.0 million of the Company’s common stock through February 2, 2024 (the “2022 Share Repurchase Program”). Under the 2022 Share Repurchase Program, the Company may repurchase its common stock through open market purchases, in privately negotiated transactions, or by other means in accordance with federal securities laws, including Rule 10b-18 of the Exchange Act. The amount and timing of purchases will be determined by the Company’s management depending upon market conditions and other factors and may be made pursuant to a Rule 10b5-1 trading plan. The 2022 Share Repurchase Program may be suspended or discontinued at any time. As of July 28, 2023, additional purchases of up to $34.8 million could be made under the 2022 Share Repurchase Program.

The following table summarizes the Company’s share repurchases through July 28, 2023:

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(Shares and $ in thousands except average per share cost)

 

July 28, 2023

 

 

July 29, 2022

 

 

July 28, 2023

 

 

July 29, 2022

 

Number of shares repurchased

 

 

403

 

 

 

212

 

 

 

833

 

 

 

212

 

Total cost

 

$

3,000

 

 

$

2,353

 

 

$

6,772

 

 

 

2,353

 

Average per share cost

 

$

7.45

 

 

$

11.10

 

 

$

8.13

 

 

 

11.10

 

 

The Company retired all shares that were repurchased through the 2022 Share Repurchase Program during the 26 weeks ended July 28, 2023. In accordance with the FASB ASC 505—Equity, the par value of the shares retired was charged against Common stock and the remaining purchase price was allocated between Additional paid-in capital and Retained earnings. The portion charged against Additional paid-in capital is determined based on the Additional paid-in capital per share amount recorded in the initial issuance of the shares with the remaining to Retained earnings. Shares purchased at a price less than that of initial issuance is charged only against Additional paid-in capital. In addition, the total cost of the broker commissions is charged directly to Retained earnings. No amount was charged to Retained earnings for the shares retired during the 13 and 26 weeks ended July 28, 2023.

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NOTE 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following:

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

 

January 27, 2023

 

Deferred gift card revenue

 

$

33,556

 

 

$

31,444

 

 

$

33,029

 

Accrued employee compensation and benefits

 

 

22,922

 

 

 

24,817

 

 

 

18,125

 

Reserve for sales returns and allowances

 

 

18,404

 

 

 

19,857

 

 

 

25,030

 

Accrued property, sales and other taxes

 

 

8,300

 

 

 

7,863

 

 

 

9,780

 

Deferred revenue

 

 

8,081

 

 

 

9,757

 

 

 

7,484

 

Other

 

 

9,369

 

 

 

7,277

 

 

 

13,308

 

Total Accrued expenses and other current liabilities

 

$

100,632

 

 

$

101,015

 

 

$

106,756

 

 

NOTE 9. LANDS’ END JAPAN CLOSING

 

In July 2022, the Board of Directors approved a plan to cease operations of Lands’ End Japan KK, a subsidiary of Lands’ End, Inc. (“Lands’ End Japan”) by the end of Fiscal 2022. The dissolution of Lands’ End Japan was authorized and approved on January 31, 2023. Lands’ End Japan operations were reported in the Japan eCommerce operating segment in Fiscal 2022 and prior. For a discussion of this operating segment, see Note 13, Segment Reporting. The closing and subsequent disposal of the assets did not represent a strategic shift with a major effect on the consolidated financial condition. Accordingly, the closing of Lands’ End Japan was not presented in the Condensed Consolidated Financial Statements as discontinued operations.

 

In Third Quarter 2022, the Company commenced recording approximately $3.9 million one-time closing costs for employee severance and benefit costs, early termination and restoration costs of leased facilities and contract cancellation and other costs. During the 26 weeks ended July 28, 2023, the Company recognized one-time closing costs for contract cancellation and other costs of approximately $0.1 million reported in Other operating expense, net in the Condensed Consolidated Statement of Operations. As of July 28, 2023 the remaining balance of accrued closing costs related to Lands’ End Japan was approximately $45 thousand and is included in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

 

NOTE 10. FAIR VALUE MEASUREMENTS OF FINANCIAL ASSETS AND LIABILITIES

 

Restricted cash is reflected on the Condensed Consolidated Balance Sheets at fair value. The fair value of restricted cash was $1.8 million, $2.1 million, and $1.8 million as of July 28, 2023, July 29, 2022 and January 27, 2023, respectively, based on Level 1 inputs. Restricted cash amounts are valued based upon statements received from financial institutions.

 

Carrying amounts and fair values of long-term debt, including current portion, in the Condensed Consolidated Balance Sheets are as follows:

 

 

 

July 28, 2023

 

 

July 29, 2022

 

 

January 27, 2023

 

(in thousands)

 

Carrying
Amount

 

 

Fair
Value

 

 

Carrying
Amount

 

 

Fair
Value

 

 

Carrying
Amount

 

 

Fair
Value

 

Long-term debt, including current portion

 

$

237,188

 

 

$

226,786

 

 

$

250,938

 

 

$

239,079

 

 

$

244,063

 

 

$

241,728

 

 

Long-term debt, including current portion, was valued by management utilizing Level 3 valuation techniques as of July 28, 2023, July 29, 2022 and January 27, 2023. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of July 28, 2023, July 29, 2022 and January 27, 2023.

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NOTE 11. INCOME TAXES

 

Provision for Income Taxes

 

At the end of each quarter, the Company estimates its effective income tax rate pursuant to ASC 740. The rate for the period consists of the tax rate expected to be applied for the full year to ordinary income adjusted for any discrete items recorded in the period.

The Company recorded a tax expense at an overall effective tax rate of (32.4)% for the 13 weeks ended July 28, 2023 and a tax benefit at an overall effective tax rate of 29.8% for the 13 weeks ended July 29, 2022. The Company recorded a tax expense at an overall rate of (17.5)% for the 26 weeks ended July 28, 2023, and tax benefit at an overall effective tax rate of 36.9% for the 26 weeks ended July 29, 2022. The overall effective tax rate for the 13 and 26 weeks ended July 28, 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation. The overall effective tax rate for the 26 weeks ended July 29, 2022 reflects a tax benefit as a result of stock-based compensation recorded in First Quarter 2022.

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on results of operations, cash flows or financial position taken as a whole.

