NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business and Separation
Lands' End, Inc. (“Lands’ End” or the “Company”) is a leading multi-channel retailer of clothing, accessories and footwear, as well as home products. Lands' End offers products through catalogs, online at
www.landsend.com, www.canvasbylandsend.com
and affiliated specialty and international websites, and through retail locations, primarily at Lands’ End Shops at Sears, stand-alone Lands’ End Inlet stores and international shop-in-shops that sell merchandise in various retail department stores.
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 agreements, dated as of April 4, 2014, with Bank of America, N.A and certain other lenders
• ASC - Financial Accounting Standards Board Accounting Standards Codification, which serves as the source for authoritative GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative GAAP for Securities and Exchange Commission registrants
• ASU - FASB Accounting Standards Update
• CAM - Common area maintenance for leased properties
• Debt Facilities - Collectively, the ABL Facility and the Term Loan Facility
• EPS - (Loss) earnings per share
• ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
• FASB - Financial Accounting Standards Board
• First Quarter 2016 - The thirteen weeks ended April 29, 2016
• Fiscal
2016
- The fifty-two weeks ending
January 27, 2017
• Fiscal
2015
- The fifty-two weeks ended
January 29, 2016
• Fiscal November 2016 - the four week fiscal month ending November 25, 2016
• GAAP - Accounting principles generally accepted in the United States
• LIBOR - London inter-bank offered rate
• Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware Corporation, and its consolidated subsidiaries (other than, for all periods following the Separation, Lands' End)
• SEC - United States Securities and Exchange Commission
• Second Quarter 2016 - The thirteen weeks ended July 29, 2016
• Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
• SYW or Shop Your Way - Shop Your Way member loyalty program
• Tax Sharing Agreement - A tax sharing agreement entered into by Sears Holdings Corporation and Lands' End in connection with the Separation
• Term Loan Facility - Term loan credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
•
Third Quarter 2016
- The thirteen weeks ended
October 28, 2016
•
Third Quarter 2015
- The thirteen weeks ended
October 30, 2015
• UTBs - Gross unrecognized tax benefits related to uncertain tax positions
• Year to Date
2016
- the
thirty-nine weeks ended
October 28, 2016
• Year to Date
2015
- the
thirty-nine weeks ended
October 30, 2015
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 1, 2016.
Reclassifications
In April 2015, FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
which changes the required presentation of debt issuance costs from an asset on the balance sheet to a deduction from related debt liability, and which was adopted by the Company in the First Quarter 2016. The reclassifications resulting from the adoption of this ASU relate to Prepaid expenses and other current assets and Other assets as of January 29, 2016 and
October 30, 2015
that were reclassified to Long-term debt. This reclassification reduced our current and total assets and our total liabilities, as previously reported in the Condensed Consolidated Balance Sheet for January 29, 2016 and
October 30, 2015
. This reclassification had no effect on the Condensed Consolidated Statements of Operations, Comprehensive Operations, Stockholders’ Equity or Cash Flows as previously reported. See Note
4
,
Debt,
for further discussion.
NOTE 2. (LOSS) EARNINGS PER SHARE
The numerator for both basic and diluted EPS is net (loss) income. 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 the ASC.
The following table summarizes the components of basic and diluted EPS:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands, except per share amounts)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Net (loss) income
|
|
$
|
(7,222
|
)
|
|
$
|
10,725
|
|
|
$
|
(14,961
|
)
|
|
$
|
19,910
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
32,029
|
|
|
31,991
|
|
|
32,018
|
|
|
31,975
|
|
Dilutive effect of stock awards
|
|
—
|
|
|
68
|
|
|
—
|
|
|
67
|
|
Diluted weighted average shares outstanding
|
|
32,029
|
|
|
32,059
|
|
|
32,018
|
|
|
32,042
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.23
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.47
|
)
|
|
$
|
0.62
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.23
|
)
|
|
$
|
0.33
|
|
|
$
|
(0.47
|
)
|
|
$
|
0.62
|
|
Anti-dilutive stock awards are comprised of awards which are anti-dilutive in the application of the treasury stock method and are excluded from the diluted weighted average shares outstanding. Total anti-dilutive stock awards were
17,719
and
30,673
shares for the
Third Quarter 2016
and
Year to Date 2016
, respectively, due to the net loss reported. Total anti-dilutive stock awards were
129
and
126,602
shares for the
Third Quarter 2015
and
Year to Date 2015
, respectively.
