SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934. (FEE REQUIRED)
For the fiscal year ended January 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934. (NO FEE REQUIRED)
For the transition period from ...... to ......
Commission file number 1-9769
LANDS' END, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2512786
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lands' End Lane, Dodgeville, WI 53595
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 608-935-9341
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock ($0.01 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( X )
As of March 20, 1998, the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $458,835,797.
The number of shares of Common Stock ($0.01 par value) outstanding as of
March 20, 1998, was 30,961,250.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Notice of 1998 Annual Meeting and Part III, Items 10,
Proxy Statement dated April 13, 1998 11, 12 and 13
Lands' End, Inc. & Subsidiaries
Index To
Annual Report On Form 10-K
For Year Ended January 30, 1998
Part I. Page
Item 1. Business ............................................. 3-8
Executive Officers of the Registrant ................. 8-9
Item 2. Properties ........................................... 10-11
Item 3. Legal Proceedings .................................... 11
Item 4. Submission of Matters to a Vote of Security Holders .. 11
Part II.
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ................................ 12
Item 6. Selected Consolidated Financial Data ................. 13
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations ...... 14-21
Item 8. Consolidated Financial Statements and Supplementary
Data ............................................... 22-42
Item 9. Changes in and Disagreements on Accounting and
Consolidated Financial Disclosure................... 43
Part III.
Item 10. Directors and Executive Officers of the Registrant.... 43
Item 11. Executive Compensation ............................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management ......................................... 43
Item 13. Certain Relationships and Related Transactions ....... 43
Part IV.
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K ............................ 44
Signatures .......................................................... 45
2
PART I.
Item 1. Business
Lands' End, Inc., is a leading direct merchant of traditionally styled, casual
clothing for men, women and children, accessories, domestics, shoes and soft
luggage. The company strives to provide products of exceptional quality at
prices representing honest value, enhanced by a commitment to excellence in
customer service and an unconditional guarantee. The company offers its
products principally through regular mailings of its monthly primary catalogs
and its specialty catalogs.
The company's growth strategy has three key elements. First, the company seeks
to increase sales from its regular catalogs in the United States both by
expanding its customer base and by increasing sales to its existing customers
through improvements in its merchandise offerings and creative presentations.
Second, the company endeavors to generate additional sales by making targeted
mailings of its specialty catalogs to existing and prospective customers, and
by offering its products on the Internet. Third, the company is actively
pursuing opportunities to apply its merchandising, marketing and order
fulfillment skills abroad by continuing its efforts in the United Kingdom,
Japan and Germany.
Date of Incorporation
The Registrant was incorporated in Illinois in 1963 and became a Delaware
corporation in 1986.
Catalogs and Marketing
Lands' End views each catalog issue as a unique opportunity to communicate with
its customers. Products are described in visual and editorial detail in which
the company shares its view of the benefits and features of its merchandise.
The catalogs use such techniques as background stories, editorials, monthly
publication and distinctive covers to stimulate the reader's interest,
combining a consistent theme with varying monthly features.
Domestic and Foreign Segments
The company's business is entirely concentrated in one product area of
traditionally styled apparel, domestics (primarily bedding and bath items) and
soft luggage. Although the company's business can not be divided into
meaningful industry segments, its operations can be grouped into two geographic
segments, Domestic and Foreign. The Domestic segment is our primary segment
and consists of United States-based operations. The Foreign segment includes
foreign-based operations conducted in Japan, the United Kingdom and Germany.
Segment disclosures are detailed below.
Domestic (U.S. Based Operations)
Regular (Primary) and Prospector Catalogs
During fiscal 1998, the company mailed 12 issues of its regular monthly
(primary) catalog with an average of 169 pages per issue from its U.S. based
operations. Worldwide, the company mailed approximately 230 million full-price
catalogs, including specialty catalogs and abridged issues.
3
Each issue of the regular catalog offers certain basic product lines for men
and women (including knit shirts, sweaters, dress and sport shirts, casual
pants, dresses, skirts, accessories, and soft luggage) that customers have come
to expect. The regular catalog also offers seasonal merchandise, such as
swimsuits, outerwear and holiday gifts. In addition to the mailings of the
regular catalog, each year Lands' End generally mails two end-of-season
clearance catalogs, an interim catalog, and a "Last Chance Before Christmas"
catalog. The company mails an abridged version of its regular catalog to
prospective customers who are identified based on lists of magazine subscribers
and customers of other direct marketers and on lists compiled of households
meeting certain demographic criteria. In addition, the company identifies
prospective new customers through its national advertising campaign.
Specialty Catalogs
In fiscal 1991, the company introduced Kids, Coming Home, and Beyond
Buttondowns. The Kids catalog offers children's clothing. In fiscal 1998, the
company launched its first Kid's Uniform catalog, that targets the growing
uniform trend in many public and private schools. The Coming Home catalog
offers domestic products, primarily bedding and bath items. Beyond Buttondowns
offers men's tailored clothing and accessories. In fiscal 1994, the company
introduced Textures, which was revamped as First Person Singular in fiscal
1997. First Person Singular features women's tailored clothing and
accessories. In fiscal 1998, the company mailed seven issues of its Kids
catalogs, six issues of its Coming Home catalogs, six issues of its Beyond
Buttondowns catalogs, and five issues of its First Person Singular catalogs.