 

NOTE 13. SEGMENT REPORTING

 

For the 26 weeks ended July 28, 2023, the Company’s operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Retail. During the 26 weeks ended July 29, 2022, the Company’s operating segments included Japan eCommerce. See Note 9, Lands’ End Japan Closing.

 

The Company determined that each of the operating segments have similar economic and other qualitative characteristics, thus the results of the operating segments are aggregated into one external reportable segment.

 

Lands’ End identifies five separate distribution channels for revenue reporting purposes:

 

U.S. eCommerce offers products through the Company’s eCommerce website.

 

International offers products primarily to consumers located in Europe and through eCommerce international websites and third-party affiliates.

 

Outfitters sells uniform and logo apparel to businesses and their employees, as well as to student households through school relationships, located primarily in the U.S.

 

Third Party sells the same products as U.S. eCommerce but direct to consumers through third-party marketplace websites and through domestic wholesale customers.

 

Retail sells products through Company Operated stores.

 

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Net revenue is presented by distribution channel in the following tables:

 

 

 

13 Weeks Ended

 

% of Net

 

 

13 Weeks Ended

 

% of Net

 

(in thousands)

 

July 28, 2023

 

Revenue

 

 

July 29, 2022

 

Revenue

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

U.S. eCommerce

 

$

195,921

 

 

60.6

%

 

$

203,288

 

 

57.9

%

International (1)

 

 

22,818

 

 

7.1

%

 

 

36,373

 

 

10.4

%

Outfitters

 

 

67,984

 

 

21.0

%

 

 

70,669

 

 

20.1

%

Third Party

 

 

24,395

 

 

7.5

%

 

 

27,290

 

 

7.8

%

Retail

 

 

12,245

 

 

3.8

%

 

 

13,558

 

 

3.9

%

Total Net revenue

 

$

323,363

 

 

 

 

$

351,178

 

 

 

 

 

 

26 Weeks Ended

 

% of Net

 

 

26 Weeks Ended

 

% of Net

 

(in thousands)

 

July 28, 2023

 

Revenue

 

 

July 29, 2022

 

Revenue

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

U.S. eCommerce

 

$

373,623

 

 

59.0

%

 

$

378,181

 

 

57.8

%

International (1)

 

 

48,210

 

 

7.6

%

 

 

80,551

 

 

12.3

%

Outfitters

 

 

141,953

 

 

22.4

%

 

 

124,631

 

 

19.0

%

Third Party

 

 

47,384

 

 

7.5

%

 

 

48,932

 

 

7.5

%

Retail

 

 

21,751

 

 

3.4

%

 

 

22,548

 

 

3.4

%

Total Net revenue

 

$

632,921

 

 

 

 

$

654,843

 

 

 

(1)
The 13 weeks and 26 weeks ended July 29, 2022 includes Net revenue of $7.6 million and $16.1 million, respectively, from the Japan eCommerce distribution channel. See Note 9, Lands’ End Japan Closing.

NOTE 14. REVENUE

 

Revenue includes sales of merchandise and delivery revenue related to merchandise sold. Substantially all of the Company’s revenue is recognized when control of product passes to customers, which for the U.S. eCommerce, International, Outfitters and Third Party distribution channels is when the merchandise is 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. Revenue by distribution channel is presented in Note 13, Segment Reporting. Revenue by geographic location was:

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

 

July 28, 2023

 

 

July 29, 2022

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

296,653

 

 

$

310,151

 

 

$

577,057

 

 

$

565,425

 

Europe

 

 

23,305

 

 

 

29,311

 

 

 

49,182

 

 

 

65,440

 

Asia (1)

 

 

129

 

 

 

7,742

 

 

 

286

 

 

 

16,439

 

Other

 

 

3,276

 

 

 

3,974

 

 

 

6,396

 

 

 

7,539

 

Total Net revenue

 

$

323,363

 

 

$

351,178

 

 

$

632,921

 

 

$

654,843

 

(1)
The 13 weeks and 26 weeks ended July 29, 2022 includes Net revenue of $7.6 million and $16.1 million, respectively, from the Japan eCommerce distribution channel. See Note 9, Lands’ End Japan Closing.

 

Contract Liabilities

 

Contract liabilities consist of payments received in advance of the transfer of control to the customer. As products are delivered and control transfers, the Company recognizes the deferred revenue in Net revenue in the Condensed Consolidated Statements of Operations. The following table summarizes the deferred revenue associated with payments received in advance of the transfer of control to the customer, which is reported in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets, as

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well as amounts recognized through Net revenue for each period presented. The majority of deferred revenue as of July 28, 2023 is expected to be recognized in Net revenue in the fiscal quarter ending October 27, 2023, as products are delivered to customers.

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

 

July 28, 2023

 

 

July 29, 2022

 

Deferred revenue beginning of period

 

$

6,019

 

 

$

6,074

 

 

$

7,484

 

 

$

8,560

 

Deferred revenue recognized in period

 

 

(5,805

)

 

 

(5,860

)

 

 

(7,270

)

 

 

(8,346

)

Revenue deferred in period

 

 

7,867

 

 

 

9,543

 

 

 

7,867

 

 

 

9,543

 

Deferred revenue end of period

 

$

8,081

 

 

$

9,757

 

 

$

8,081

 

 

$

9,757

 

 

Revenue from gift cards is recognized (i) when the gift card is redeemed by the customer for merchandise, or (ii) as gift card breakage, an estimate of gift cards which will not be redeemed where the Company does not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions. Gift card breakage is recorded within Net revenue in the Condensed Consolidated Statements of Operations. Prior to their redemption, gift cards are recorded as a liability and included within Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. The liability is estimated based on expected breakage that considers historical patterns of redemption. The following table provides the reconciliation of the contract liability related to gift cards:

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

 

July 28, 2023

 

 

July 29, 2022

 

Balance as of beginning of period

 

$

34,222

 

 

$

32,015

 

 

$

33,029

 

 

$

33,070

 

Gift cards sold

 

 

13,171

 

 

 

17,042

 

 

 

28,786

 

 

 

31,670

 

Gift cards redeemed

 

 

(13,048

)

 

 

(17,245

)

 

 

(26,682

)

 

 

(32,713

)

Gift card breakage

 

 

(789

)

 

 

(368

)

 

 

(1,577

)

 

 

(583

)

Balance as of end of period

 

$

33,556

 

 

$

31,444

 

 

$

33,556

 

 

$

31,444

 

 

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 July 28, 2023, July 29, 2022 and January 27, 2023, $18.4 million, $19.9 million and $25.0 million, respectively, of refund liabilities, primarily associated with product returns, were reported in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. An asset for product returns is recorded in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. See “Cautionary Statement concerning Forward-Looking Statements” below, “Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended January 27, 2023 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q, for a discussion of the uncertainties, risks and assumptions associated with these statements.