NOTE 3. OTHER COMPREHENSIVE (LOSS)
Other comprehensive (loss) income encompasses all changes in equity other than those arising from transactions with stockholders, and is comprised solely of foreign currency translation adjustments.
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|
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13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Beginning balance: Accumulated other comprehensive loss (net of tax of $5,467, $3,572, $5,053 and $3,931, respectively)
|
|
$
|
(10,153
|
)
|
|
$
|
(6,633
|
)
|
|
$
|
(9,384
|
)
|
|
$
|
(7,298
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (net of tax (benefit) expense of $1,176, $(141), $1,590 and $(500), respectively)
|
|
(2,183
|
)
|
|
260
|
|
|
(2,952
|
)
|
|
925
|
|
Ending balance: Accumulated other comprehensive loss (net of tax of $6,643, $3,431, $6,643 and $3,431, respectively)
|
|
$
|
(12,336
|
)
|
|
$
|
(6,373
|
)
|
|
$
|
(12,336
|
)
|
|
$
|
(6,373
|
)
|
No amounts were reclassified out of Accumulated other comprehensive loss during any of the periods presented.
NOTE
4
. DEBT
The Company's debt consisted of the following:
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|
|
|
|
|
|
October 28, 2016
|
|
October 30, 2015
|
|
January 29, 2016
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
Term Loan Facility, maturing April 4, 2021
|
|
$
|
502,125
|
|
|
4.25
|
%
|
|
$
|
507,275
|
|
|
4.25
|
%
|
|
$
|
505,988
|
|
|
4.25
|
%
|
ABL Facility, maturing April 4, 2019
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
|
502,125
|
|
|
|
|
507,275
|
|
|
|
|
505,988
|
|
|
|
Less: Current maturities in Other current liabilities, net
|
|
5,150
|
|
|
|
|
5,150
|
|
|
|
|
5,150
|
|
|
|
Less: Unamortized debt issuance costs
|
|
5,983
|
|
|
|
|
7,337
|
|
|
|
|
7,000
|
|
|
|
Long-term debt, net
|
|
$
|
490,992
|
|
|
|
|
$
|
494,788
|
|
|
|
|
$
|
493,838
|
|
|
|
The following table summarizes the Company's borrowing availability under the ABL Facility:
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|
|
|
|
|
|
October 28, 2016
|
|
October 30, 2015
|
|
January 29, 2016
|
ABL maximum borrowing
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Outstanding Letters of Credit
|
|
13,845
|
|
|
18,523
|
|
|
24,311
|
|
Borrowing availability under ABL
|
|
$
|
161,155
|
|
|
$
|
156,477
|
|
|
$
|
150,689
|
|
During First Quarter 2016, the Company adopted ASU 2015-03,
Simplifying the Presentation of Debt Issuance,
which requires an entity to present debt issuance costs as a deduction from the related debt liability. To conform to the current year presentation the Company reclassified
$1.4 million
of Prepaid expenses and other current assets and
$6.0 million
of Other assets to Long-term debt as of
October 30, 2015
. Similarly, as of January 29, 2016, the company reclassified
$1.4 million
of Prepaid expenses and other current assets and
$5.6 million
of Other assets to Long-term debt.
Interest; Fees
The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at
3.25%
in the case of LIBOR loans and
2.25%
in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a
1%
interest rate floor. The borrowing margin for the ABL Facility is subject to adjustment based on the average excess availability under the ABL Facility for the preceding fiscal quarter, and will range from
1.50%
to
2.00%
in the case of LIBOR borrowings and will range from
0.50%
to
1.00%
in the case of base rate borrowings.
Customary agency fees are payable in respect of both Debt Facilities. The ABL Facility fees also include (i) commitment fees, based on a percentage ranging from approximately
0.25%
to
0.375%
of the daily unused portions of the ABL Facility, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries 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. In addition, if excess availability under the ABL Facility falls below the greater of
10%
of the loan cap amount or
$15.0 million
, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of
1.0
to
1.0
. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of
October 28, 2016
.
