Lands’ End(LE) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Lands' End's unaudited consolidated financial statements detail revenue decline, increased net loss, inventory reduction, and debt facility amendments Condensed Consolidated Statements of Operations Net revenue decreased for both 13 and 26-week periods, with increased operating income but wider net losses due to higher interest expense Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 13 Weeks Ended July 28, 2023 | 13 Weeks Ended July 29, 2022 | 26 Weeks Ended July 28, 2023 | 26 Weeks Ended July 29, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $323,363 | $351,178 | $632,921 | $654,843 | | Gross profit | $139,597 | $144,037 | $277,534 | $273,212 | | Operating income | $5,798 | $5,542 | $15,718 | $9,439 | | Net loss | $(8,018) | $(2,179) | $(9,670) | $(4,550) | | Diluted loss per share | $(0.25) | $(0.07) | $(0.30) | $(0.14) | Condensed Consolidated Balance Sheets Total assets and liabilities decreased due to inventory reduction and lower borrowings, while stockholders' equity also declined Balance Sheet Highlights (in thousands) | Metric | July 28, 2023 | July 29, 2022 | January 27, 2023 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $26,610 | $23,505 | $39,557 | | Inventories, net | $396,087 | $569,174 | $425,513 | | Total assets | $1,014,479 | $1,199,155 | $1,082,148 | | Total liabilities | $648,711 | $804,210 | $701,396 | | Total stockholders' equity | $365,768 | $394,945 | $380,752 | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly improved to a positive $54.8 million, driven by efficient inventory management, despite increased investing and financing cash usage Cash Flow Summary (in thousands) | Cash Flow Activity | 26 Weeks Ended July 28, 2023 | 26 Weeks Ended July 29, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $54,827 | $(117,525) | | Net cash used in investing activities | $(22,862) | $(14,776) | | Net cash (used in) provided by financing activities | $(44,908) | $121,458 | - The major driver for the improvement in operating cash flow was a positive change in inventories of $30.4 million, compared to a negative impact of $190.9 million in the prior year period[19] Notes to Condensed Consolidated Financial Statements Notes detail debt facility amendments to SOFR, Lands' End Japan closure, ongoing share repurchases, and disaggregated revenue by channel and geography - In Q2 2023, the company amended its ABL Facility and Term Loan Facility to replace the LIBOR benchmark with the SOFR benchmark for interest rate calculations[29][39][42] - The company ceased operations of Lands' End Japan by the end of Fiscal 2022. This closure impacted year-over-year comparisons for the International eCommerce channel and revenue from Asia[67][77][79] - Under its 2022 Share Repurchase Program, the company repurchased 833,000 shares for a total cost of $6.8 million in the 26 weeks ended July 28, 2023. As of this date, $34.8 million remained available for future repurchases[64][65] Net Revenue by Distribution Channel (26 Weeks Ended, in thousands) | Channel | July 28, 2023 | July 29, 2022 | | :--- | :--- | :--- | | U.S. eCommerce | $373,623 | $378,181 | | International | $48,210 | $80,551 | | Outfitters | $141,953 | $124,631 | | Third Party | $47,384 | $48,932 | | Retail | $21,751 | $22,548 | | Total Net revenue | $632,921 | $654,843 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 revenue decline, improved gross margin, flat Adjusted EBITDA, and enhanced operating cash flow from inventory management Results of Operations Q2 net revenue declined 7.9% due to International and Third Party channels, while gross margin improved and Adjusted EBITDA remained flat Q2 2023 vs Q2 2022 Performance (in millions) | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Revenue | $323.3 | $351.2 | (7.9)% | | Gross Profit | $139.6 | $144.0 | (3.1)% | | Gross Margin | 43.2% | 41.0% | +220 bps | | Net Loss | $(8.0) | $(2.2) | $(5.8) | | Adjusted EBITDA | $15.8 | $15.8 | 0.0% | - International eCommerce revenue decreased 37.3% in Q2, or 20.8% excluding the $7.6 million impact from the closure of Lands' End Japan[101] - Outfitters revenue decreased 3.8% in Q2; however, excluding the impact of the concluded Delta Air Lines contract, the business grew 3.5%, driven by high single-digit growth in school uniform revenue[102] - For the year-to-date period, Adjusted EBITDA increased to $35.3 million from $29.6 million in the prior year, despite a 3.3% decline in net revenue[115][130] Liquidity and Capital Resources Liquidity is supported by cash and ABL Facility, with improved operating cash flow from inventory management and debt covenant compliance - Net cash from operating activities was $54.8 million YTD, a $172.3 million improvement from the prior year, primarily due to efficient inventory management[152] - The company plans to invest approximately $35.0 million in capital expenditures for Fiscal 2023, mainly for technology and infrastructure[153] - As of July 28, 2023, the company had $70.0 million in borrowings under the ABL Facility and was in compliance with all financial covenants[132][150] - Both the ABL Facility and Term Loan Facility were amended during the quarter to replace the LIBOR interest rate benchmark with a SOFR-based benchmark[134][137] Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risks include foreign currency fluctuations, impacting international revenue, and interest rate changes on variable-rate debt - A 10% change in foreign currency exchange rates would have increased or decreased year-to-date 2023 net revenue by approximately $4.8 million[163] - The company is subject to interest rate risk on its variable-rate debt. Each one percentage point change in interest rates on the Term Loan Facility would result in a $2.3 million change in annual cash interest expense[165] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting - The Chief Executive Officer and Interim Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of July 28, 2023[167] - No changes in internal controls over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[168] PART II. OTHER INFORMATION Legal Proceedings Company faces lawsuits over uniforms, with personal injury claims dismissed and property damage claims reaching a settlement in principle - The company is involved in consolidated lawsuits regarding uniforms, where plaintiffs allege health issues and property damage[172] - The court denied plaintiffs' motion for class certification and granted summary judgment for Lands' End on personal injury claims after excluding plaintiffs' expert opinions[174][175] - As of July 19, 2023, the parties reached a settlement in principle for the remaining property damage claims, which total approximately $110,000[176] Risk Factors No material changes to risk factors previously disclosed in the latest Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the company's most recent Annual Report on Form 10-K[177] Unregistered Sales of Equity Securities and Use of Proceeds Company repurchased 402,641 shares for approximately $3.0 million in Q2 under its 2022 Share Repurchase Program Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased (in thousands) | | :--- | :--- | :--- | :--- | | April 29 - May 26 | 402,641 | $7.45 | $34,780 | | May 27 - June 30 | — | $— | $34,780 | | July 1 - July 28 | — | $— | $34,780 | | Total | 402,641 | $7.45 | | Other Information No directors or executive officers adopted or terminated Rule 10b5-1 trading plans during the quarter - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the quarter[179] Exhibits This section lists exhibits filed with the 10-Q, including debt amendments, stock plans, and officer certifications - The report includes exhibits such as an amendment to the Term Loan Credit Agreement, an amendment to the 2017 Stock Plan, and various officer certifications[183]