 

As used in this Quarterly Report on Form 10-Q, references to the “Company”, “Lands’ End”, “we”, “us”, “our” and similar terms refer to Lands’ End, Inc. and its subsidiaries. Our fiscal year ends on the Friday preceding the Saturday closest to January 31. Other terms that are commonly used in this Quarterly Report on Form 10-Q are defined as follows:

ABL Facility – Asset-based senior secured credit agreement, providing for a revolving facility, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders, as amended to date
Adjusted EBITDA – Net income (loss) appearing on the Consolidated Statements of Operations net of Income tax expense, Interest expense, Depreciation and amortization and certain significant items
Company Operated stores – Lands’ End retail stores in the Retail distribution channel
Debt Facilities – Collectively, the Term Loan Facility and ABL Facility
First Quarter 2022 - The 13 weeks ended April 29, 2022
Fiscal 2023 – The 53 weeks ending February 2, 2024
Fiscal 2022 – The 52 weeks ended January 27, 2023
Fiscal 2021 – The 52 weeks ended January 28, 2022
GAAP – Accounting principles generally accepted in the United States
LIBOR – London inter-bank offered rate
SEC – United States Securities and Exchange Commission
Second Quarter 2023 – The 13 weeks ended July 28, 2023
Second Quarter 2022 – The 13 weeks ended July 29, 2022
SOFR – Secured Overnight Funding Rate
Term Loan Facility – Term loan credit agreement, dated as of September 9, 2020, among the Company, Fortress Credit Corp., as Administrative Agent and Collateral Agent, and the lenders party thereto, as amended to date
Year-to-Date 2023 – The 26 weeks ended July 28, 2023
Year-to-Date 2022 – The 26 weeks ended July 29, 2022

 

Executive Overview

 

Description of the Company

 

Lands’ End is a leading digital retailer of casual clothing, swimwear, outerwear, accessories, footwear, home products and uniform solutions. Operating out of America’s heartland, we believe our vision and values make a strong connection with our core

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customers. We offer products online at www.landsend.com, through our own Company Operated stores and through third-party distribution channels. We are a classic American lifestyle brand with a passion for quality, legendary service and real value. We seek to deliver timeless style for women, men, kids and the home. We also offer products to businesses and schools, for their employees and students, through the Outfitters distribution channel.

 

Lands’ End was founded in 1963 by Gary Comer and his partners to sell sailboat hardware and equipment by catalog. While our product focus has shifted significantly over the years, we have continued to adhere to our founder’s motto as one of our guiding principles: “Take care of the customer, take care of the employee and the rest will take care of itself.”

 

We have one external reportable segment and identify our operating segments according to how our business activities are managed and evaluated. During Second Quarter 2023, our operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Retail. Our operating segments included Japan eCommerce during the Second Quarter 2022 and Year-to-Date 2022. See Note 9, Lands’ End Japan Closing.

 

We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into one external reportable segment.

 

Distribution Channels

 

We identify five separate distribution channels for revenue reporting purposes:

U.S. eCommerce offers products through our eCommerce website.
International offers products primarily to consumers located in Europe through our eCommerce international websites and third-party affiliates.
Outfitters sells uniform and logo apparel to businesses and their employees, as well as to school households through school relationships, located primarily in the U.S.
Third Party sells the same products as U.S. eCommerce but direct to consumers through third-party marketplace websites and through domestic wholesale customers.
Retail sells products through our Company Operated stores.

 

Macroeconomic Challenges

 

Macroeconomic issues, such as recent inflationary pressures, have continued to have an impact on our business. Since apparel purchases are discretionary expenditures that historically have been influenced by domestic and global economic conditions, higher prices of consumer goods due to inflation may result in less discretionary spending for consumers which may negatively impact customer demand and require higher levels of promotion in order to attract and retain customers. These macroeconomic challenges have led to increased cost of raw materials, packaging materials, labor, energy, fuel and other inputs necessary for the production and distribution of our products.

Basis of Presentation

 

The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.

 

Seasonality

 

We experience seasonal fluctuations in our Net revenue and operating results and historically have realized a significant portion of our net revenue and earnings for the year during our fourth fiscal quarter. We generated 34.0% and 33.9% of our net revenue in the fourth quarter of Fiscal 2022 and Fiscal 2021, respectively.

 

Working capital requirements typically increase during the second and third quarters of the fiscal year as inventory builds to support peak selling periods and, accordingly, typically decrease during the fourth quarter of the fiscal year as inventory is 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.

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Results of Operations

 

The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue:

 

 

 

13 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

Net revenue

 

$

323,363

 

 

 

100.0

%

 

$

351,178

 

 

 

100.0

%

Cost of sales (excluding depreciation and amortization)

 

 

183,766

 

 

 

56.8

%

 

 

207,141

 

 

 

59.0

%

Gross profit

 

 

139,597

 

 

 

43.2

%

 

 

144,037

 

 

 

41.0

%

Selling and administrative

 

 

123,866

 

 

 

38.3

%

 

 

128,573

 

 

 

36.6

%

Depreciation and amortization

 

 

9,543

 

 

 

3.0

%

 

 

9,883

 

 

 

2.8

%

Other operating expense, net

 

 

390

 

 

 

0.1

%

 

 

39

 

 

 

0.0

%

Operating income

 

 

5,798

 

 

 

1.8

%

 

 

5,542

 

 

 

1.6

%

Interest expense

 

 

12,024

 

 

 

3.7

%

 

 

8,813

 

 

 

2.5

%

Other income, net

 

 

(169

)

 

 

(0.1

)%

 

 

(166

)

 

 

0.0

%

Loss before income taxes

 

 

(6,057

)

 

 

(1.9

)%

 

 

(3,105

)

 

 

(0.9

)%

Income tax expense (benefit)

 

 

1,961

 

 

 