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.
NOTE 5. STOCK-BASED COMPENSATION
Accounting standards require, among other things, that (i) the fair value of all stock awards be expensed over their respective vesting periods; (ii) the amount of cumulative compensation cost recognized at any date must at least be equal to the portion of the grant-date value of the award that is vested at that date and (iii) compensation expense includes a forfeiture estimate for those shares not expected to vest. Also in accordance with these provisions, for awards that only have a service requirement with multiple vest dates, the Company is required to recognize compensation cost on a straight-line basis over the requisite service period for the entire award.
The Company has granted time vesting stock awards ("Deferred Awards") and performance-based stock awards ("Performance Awards") to employees at management levels and above. Deferred Awards were granted in the form of restricted stock units that only require each recipient to complete a service period. Deferred Awards generally vest over three years or in full after a three year period. Performance Awards were granted in the form of restricted stock units which have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. Performance Awards have annual vesting, but due to the performance criteria, are not eligible for straight-line expensing. Therefore, Performance Awards are amortized using a graded expense process. The fair value of all awards is based on the closing price of the Company’s common stock on the grant date. Compensation expense is reduced for estimated forfeitures of those awards not expected to vest due to employee turnover.
The following table summarizes the Company’s stock-based compensation expense, which is included in Selling and administrative expense in the Condensed Consolidated Statements of Operations:
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|
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|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Performance Awards
|
|
$
|
127
|
|
|
$
|
315
|
|
|
$
|
511
|
|
|
$
|
1,096
|
|
Deferred Awards
|
|
(301
|
)
|
|
471
|
|
|
1,067
|
|
|
1,211
|
|
Total stock-based compensation (benefit) expense
|
|
$
|
(174
|
)
|
|
$
|
786
|
|
|
$
|
1,578
|
|
|
$
|
2,307
|
|
In Third Quarter 2016 there was a reversal of prior period expense due to the resignation of the former Chief Executive Officer.
Awards Granted
Year to Date 2016
The company granted Deferred Awards to various employees during the
Year to Date 2016
, which generally vest ratably over a three year period. There were no Performance Awards granted in the
Year to Date 2016
.
Changes in the Company’s Unvested Stock Awards
Year to Date 2016
Deferred Awards
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Unvested Deferred Awards, as of January 29, 2016
|
|
175
|
|
|
$
|
30.87
|
|
Granted
|
|
225
|
|
|
24.39
|
|
Vested
|
|
(27
|
)
|
|
33.53
|
|
Forfeited
|
|
(132
|
)
|
|
30.25
|
|
Unvested Deferred Awards, as of October 28, 2016
|
|
241
|
|
|
24.91
|
|
Total unrecognized stock-based compensation expense related to unvested Deferred Awards approximated
$4.5 million
as of
October 28, 2016
, which will be recognized over a weighted average period of approximately
2.2 years
.
Performance Awards
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Unvested Performance Awards, as of January 29, 2016
|
|
109
|
|
|
$
|
26.81
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
(30
|
)
|
|
27.84
|
|
Forfeited
|
|
(10
|
)
|
|
26.73
|
|
Unvested Performance Awards, as of October 28, 2016
|
|
69
|
|
|
26.38
|
|
Total unrecognized stock-based compensation expense related to unvested Performance Awards approximated
$0.5 million
as of
October 28, 2016
, which will be recognized over a weighted average period of approximately
0.6 years
.
NOTE 6. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The Company determines fair value of financial assets and liabilities based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:
Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.
Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.
Level 3 inputs—unobservable inputs for the asset or liability.
Restricted cash is reflected on the Condensed Consolidated Balance Sheets at fair value. The fair value of restricted cash as of
October 28, 2016
,
October 30, 2015
and
January 29, 2016
was
$3.3 million
based on Level 1 inputs. Restricted cash amounts are valued based upon statements received from financial institutions.
Cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are reflected on the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments.