0.6

%

 

 

(926

)

 

 

(0.3

)%

NET LOSS

 

$

(8,018

)

 

 

(2.5

)%

 

$

(2,179

)

 

 

(0.6

)%

 

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

Net revenue

 

$

632,921

 

 

 

100.0

%

 

$

654,843

 

 

 

100.0

%

Cost of sales (excluding depreciation and amortization)

 

 

355,387

 

 

 

56.2

%

 

 

381,631

 

 

 

58.3

%

Gross profit

 

 

277,534

 

 

 

43.8

%

 

 

273,212

 

 

 

41.7

%

Selling and administrative

 

 

242,380

 

 

 

38.3

%

 

 

244,267

 

 

 

37.3

%

Depreciation and amortization

 

 

18,844

 

 

 

3.0

%

 

 

19,467

 

 

 

3.0

%

Other operating expense, net

 

 

592

 

 

 

0.1

%

 

 

39

 

 

 

0.0

%

Operating income

 

 

15,718

 

 

 

2.5

%

 

 

9,439

 

 

 

1.4

%

Interest expense

 

 

24,307

 

 

 

3.8

%

 

 

16,982

 

 

 

2.6

%

Other income, net

 

 

(356

)

 

 

(0.1

)%

 

 

(328

)

 

 

(0.1

)%

Loss before income taxes

 

 

(8,233

)

 

 

(1.3

)%

 

 

(7,215

)

 

 

(1.1

)%

Income tax expense (benefit)

 

 

1,437

 

 

 

0.2

%

 

 

(2,665

)

 

 

(0.4

)%

NET LOSS

 

$

(9,670

)

 

 

(1.5

)%

 

$

(4,550

)

 

 

(0.7

)%

 

Depreciation and amortization are not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.

 

Net Income (Loss) and Adjusted EBITDA

 

We recorded a Net loss of $8.0 million in Second Quarter 2023 compared to Net loss of $2.2 million in Second Quarter 2022. In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit), Interest expense, Depreciation and amortization and certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our business for comparable periods and as a basis for an executive compensation metric. The methods we use to calculate our non-GAAP financial measures may differ significantly from methods other companies use to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.

 

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While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance, and is useful to investors, because:

 

EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax.

 

Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.

 

Lands’ End Japan closure – one-time closing costs, net of other operating income, recorded for the 13 and 26 weeks ended July 28, 2023.

 

Net gain or loss on disposal of property and equipment – disposal of property and equipment for the 13 and 26 weeks ended July 28, 2023 and July 29, 2022.

 

Other – amortization of transaction related costs associated with our Third Party distribution channel and other miscellaneous expenses for the 13 and 26 weeks ended July 28, 2023 and July 29, 2022.

 

The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue:

 

 

 

13 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

Net loss

 

$

(8,018

)

 

 

(2.5

)%

 

$

(2,179

)

 

 

(0.6

)%

Income tax expense (benefit)

 

 

1,961

 

 

 

0.6

%

 

 

(926

)

 

 

(0.3

)%

Other income, net

 

 

(169

)

 

 

(0.1

)%

 

 

(166

)

 

 

(0.0

)%

Interest expense

 

 

12,024

 

 

 

3.7

%

 

 

8,813

 

 

 

2.5

%

Operating income

 

 

5,798

 

 

 

1.8

%

 

 

5,542

 

 

 

1.6

%

Depreciation and amortization

 

 

9,543

 

 

 

3.0

%

 

 

9,883

 

 

 

2.8

%

Lands' End Japan closure

 

 

23

 

 

 

0.0

%

 

 

 

 

 

%

(Gain) loss on disposal of property and equipment

 

 

(23

)

 

 

(0.0

)%

 

 

39

 

 

 

0.0

%

Other

 

 

484

 

 

 

0.1

%

 

 

344

 

 

 

0.1

%

Adjusted EBITDA

 

$

15,825

 

 

 

4.9

%

 

$

15,808

 

 

 

4.5

%

 

 

 

26 Weeks Ended

 

(in thousands)

 

July 28, 2023

 

 

July 29, 2022

 

Net loss

 

$

(9,670

)

 

 

(1.5

)%

 

$

(4,550

)

 

 

(0.7

)%

Income tax expense (benefit)

 

 

1,437

 

 

 

0.2

%

 

 

(2,665

)

 

 

(0.4

)%

Other income, net

 

 

(356

)

 

 

(0.1

)%

 

 

(328

)

 

 

(0.1

)%

Interest expense

 

 

24,307

 

 

 

3.8

%

 

 

16,982

 

 

 

2.6

%

Operating income

 

 

15,718

 

 

 

2.5

%

 

 

9,439

 

 

 

1.4

%

Depreciation and amortization

 

 

18,844

 

 

 

3.0

%

 

 

19,467

 

 

 

3.0

%

Landsʼ End Japan closure

 

 

99

 

 

 

0.0

%

 

 

 

 

 

%

Loss on disposal of property and equipment

 

 

100

 

 

 

0.0

%

 

 

39

 

 

 

0.0

%

Other

 

 

579

 

 

 

0.1

%

 

 

688

 

 

 

0.1

%

Adjusted EBITDA

 

$

35,340

 

 

 

5.6

%

 

$

29,633

 

 

 

4.5

%

 

In assessing the operational performance of our business, we consider a variety of financial measures. We operate in five separate distribution channels for revenue reporting purposes: U.S. eCommerce, International, Outfitters, Third Party and Retail. A key measure in the evaluation of our business is revenue performance by distribution channel. We also consider Gross margin and Selling and administrative expenses in evaluating the performance of our business.

 

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We use Net revenue to evaluate revenue performance for the U.S. eCommerce, International, Outfitters and Third Party distribution channels. For our Retail distribution channel, we use Same Store Sales as a key measure in evaluating performance. A Company Operated store is included in U.S. Same Store Sales calculations when it has been open for at least 14 months. Online sales and sales generated through our in-store web portal are considered revenue in our U.S. eCommerce and are excluded from U.S. Same Store Sales.

 

Discussion and Analysis

 

Second Quarter 2023 compared with Second Quarter 2022

 

Net Revenue

 

Net revenue was $323.3 million for Second Quarter 2023, a decrease of $27.9 million or 7.9%, from $351.2 million during the Second Quarter 2022.

 

U.S. eCommerce Net revenue was $195.9 million for Second Quarter 2023, a decrease of $7.4 million or 3.6%, from $203.3 million during the Second Quarter 2022. The decrease in U.S. eCommerce was primarily driven by continued promotional productivity within swim and adjacent product categories more than offset by lower markdown inventory sales.

 

International eCommerce Net revenue was $22.8 million for Second Quarter 2023, a decrease of $13.6 million or 37.3%, from $36.4 million during the Second Quarter 2022. The decrease in International eCommerce was due to continued assortment editing with a focus on key categories and reduced markdown inventories in Europe and the closing of Lands’ End Japan at the end of Fiscal 2022. Excluding the $7.6 million of Lands’ End Japan, Net revenue for International eCommerce decreased 20.8%.

 

Outfitters Net revenue was $68.0 million for Second Quarter 2023, a decrease of $2.7 million or 3.8%, from $70.7 million during the Second Quarter 2022. The decrease was primarily driven by the conclusion of the Delta Air Lines contract in the First Quarter 2023 partially offset by school uniform revenue increasing high single digits year over year. Excluding the $4.9 million decrease in year over year revenue from the Delta Air Lines business, Net revenue for the Outfitters business increased 3.5%.

 

Third Party Net revenue was $24.4 million for Second Quarter 2023, a decrease of $2.9 million or 10.6%, from $27.3 million during the Second Quarter 2022. The decrease was primarily attributed to weaker than expected online demand performance at Kohl’s partially offset by continued growth of existing marketplaces.

 

Retail Net revenue was $12.2 million for Second Quarter 2023, a decrease of $1.3 million or 9.7%, from $13.5 million during the Second Quarter 2022. Our U.S. Company Operated stores experienced a decrease of 7.5% in Same Store Sales as compared to the Second Quarter 2022. On July 28, 2023 there were 27 U.S. Company Operated stores, compared to 30 U.S. Company Operated stores on July 29, 2022.

 

Gross Profit

 

Gross profit was $139.6 million for Second Quarter 2023, a decrease of $4.4 million or 3.1% from $144.0 million during the Second Quarter of 2022. Gross margin increased approximately 220 basis points to 43.2% in Second Quarter 2023, compared with 41.0% in Second Quarter 2022. The Gross margin improvement was primarily driven by leveraging the strength in the swim and adjacent product categories across the channels, reduction in markdown inventory and improvements in supply chain costs in the second quarter of fiscal 2023 compared to the prior year.

 

Selling and Administrative Expenses

 

Selling and administrative expenses decreased $4.7 million to $123.9 million or 38.3% of total Net revenue in Second Quarter 2023 compared with $128.6 million or 36.6% of Net revenue in Second Quarter 2022. The approximately 170 basis points increase was driven by deleveraging from lower revenues, partially offset by lower digital marketing spend and continued cost controls.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased $0.4 million to $9.5 million in Second Quarter 2023 compared with $9.9 million in the Second Quarter 2022.

 

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Other Operating Expense

 

Other operating expense, net was $0.4 million in Second Quarter 2023 compared to an insignificant amount in Second Quarter 2022.

 

Operating Income

 

Operating income was $5.8 million in Second Quarter 2023 compared to $5.5 million in Second Quarter 2022. The $0.3 million increase was driven by the increase in Gross profit slightly offset by higher selling and administrative expenses.

 

Interest Expense

 

Interest expense was $12.0 million in Second Quarter 2023 compared to $8.8 million in Second Quarter 2022. The $3.2 million increase was driven by higher applicable interest rates under the Debt Facilities.

 

Other Expense (Income)

 

Other income remained unchanged at $0.2 million in Second Quarter 2023 and Second Quarter 2022, respectively.

 

Income Tax (Benefit) Expense

 

We recorded an income tax expense at an overall effective tax rate of (32.4)% for Second Quarter 2023 and income tax benefit at an overall effective tax rate of 29.8% for Second Quarter 2022. The overall effective tax rate for the Second Quarter 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation.

Net Income (Loss)

 

As a result of the above factors, Net loss was $8.0 million and diluted loss per share was $0.25 in Second Quarter 2023 compared with Net loss of $2.2 million and diluted loss per share of $0.07 in Second Quarter 2022.

 

Adjusted EBITDA

 

As a result of the above factors, Adjusted EBITDA was $15.8 million in both Second Quarter 2023 and Second Quarter 2022, respectively.

 

Year-to-Date 2023 compared with Year-to-Date 2022

Net Revenue

Net revenue was $632.9 million for Year-to-Date 2023, a decrease of $21.9 million or 3.3%, from $654.8 million during the Year-to-Date 2022.

U.S. eCommerce Net revenue was $373.6 million for Year-to-Date 2023, a decrease of $4.6 million or 1.2%, from $378.2 million during the Year-to-Date 2022. The decrease in U.S. eCommerce was primarily driven by continued promotional productivity within swim and our adjacent product categories more than offset by lower markdown inventory sales.

International eCommerce Net revenue was $48.2 million for Year-to-Date 2023, a decrease of $32.4 million or 40.1%, from $80.6 million during the Year-to-Date 2022. The decrease in International eCommerce was due to continued assortment editing with a focus on key categories and reduced markdown inventories in Europe and the closing of Lands’ End Japan at the end of Fiscal 2022. Excluding the $16.1 million of Lands’ End Japan, Net revenue for International eCommerce decreased 25.2%.

Outfitters Net revenue was $142.0 million for Year-to-Date 2023, an increase of $17.4 million or 13.9%, from $124.6 million during the Year-to-Date 2022. Compared to the Year-to-Date 2022, the increase was primarily driven by inventory sales to Delta Air Lines at the conclusion of their five-year contract in the First Quarter 2023 as well as an increase in the school uniform business. Excluding the $13.4 million increase in year over year revenue from the Delta Air Lines business, Net revenue for the Outfitters business increased by 3.6%.

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Third Party Net revenue was $47.4 million for Year-to-Date 2023, a decrease of $1.5 million or 3.2% from $48.9 million during the Year-to-Date 2022. The decrease was primarily driven by a decline in the Kohl’s online marketplace and stores partially offset by growth in existing online marketplaces.