Carrying values and fair values of long-term debt, including the short-term portion, in the Condensed Consolidated Balance Sheets are as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2016
|
|
October 30, 2015
|
|
January 29, 2016
|
(in thousands)
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Long-term debt, including short-term portion
|
|
$
|
502,125
|
|
|
$
|
386,636
|
|
|
$
|
507,275
|
|
|
$
|
473,668
|
|
|
$
|
505,988
|
|
|
$
|
418,073
|
|
Long-term debt was valued utilizing level 2 valuation techniques based on the closing inactive market bid price on
October 28, 2016
,
October 30, 2015
, and
January 29, 2016
. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of
October 28, 2016
,
October 30, 2015
, and
January 29, 2016
.
NOTE 7. GOODWILL AND INTANGIBLE ASSET
The Company's intangible asset, consisting of a trade name, and goodwill were valued as a result of business combinations accounted for under the purchase accounting method. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The net carrying amounts of goodwill and trade name are included within the Company's Direct segment.
ASC 350,
Intangibles - Goodwill and Other,
requires companies to test goodwill and indefinite-lived intangible assets for impairment annually, or more often if an event or circumstance indicates that the carrying amount may not be recoverable. There was no impairment charge recorded for the intangible asset in
Year to Date 2016
. As a result of the 2015 annual impairment testing the Company recorded a non-cash pretax intangible asset impairment charge of
$98.3 million
during Fiscal 2015. There was no impairment charge for the intangible asset recorded in any other prior years. There were
no
impairments of goodwill during any periods presented or since goodwill was first recognized. If actual results are not consistent with our estimates and assumptions used in estimating revenue growth, future cash flows and asset fair values, we could incur further impairment charges for the intangible asset or goodwill, which could have an adverse effect on our results of operations. The annual test for impairment will be conducted as of the end of Fiscal November 2016.
The following summarizes goodwill and the intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
January 29, 2016
|
Indefinite-lived intangible asset:
|
|
|
|
|
|
|
Gross Trade Name
|
|
$
|
528,300
|
|
|
$
|
528,300
|
|
|
$
|
528,300
|
|
Cumulative impairment
|
|
(98,300
|
)
|
|
—
|
|
|
(98,300
|
)
|
Net Trade Name
|
|
430,000
|
|
|
528,300
|
|
|
430,000
|
|
Total intangible asset, net
|
|
$
|
430,000
|
|
|
$
|
528,300
|
|
|
$
|
430,000
|
|
Goodwill
|
|
$
|
110,000
|
|
|
$
|
110,000
|
|
|
$
|
110,000
|
|
NOTE 8. INCOME TAXES
Lands’ End and Sears Holdings Corporation entered into a Tax Sharing Agreement in connection with the Separation which governs Sears Holdings Corporation’s and Lands’ End’s respective rights, responsibilities and obligations after the Separation with respect to liabilities for United States federal, state, local and foreign taxes attributable to the Lands’ End business. In addition to the allocation of tax liabilities, the Tax Sharing Agreement addresses the preparation and filing of tax returns for such taxes and dispute resolution with taxing authorities regarding such taxes. Generally, Sears Holdings Corporation is liable for all pre-Separation United States federal, state and local income taxes. Lands’ End generally is liable for all other income taxes attributable to its business, including all foreign taxes.
Prior to the Separation, all tax obligations were settled through Sears Holdings through Net parent company investment. At the date of Separation, certain tax attributes that were recorded in Net parent company investment were reclassified. During the Third Quarter 2016, as a result of filing its Fiscal Year 2015 income tax return, the Company recorded an increase in the deferred tax liabilities and a decrease in Additional paid in capital of $2.1 million related to the calculation of a deferred tax liability related to the LIFO inventory calculation that existed as of the date of the Separation.
As of
October 28, 2016
, the Company had UTBs of
$8.3 million
. Of this amount,
$5.4 million
would, if recognized, impact its effective tax rate, with the remaining amount being comprised of UTBs related to gross temporary differences or other indirect benefits. Pursuant to the Tax Sharing Agreement, Sears Holdings Corporation is generally responsible for all United States federal, state and local UTBs through the date of the Separation and, as such, an indemnification asset from Sears Holdings Corporation for the pre-Separation UTBs is recorded in Other assets in the Condensed Consolidated Balance Sheets. The indemnification asset was
$14.4 million
,
$13.5 million
and
$13.7 million
as of
October 28, 2016
,
October 30, 2015
, and
January 29, 2016
, respectively.