Retail Net revenue was $21.8 million for Year-to-Date 2023, a decrease of $0.7 million or 3.5%, from $22.5 million during the Year-to-Date 2022. Our U.S. Company Operated stores experienced a decrease of 0.6% in Same Store Sales as compared to the Year-to-Date 2022. On July 28, 2023 there were 27 U.S. Company Operated stores compared to 30 U.S. Company Operated stores on July 29, 2022.

Gross Profit

Gross profit was $277.5 million for Year-to-Date 2023, an increase of $4.3 million or 1.6% from $273.2 million during Year-to-Date 2022. Gross margin increased to 43.8% in Year-to-Date 2023, compared with 41.7% in Year-to-Date 2022. The 210 basis point improvement in gross margin was primarily driven by leveraging the strength in the swim and adjacent product categories across the channels, reduction in markdown inventory and improvements in supply chain costs for Year-to-Date 2023 compared to the prior year.

Selling and Administrative Expenses

Selling and administrative expenses decreased $1.9 million to $242.4 million or 38.3% of total Net revenue in Year-to-Date 2023 compared with $244.3 million or 37.3% of Net revenue in Year-to-Date 2022. The approximately 100 basis point increase was driven by deleveraging from lower revenues, partially offset by lower digital marketing spend and continued cost controls.

Depreciation and Amortization

Depreciation and amortization expense was $18.8 million in Year-to-Date 2023, a decrease of $0.7 million or 3.6%, compared with $19.5 million in Year-to-Date 2022.

Other Operating Expense

Other operating expense, net was $0.6 million in Year-to-Date 2023 compared to an insignificant amount in Year-to-Date 2022.

Operating Income (Loss)

Operating income was $15.7 million in Year-to-Date 2023 compared to Operating income of $9.4 million in Year-to-Date 2022. The $6.3 million increase was driven by the increase in Gross Profit and decrease in Selling and administrative expenses.

Interest Expense

Interest expense was $24.3 million in Year-to-Date 2023 compared to $17.0 million in Year-to-Date 2022. The $7.3 million increase was primarily attributed to higher applicable interest rates on the Debt Facilities.

Other Expense (Income)

Other income was $0.4 million in Year-to-Date 2023 compared to other income $0.3 million in Year-to-Date 2022.

Income Tax (Benefit) Expense

We recorded an income tax expense at an overall effective tax rate of (17.5)% for Year-to-Date 2023 and an income tax benefit at an overall effective tax rate of 36.9% for Year-to-Date 2022. The overall effective tax rate for Year-to-Date 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation. The overall effective tax rate for Year-to-Date 2022 reflects a tax benefit as a result of stock-based compensation recorded in First Quarter 2022.

Net Income (Loss)

As a result of the above factors, Net loss was $9.6 million and diluted loss per share was $0.30 in Year-to-Date 2023 compared with Net loss of $4.5 million and diluted earnings per share of $0.14 in Year-to-Date 2022.

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Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $35.3 million in Year-to-Date 2023 compared to $29.6 million in Year-to-Date 2022.

 

Liquidity and Capital Resources

 

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. The ABL Facility had a balance outstanding of $70.0 million on July 28, 2023, other than letters of credit. Cash generated from our net revenue and profitability, and to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a significant amount of net revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year. We expect that our cash on hand and cash flows from operations, along with revolving on the ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months.

 

Description of Material Indebtedness

 

Debt Arrangements

 

Our $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs. The amount available to borrow is the lesser of (1) the Aggregate Commitments of $275.0 million (“ABL Facility Limit”) or (2) the Borrowing Base which is calculated from Eligible Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility. The balance outstanding on July 28, 2023 and July 29, 2022 was $70.0 million and $135.0 million, respectively. The balance of outstanding letters of credit was $8.6 million and $13.8 million on July 28, 2023 and July 29, 2022, respectively.

 

On September 9, 2020, we entered into the Term Loan Facility which provided borrowings of $275.0 million. Origination costs, including an Original Issue Discount (“OID”) of 3% and $5.1 million in debt origination fees, were paid in connection with entering into the Term Loan Facility.

 

Interest; Fees

 

Effective May 12, 2023, we executed the Fourth Amendment (the “Fourth Amendment”) to the ABL Facility which replaced the interest rate benchmark based on LIBOR with an interest rate benchmark based on SOFR plus an adjustment of 0.10% for all loans (“ABL Adjusted SOFR”). This transition resulted in no material interest rate impact. The ABL Adjusted SOFR rate is now available for all new loans after the effective date of the Fourth Amendment.

Effective with the Fourth Amendment, the ABL Facility interest rate, selected at the borrower’s election, is either (1) ABL Adjusted SOFR, or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month ABL Adjusted SOFR rate plus 1.00%, or (c) the Wells Fargo “prime rate”. The borrowing margin for ABL Adjusted SOFR loans is (i) less than $95.0 million, 1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For base rate loans, the borrowing margin is (i) less than $95.0 million, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00% (“Applicable Borrowing Margin”). The Applicable Borrowing Margin for all loans is based upon the average daily total loans outstanding for the previous quarter.

 

Prior to the Fourth Amendment to the ABL Facility, the interest rate, selected at the borrower’s election, was either (1) LIBOR (plus the Applicable Borrowing Margin), or (2) a base rate (plus the Applicable Borrowing Margin) which was the greater of (a) the federal funds rate plus 0.50%, (b) the one-month LIBOR rate plus 1.00%, or (c) the Wells Fargo “prime rate”.

Effective June 22, 2023, we entered into Amendment No. 1 (the “First Amendment”) to the Term Loan Facility which (subject to a 1% floor) replaced the interest rate benchmark based upon LIBOR with an interest rate benchmark based upon SOFR plus adjustments of either (a) 0.11448% for a one-month interest period, (b) 0.26161% for a three-month interest period, or (c) 0.42826% for a six-month interest period (“Term Loan Adjusted SOFR”). This transition resulted in no material interest rate impact.

Effective with the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility is based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Adjusted Loan SOFR rate plus 9.75% or (2) an alternative base rate (which is the greater of (i) the prime rate published in the Wall

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Street Journal, (ii) the federal funds rate, which shall be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month Term Loan Adjusted SOFR rate plus 1.00% per annum) plus 8.75%.