The Company classifies interest expense and penalties related to UTBs and interest income on tax overpayments as components of income tax expense. As of
October 28, 2016
, the total amount of interest expense and penalties recognized on our balance sheet was
$6.4 million
(
$4.2 million
net of federal benefit). The total amount of net interest expense recognized in the Condensed Consolidated Statements of Operations was insignificant for all periods presented. The Company files income tax returns in the United States and various foreign jurisdictions. The Company is under examination by various income tax jurisdictions for the years 2009 to 2015.
During the Third Quarter 2015, Sears Holdings settled tax audits in certain state tax jurisdictions related to pre-Separation periods. As a result, the Company re-evaluated the reserves for the pre-Separation period and recorded a
$1.2 million
reduction in income tax expense, before consideration of federal income tax benefit. Under the Tax Sharing Agreement, Sears Holdings indemnifies the Company for such liabilities and, as a result, the Company reduced the indemnification receivable by
$1.2 million
; such reduction was reflected as a decrease in Other assets in the Condensed Consolidated Balance Sheets and as Other expense (income), net in the Condensed Consolidated and Combined Statements of Operations.
NOTE 9. 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.
Beginning in 2005, the Company initiated the first of several claims in Iowa County Circuit Court against the City of Dodgeville (the "City") to recover overpaid taxes resulting from the City’s excessive property tax assessment of the Company’s headquarters campus. In July 2016, the Company filed an amended and supplemental complaint to recover over paid property taxes for the 2016 tax year. As of November 30, 2016, the City has refunded, as the result of various court decisions, approximately
$6.5 million
in excessive taxes and interest to the Company in the following amounts: (1) approximately
$1.6 million
arising from the 2005 and 2006 tax years that was recognized in the fiscal year ended January 29, 2010; (2) approximately
$1.6 million
arising from the 2007, 2009 and 2010 tax years, recognized in the fiscal year ended January 31, 2014; (3) approximately
$0.9 million
arising from the 2008 tax year, recognized in the fiscal year ended January 30, 2015; (4) approximately
$1.3 million
arising from the 2011 and 2012 tax years, recognized in Second Quarter 2016; and (5) approximately
$1.1 million
arising from the 2007, 2009 and 2010 tax years, recognized in Third Quarter 2016; primarily within Selling and administrative costs in the Condensed Consolidated Statements of Operations.
The claims arising from the 2005 through 2010 and 2012 tax years are closed. The Company's claims arising from tax years 2011 and 2013 through 2016 remain unresolved and are still pending before the courts. The Company believes that the potential additional aggregate recovery from the City arising from the 2011 and 2013 through 2016 tax years will range from
$0.7 million
to
$2.0 million
, none of which has been recorded in the Condensed Consolidated Financial Statements.
NOTE 10. RELATED PARTY TRANSACTIONS
According to statements on form Schedule 13D filed with the SEC by ESL, ESL beneficially owned significant portions of both the Company's and Sears Holdings Corporation's outstanding shares of common stock. Therefore, Sears Holdings Corporation, the Company's former parent company, is considered a related party.
In connection with and subsequent to the Separation, the Company entered into various agreements with Sears Holdings which, among other things, (i) govern specified aspects of the Company's relationship following the Separation, especially with regards to the Lands’ End Shops at Sears, and (ii) establish terms pursuant to which subsidiaries of Sears Holdings Corporation are providing services to us.
See further descriptions of the transactions in the Company's 2015 Annual Report on Form 10-K and proxy statement filed with the SEC on April 1, 2016 . The components of the transactions between the Company and Sears Holdings, which exclude pass-through payments to third parties, are as follows:
Lands’ End Shops at Sears
Related party costs charged by Sears Holdings to the Company related to Lands’ End Shops at Sears are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands, except for number of stores)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Rent, CAM and occupancy costs
|
|
$
|
6,165
|
|
|
$
|
6,167
|
|
|
$
|
18,707
|
|
|
$
|
19,049
|
|
Retail services, store labor
|
|
6,004
|
|
|
6,774
|
|
|
18,034
|
|
|
20,051
|
|
Financial services and payment processing
|
|
573
|
|
|
627
|
|
|
1,963
|
|
|
1,876
|
|
Supply chain costs
|
|
183
|
|
|
219
|
|
|
735
|
|
|
768
|
|
Total expenses
|
|
$
|
12,925
|
|
|
$
|
13,787
|
|
|
$
|
39,439
|
|
|
$
|
41,744
|
|
Number of Lands’ End Shops at Sears at period end
|
|
219
|
|
|
227
|
|
|
219
|
|
|
227
|
|
General Corporate Services
Related party costs charged by Sears Holdings to the Company for general corporate services are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Sourcing
|
|
$
|
4,941
|
|
|
$
|
3,632
|
|
|
$
|
7,979
|
|
|
$
|
7,670
|
|
Shop Your Way
|
|
596
|
|
|
751
|
|
|
1,670
|
|
|
2,007
|
|
Shared services
|
|
48
|
|
|
111
|
|
|
143
|
|
|
393
|
|
Total expenses
|
|
$
|
5,585
|
|
|
$
|
4,494
|
|
|
$
|
9,792
|
|
|
$
|
10,070
|
|
Sourcing
The Company contracts with a subsidiary of Sears Holdings to provide agreed upon buying agency services, on a non-exclusive basis, in foreign territories from where the Company purchases merchandise. These services, primarily based upon quantities purchased, include quality-control functions, regulatory compliance, product claims management and new vendor selection and setup assistance. During Second Quarter 2016 the Company entered into a new buying agency services agreement with a subsidiary of Sears Holding and terminated the agreement that was entered into at the time of the Separation. The new agreement provides for a higher commission rate and a higher annual commission minimum, as well as enhanced sourcing services, including for product development, costing analyses, vendor communications, vendor strategy and quality assurance. Certain of these amounts are capitalized into inventory and are expensed through cost of goods sold over the course of inventory turns and included in Cost of sales in the Condensed Consolidated Statements of Comprehensive Operations.
Use of Intellectual Property or Services
Related party revenue and costs charged by the Company to and from Sears Holdings for the use of intellectual property or services is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Call center services
|
|
$
|
492
|
|
|
$
|
674
|
|
|
$
|
1,459
|
|
|
$
|
1,343
|
|
Lands' End business outfitters revenue
|
|
333
|
|
|
323
|
|
|
1,307
|
|
|
1,043
|
|
Credit card revenue
|
|
265
|
|
|
300
|
|
|
776
|
|
|
868
|
|
Royalty income
|
|
56
|
|
|
60
|
|
|
182
|
|
|
183
|
|
Gift card (expense)
|
|
(7
|
)
|
|
(5
|
)
|
|
(20
|
)
|
|
(16
|
)
|
Total income
|
|
$
|
1,139
|
|
|
$
|
1,352
|
|
|
$
|
3,704
|
|
|
$
|
3,421
|
|
Call Center Services
The Company has entered into a contract with Sears Holdings Management Corporation, a subsidiary of Sears Holdings Corporation, to provide call center services in support of Sears Holdings’ SYW. This income is net of agreed upon costs directly attributable to the Company providing these services. The income is included in Net revenue and costs are included in Selling and administrative expenses in the Condensed Consolidated Statements of Operations. Total call center service income included in Net revenue was
$2.0 million
,
$2.2 million
,
$5.8 million
and
$5.3 million
for the
Third Quarter 2016
,
Third Quarter 2015
,
Year to Date 2016
and
Year to Date 2015
, respectively.
Additional Balance Sheet Information
At
October 28, 2016
,
October 30, 2015
and
January 29, 2016
the Company included
$4.6 million
,
$5.1 million
and
$3.9 million
in Accounts receivable, net, respectively, and
$3.8 million
,
$9.4 million
and
$2.7 million
in Accounts payable, respectively, in the Condensed Consolidated Balance Sheets to reflect amounts due from and owed to Sears Holdings.
At
October 28, 2016
,
October 30, 2015
and
January 29, 2016
a
$14.4 million
,
$13.5 million
and
$13.7 million
receivable, respectively, was recorded by the Company in Other assets in the Condensed Consolidated Balance Sheets to reflect the indemnification by Sears Holdings Corporation of the pre-Separation UTBs (including penalties and interest) for which Sears Holdings Corporation is responsible under the Tax Sharing Agreement.