Prior to the First Amendment to the Term Loan Facility, the interest rate per annum applicable to the loans under the Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a LIBOR rate (with a minimum rate of 1.00%) plus 9.75% or (2) an alternative base rate (which was the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which was to be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month LIBOR rate plus 1.00% per annum) plus 8.75%.

During Second Quarter 2023, we adopted ASU 2020-04, the optional practical expedient for Reference Rate Reform related to its Debt Facilities and as such, these amendments are treated as a continuation of the existing debt agreement and no gain or loss on these modifications were recorded in the Condensed Consolidated Statement of Operations.

Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees include (i) commitment fees of 0.25% based upon the average daily unused commitment (aggregate commitment less loans and letter of credit outstanding) under the ABL Facility for the preceding fiscal quarter and (ii) customary letter of credit fees. As of July 28, 2023, we had borrowings of $70.0 million under the ABL Facility.

 

Maturity; Amortization and Prepayments

 

The ABL Facility maturity date is the earlier of (a) July 29, 2026 and (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 Term Loan Facility matures on September 9, 2025 and amortizes at a rate equal to 1.25% per quarter. It is subject to mandatory prepayments in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 75% depending on our total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan could not be voluntarily prepaid during the first two years of its term without significant penalties. A prepayment premium of 3% applies to voluntary prepayments and certain mandatory prepayments made after September 9, 2022 and on or prior to September 9, 2023, 1% for such prepayments made after September 9, 2023 and on or prior to September 9, 2024 and no premium on such prepayments thereafter.

 

Guarantees; Security

 

All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.

 

The Term Loan Facility is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is secured by a second priority interest in the same collateral, with certain exceptions.

 

Representations and Warranties; Covenants

 

Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business.

The Term Loan Facility contains certain financial covenants, including a quarterly maximum total leverage ratio test, a weekly minimum liquidity test and an annual maximum capital expenditure amount.

Under the ABL Facility, if excess availability falls below the greater of 10% of the Loan Cap amount or $15.0 million, we will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0.

 

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The Debt Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance and providing additional guarantees and collateral in certain circumstances.

 

As of July 28, 2023, we were in compliance with our financial covenants in the Debt Facilities.

 

Events of Default

 

The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities was $54.8 million during Year-to-Date 2023 compared to net cash used in operating activities of $117.5 million during Year-To-Date 2022. The $172.3 million improvement in cash provided by operating activities was primarily due to the efficient management of inventory. We capitalized on a more stable supply chain and purchased less inventory than the prior year while receiving it closer to the selling season. Additionally, we benefited from timing of payments for current liabilities compared to last year.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was $22.9 million and $14.8 million during Year-To-Date 2023 and Year-To-Date 2022, respectively. Cash used in investing activities for both periods was primarily used for investments to update our digital information technology infrastructure.

 

For Fiscal 2023, we plan to invest approximately $35.0 million in capital expenditures for strategic investments and infrastructure, primarily in technology and general corporate needs.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities was $44.9 million during Year-To-Date 2023, compared with net cash provided by financing activities of $121.5 million during Year-To-Date 2022. The decrease in net cash provided by financing activities is primarily due to lower inventory levels.

 

Contractual Obligations and Off-Balance-Sheet Arrangements

 

There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended January 27, 2023.

 

Financial Instruments with Off-Balance-Sheet Risk

 

The $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and has a maturity date of the earlier of (a) July 29, 2026 and (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. The balance outstanding on July 28, 2023 and July 29, 2022 was $70.0 million and $135.0 million, respectively. The balance of outstanding letters of credit was $8.6 million and $13.8 million on July 28, 2023 and July 29, 2022, respectively.

 

Application of Critical Accounting Policies and Estimates

 

We believe that the assumptions and estimates associated with revenue, inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

 

For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended January 27, 2023. There have been no significant changes in our critical accounting policies or their application since January 27, 2023.

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Recent Accounting Pronouncements

 

See Part I, Item 1, Note 2, Recent Accounting Pronouncements, of the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross margin, operating expenses, operating income, net income, adjusted EBITDA, cash flow, financial condition, financings, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, market opportunities and general market and industry conditions. We generally identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely,” “targeting” or the negative version of these words or comparable words. Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 27, 2023 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Currency Exchange Risk

 

The Company’s international subsidiaries operate with functional currencies other than the U.S. dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. dollars, the Company must translate all components of these financial statements from the functional currencies into U.S. dollars at exchange rates in effect during or at the end of the reporting period. Net revenue generated from the International distribution channel represented approximately 8% of our total net revenue Year-to-Date 2023. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of net revenue, expenses, assets and liabilities. Assuming a 10% change in foreign currency exchange rates, net revenue for Year-to-Date 2023 would have increased or decreased by approximately $4.8 million. Translation gains or losses, which are recorded in other comprehensive income or loss, result from translation of the assets and liabilities of our international subsidiaries into U.S. dollars. Foreign currency translation gains, net, for Year-to-Date 2023 totaled approximately $0.8 million related to our international subsidiaries in United Kingdom and Germany. Additionally, the Company has foreign currency denominated intercompany receivables and payables that when settled result in a transaction gain or loss. A 10% change in foreign currency exchanges rates would not result in a significant transaction gain or loss in earnings. The Company does not utilize financial instruments for trading purposes or hedging and have not used any derivative financial instruments to limit foreign currency exchange rate exposures. The Company does not consider our foreign earnings to be permanently reinvested.

 

As of July 28, 2023, the Company had $4.7 million of cash and cash equivalents denominated in foreign currency in British pound sterling, Hong Kong dollar, euro and Japanese yen.

 

Interest Rate Risk

 

We are subject to interest rate risk with the Term Loan Facility and the ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates (above the 1.00% SOFR floor) associated with the Term Loan Facility would result in a $2.3 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn to a principal amount equal to $275.0 million, each one percentage point change in interest rates would result in a $2.8 million change in our annual cash interest expense.

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ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and our Interim Chief Financial Officer have concluded that, as of July 28, 2023, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) are effective.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the most recently completed fiscal quarter ended July 28, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

 

 

The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.

As disclosed in the Company’s Annual Report on Form 10-K for the year ended January 27, 2023, the Company is the defendant in three separate lawsuits, each of which allege adverse health events and personal property damage as a result of wearing uniforms manufactured by Lands’ End: (1) Gilbert et al. v. Lands’ End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-00823-JDP, complaint filed October 3, 2019; (2) Andrews et al. v. Lands’ End, Inc., United States District Court for the Western District of Wisconsin, Civil Action No. 3:19-cv-01066-JDP, complaint filed on December 31, 2019, on behalf of 521 named plaintiffs, later amended to include 1,089 named plaintiffs; and (3) Davis et al. v. Lands’ End, Inc. and Lands’ End Business Outfitters, Inc., United States District Court for the Western District of Wisconsin, Case No. 3:20-cv-00195, complaint filed on March 4, 2020. Plaintiffs in Gilbert, Andrews, and Davis seek nationwide class certification on behalf of similarly situated Delta employees.

 

By order dated April 20, 2020, the Court consolidated the Gilbert and Andrews cases (the “Consolidated Wisconsin Action”) and stayed the Davis case. Plaintiffs in the Consolidated Wisconsin Action and Davis each assert that the damages sustained by the members of the proposed class exceed $5,000,000. Plaintiffs in each case seek damages for personal injuries, pain and suffering, severe emotional distress, financial or economic loss, including medical services and expenses, lost income and other compensable injuries. Plaintiffs in the Consolidated Wisconsin Action seek class certification with respect to performance of the uniforms and warranty claims and maintain individual claims for personal injury by numerous named plaintiffs.

 

On August 18, 2021, the Court ruled on several pending motions in the Consolidated Wisconsin Action. The Court denied Plaintiffs’ motion for class certification with respect to performance of the uniforms and warranty claims. The Court denied Plaintiffs’ motion for partial summary judgment regarding crocking claims and granted Lands’ End’s motion for partial summary judgment related to certain warranty claims. In addition, giving effect to both the addition and voluntary dismissal of individual plaintiffs over the course of the litigation, the number of individual plaintiffs had been reduced from 1,089 to 603 as of August 18, 2021. On September 1, 2021, Plaintiffs filed a Rule 23(f) petition, seeking interlocutory review of the Court’s decision denying class certification. On September 22, 2021, the U.S. Court of Appeals for the Seventh Circuit denied plaintiffs’ petition.

 

On July 8, 2022, the Court issued an Opinion and Order in the Consolidated Wisconsin Action (the “July 8 Opinion”), ruling in the Company’s favor on several additional pending motions. The Court granted the Company’s motion to exclude Plaintiffs’ expert opinions because the opinions were not based on reliably applied and scientifically valid methods. Accordingly, because Plaintiffs failed to submit evidence sufficient to show that the uniforms were defective or that a defect in the uniforms caused Plaintiffs’ alleged health problems, the Court granted the Company’s motion for summary judgement on Plaintiffs’ personal injury claims.

 

After giving effect to the July 8 Opinion, the remaining claims under the Consolidated Wisconsin Action related to claims for property damage and breach of warranty. Following these rulings and an order of the court dated December 1, 2022, 277 named Plaintiffs remained in the case who claim they have suffered personal property damage as a result of dye transferring to personal items, with aggregate claims of approximately $110,000 in damages. The Court set a deadline for the parties to voluntarily resolve these remaining outstanding claims, and on July 19, 2023 the parties reported to the Court that they had reached a settlement in principle of the matter.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 27, 2023, filed with the SEC on April 10, 2023.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

 

The following table presents a month-to-month summary of information with respect to purchases of common stock made during the Second Quarter 2023 pursuant to the 2022 Share Repurchase Program announced on June 28, 2022:

 

Period

 

Total Number of Shares Purchased (1)

 

 

Average Price Paid per Share (2)

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3)

 

 

Approximate Dollar Value (in thousands) of Shares that May Yet Be Purchased Under the Plans or Programs

 

April 29 - May 26

 

 

402,641

 

 

$

7.45

 

 

 

402,641

 

 

$

34,780

 

May 27 - June 30

 

 

 

 

$

 

 

 

 

 

$

34,780

 

July 1 - July 28

 

 

 

 

$

 

 

 

 

 

$

34,780

 

Total

 

 

402,641

 

 

$

7.45

 

 

 

402,641

 

 

 

 

 

(1)
All shares of common stock were retired following purchase.
(2)
Average price paid per share excludes broker commissions and taxes.
(3)
On June 28, 2022, the Company announced that its Board of Directors authorized the Company to repurchase up to $50.0 million of the Company’s common stock through February 2, 2024 (the “2022 Share Repurchase Program”). The 2022 Share Repurchase Program may be suspended or discontinued at any time.

 

ITEM 5. OTHER INFORMATION

 

Rule 10b5-1 Trading Plans

 

During the fiscal quarter ended July 28, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

 

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ITEM 6. EXHIBITS

 

The following documents are filed as exhibits to this report:

 

Exhibit Number

 

Exhibit Description

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation of Lands’ End, Inc. (incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K filed by Lands’ End, Inc. on March 24, 2022 (File No. 001-09769)).

 

 

 

3.2

 

Amended and Restated Bylaws of Lands’ End, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Lands’ End, Inc. on April 8, 2014 (File No. 001-09769)).

 

 

 

4.1

 

Amendment No. 1 to Term Loan Credit Agreement, dated June 22, 2023, by and among Lands’ End, Inc. (as the borrower), the grantors party thereto, and Fortress Credit Corp. (as administrative agent and collateral agent) (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on June 27, 2023 (File No. 001-09769)).

 

 

 

10.1

 

Amendment No. 1 to the Lands’ End, Inc. Amended and Restated 2017 Stock Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on June 13, 2023 (File No. 001-09769)).

 

 

 

10.2

 

Letter from Lands’ End, Inc. to Angela Rieger relating to employment, dated January 16, 2023.*

 

 

 

10.3

 

Executive Severance Agreement by and between Lands’ End, Inc. and Angela Rieger, dated March 10, 2016.*

 

 

 

31.1

 

Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*

 

 

 

31.2

 

Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*

 

 

 

32.1

 

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Document*

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document*

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

 

104

 

Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)*

 

* Filed herewith.

** Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Lands’ End, Inc.

(Registrant)

 

 

 

By:

/s/ Bernard McCracken

 

Name:

Bernard McCracken

 

Title:

Interim Chief Financial Officer

Vice President, Controller and Chief Accounting Officer

(Principal Financial Officer and Principal Accounting Officer)

 

 

Date: August 31, 2023

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