NOTE 11. SEGMENT REPORTING
The Company is a leading multi-channel retailer of clothing, accessories and footwear, as well as home products, and has
two
reportable segments: Direct and Retail. Both segments sell similar products and provide services. Product revenues are divided by product categories: Apparel and Non-apparel. The Non-apparel revenues include accessories, footwear, and home goods. Services and other revenue includes embroidery, monogramming, gift wrapping, shipping and other services. Net revenue is aggregated by product category in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Net revenue:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
252,082
|
|
|
$
|
272,228
|
|
|
$
|
725,062
|
|
|
$
|
783,841
|
|
Non-apparel
|
|
37,854
|
|
|
40,708
|
|
|
95,021
|
|
|
106,536
|
|
Service and other
|
|
21,540
|
|
|
21,498
|
|
|
56,836
|
|
|
55,858
|
|
Total net revenue
|
|
$
|
311,476
|
|
|
$
|
334,434
|
|
|
$
|
876,919
|
|
|
$
|
946,235
|
|
The Company identifies reportable segments according to how business activities are managed and evaluated. Each of the Company’s operating segments are reportable segments and are strategic business units that offer similar products and services but are sold either directly from its warehouses (Direct) or through its retail stores (Retail).
Adjusted EBITDA is the primary measure used to make decisions on allocating resources and assessing performance of each operating segment. Adjusted EBITDA is computed as Income before taxes appearing on the Condensed Consolidated Statements of Operations net of interest expense, depreciation and amortization and other significant items that while periodically affecting the Company's results, may vary significantly from period to period and may have a disproportionate effect in a given period, which may affect comparability of results. Reportable segment assets are those directly used in or clearly allocable to an operating segment’s operations. Depreciation, amortization, and property and equipment expenditures are recognized in each respective segment. There were no material transactions between reporting segments for any periods presented.
|
|
•
|
The Direct segment sells products through the Company’s e-commerce websites and direct mail catalogs. Operating costs consist primarily of direct marketing costs (catalog and e-commerce marketing costs); order processing and shipping costs; direct labor and benefits costs and facility costs. Assets primarily include goodwill and trade name intangible assets, inventory, accounts receivable, prepaid expenses (deferred catalog costs), technology infrastructure, and property and equipment.
|
|
|
•
|
The Retail segment sells products and services through dedicated Lands’ End Shops at Sears across the United States, the Company’s stand-alone Lands’ End Inlet stores and international shop-in-shops. Operating costs consist primarily of labor and benefits costs; rent, CAM and occupancy costs; distribution costs; and in-store marketing costs. Assets primarily include retail inventory, fixtures and leasehold improvements.
|
|
|
•
|
Corporate overhead and other expenses include unallocated shared-service costs, which primarily consist of employee services and financial services, legal and corporate expenses. These expenses include labor and benefits costs, corporate headquarters occupancy costs and other administrative expenses. Assets include corporate headquarters and facilities, corporate cash and cash equivalents and deferred income taxes.
|
Financial information by segment is presented in the following tables.
SUMMARY OF SEGMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Net revenue:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
272,080
|
|
|
$
|
287,778
|
|
|
$
|
750,660
|
|
|
805,886
|
|
Retail
|
|
39,340
|
|
|
46,597
|
|
|
126,077
|
|
|
140,166
|
|
Corporate / other
|
|
56
|
|
|
59
|
|
|
182
|
|
|
183
|
|
Total net revenue
|
|
$
|
311,476
|
|
|
$
|
334,434
|
|
|
$
|
876,919
|
|
|
$
|
946,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
13,904
|
|
|
$
|
36,951
|
|
|
$
|
41,516
|
|
|
$
|
85,316
|
|
Retail
|
|
(3,583
|
)
|
|
(1,714
|
)
|
|
(7,063
|
)
|
|
(907
|
)
|
Corporate / other
|
|
(9,035
|
)
|
|
(8,689
|
)
|
|
(25,271
|
)
|
|
(25,191
|
)
|
Total adjusted EBITDA
|
|
$
|
1,286
|
|
|
$
|
26,548
|
|
|
$
|
9,182
|
|
|
$
|
59,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
4,027
|
|
|
$
|
3,385
|
|
|
$
|
11,097
|
|
|
$
|
10,280
|
|
Retail
|
|
408
|
|
|
510
|
|
|
1,233
|
|
|
1,506
|
|
Corporate / other
|
|
360
|
|
|
365
|
|
|
1,089
|
|
|
1,088
|
|
Total depreciation and amortization
|
|
$
|
4,795
|
|
|
$
|
4,260
|
|
|
$
|
13,419
|
|
|
$
|
12,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
January 29, 2016
|
Total Assets:
|
|
|
|
|
|
|
Direct
|
|
$
|
1,073,975
|
|
|
$
|
1,166,991
|
|
|
$
|
953,502
|
|
Retail
|
|
78,373
|
|
|
79,492
|
|
|
69,321
|
|
Corporate / other
|
|
160,830
|
|
|
135,536
|
|
|
258,703
|
|
Total assets
|
|
$
|
1,313,178
|
|
|
$
|
1,382,019
|
|
|
$
|
1,281,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
(in thousands)
|
|
October 28, 2016
|
|
October 30, 2015
|
|
October 28, 2016
|
|
October 30, 2015
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
8,041
|
|
|
$
|
4,415
|
|
|
$
|
25,804
|
|
|
$
|
17,717
|
|
Retail
|
|
25
|
|
|
95
|
|
|
279
|
|
|
148
|
|
Corporate / other
|
|
—
|
|
|
87
|
|
|
—
|
|
|
252
|
|
Total capital expenditures
|
|
$
|
8,066
|
|
|
$
|
4,597
|
|
|
$
|
26,083
|
|
|
$
|
18,117
|
|
NOTE
12
. RECENT ACCOUNTING PRONOUNCEMENTS
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
. Under this ASU, non-LIFO inventory will be measured at the lower of cost and net realizable value, eliminating the options that currently exist for market valuation. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. No other changes were made to the current guidance on inventory measurement. This guidance was effective for Lands' End in the First Quarter 2016 and only applies to our international inventory as United States inventory is valued using LIFO. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements.
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU 2015-05,
Customers' Accounting for Fees Paid in a Cloud Computing Arrangement
, which clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. This guidance was effective for Lands' End in the First Quarter 2016. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, which changed the required presentation of debt issuance costs from an asset on the balance sheet to a deduction from the related debt liability. This guidance was adopted by the Company during First Quarter 2016. See Note
4
,
Debt,
for further discussion.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance was deferred by ASU 2015-14,
Revenue from Contracts with Customers
, issued by the FASB in August 2015, and will be effective for Lands' End in the first quarter of its fiscal year ending February 1, 2019. Subsequently, the FASB has also issued accounting standards updates which clarify the guidance. The Company is currently in the process of evaluating the impact of adoption of this ASU and related clarifications on the Company's Condensed Consolidated Financial Statements.
Compensation - Stock Compensation
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation
, which simplifies the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. This guidance will be effective for Lands' End in the first quarter of its fiscal year ending February 2, 2018. The adoption of this guidance is not expected to have a material impact on the Company's Condensed Consolidated Financial Statements.
Recognition of Breakage for Certain Prepaid Stored-Value Products
In March 2016, the FASB issued ASU 2016-04,
Recognition of Breakage for Certain Prepaid Stored-Value Products
. This update clarifies when it is acceptable to recognize the unredeemed portion of prepaid gift cards into income. This guidance will be effective for Lands' End in the first quarter of its fiscal year ending February 1, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's Condensed Consolidated Financial Statements.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. This update clarifies issues to reduce the current and potential future diversity in practice of the classification of certain cash receipts and cash payments within the statement of cash flows. This guidance will be effective for Lands' End in the first quarter of its fiscal year ending February 1, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's Condensed Consolidated Financial Statements.
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases,
which will replace the existing guidance in ASC 840,
Leases
. This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. This guidance will be effective for Lands' End in the first quarter of its fiscal year ending January 31, 2020. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's Condensed Consolidated Financial Statements.