In fiscal 1994, the company purchased a majority interest in The Territory
Ahead. In the first quarter of fiscal 1998, the company sold The Territory
Ahead and recorded an after-tax gain of approximately $5.0 million. In fiscal
1998, The Territory Ahead mailed one issue of its catalogs while a part of
Lands' End.
In fiscal 1994, Corporate Sales, the company's business-to-business catalog,
was introduced. Corporate Sales offers quality products to groups, teams and
clubs or to companies that use Lands' End's merchandise for corporate premiums
or incentive programs. The company's embroidery capabilities allow for the
design and monogram of unique logos or emblems for groups. In fiscal 1998, the
company mailed five issues of its Corporate Sales catalogs.
In fiscal 1995, the company purchased the trademark of Willis & Geiger Company,
a respected brand that offers apparel and related products targeted to the
outdoor enthusiast. There were four issues of Willis & Geiger catalogs mailed
in fiscal 1998.
Pan International
Through the company's Pan International business, regular mailings of primary
and specialty catalogs are sent to customers in more than 175 countries
throughout the world. Fulfillment for these export sales is handled through
the company's Wisconsin facilities in the United States.
4
Foreign Based Operations
In September 1991, the company launched its first United Kingdom (U.K.)
catalog denominated in British pound sterling. In August 1993, the company
opened a telephone order and distribution center in Oakham, England, which
allowed the company to fill orders locally and greatly reduce delivery time to
U.K. customers. Construction of a new phone and distribution center in Oakham
is targeted to be completed in the summer of 1998. Nine issues of the pound-
denominated U.K. catalog were mailed in fiscal 1998.
In fall 1994, the company launched operations in Japan, and in fiscal 1998, the
company mailed six issues of the Japanese-language, yen-denominated catalog.
During fiscal 1998, the company's phone center and administrative office moved
to a larger facility in Yokohama. The distribution center moved to Fujieda
from Maebashi in fiscal 1997 to accommodate future growth. Packages are
delivered from this warehouse in Fujieda which is managed by Lands' End's
employees.
In August 1996, the company launched its first German-language,
Deutsche mark-denominated catalog. Four issues were mailed during fiscal 1998.
The company's phone center and administrative functions operate from its
Mettlach, Germany, offices. Orders are packed and shipped from the Lands' End
European distribution center in Oakham, England.
Financial Information about Foreign and Domestic Operations
See Note 11 to the Consolidated Financial Statements in Item 8 for geographic
segment financial data.
The Internet
The company believes that ways of reaching customers other than by regular
catalog mailings may become increasingly important in the future. The company
offers cybershopping, company profile, product information and other services
to its customers on its user-friendly web site at www.landsend.com. During
fiscal 1998, the company added a new website called "Beyond Lands' End" that is
devoted to bringing unique adventures to its Internet shoppers. In addition,
Lands' End Japan opened a home page (www.landsend.co.jp) late in fiscal 1998.
The company will continue to explore the development of interactive shopping to
meet its customer's expectations. However, marketing the company's products
through regular and specialty catalogs is expected to remain the primary means
of communicating with customers.
Customers
A principal factor in the company's success to date has been the development of
its own list of active customers, many of whom have been identified through
their response to the company's advertising. At the end of fiscal 1998, the
company's mailing list consisted of about 27.2 million persons, approximately
9.6 million of whom are viewed as "current customers" because they have made at
least one purchase from the company within the last 36 months. The company
routinely updates and refines this list prior to individual catalog mailings to
monitor customer interest as reflected in criteria such as the recency,
frequency, dollar amount, and product type of purchases.
5
The company believes that its customer list has desirable demographic
characteristics and is well-suited to the products offered in the company's
catalogs. A customer research survey conducted by the company in the United
States during 1997 indicated that approximately 54 percent of its customers
were in the 35-54 age group and had median incomes of $60,000. This research
indicated that approximately 88 percent of Lands' End customers attended or
graduated from college.
The company conducts a national advertising campaign intended to build the
company's reputation and to attract new customers. In fiscal 1998, this
advertising appeared in about 50 national magazines, as well as on national
television and radio. In addition, the company advertises in approximately 80
national, regional and local publications in Canada, the U.K., Japan, Germany,
the Middle East, and in Pacific Rim countries.
The company is not dependent upon any single customer, or upon any single group
of customers, the loss of which would have a material effect on the company.
Product Development
Lands' End concentrates on traditional clothing and other products that are
classically inspired, simply styled and quality crafted to meet the changing
tastes of the company's customers rather than to mimic the changing fads of the
fashion world. At the same time, the company seeks to maintain customer
interest by developing new product offerings, improving existing core products
and reinforcing its value positioning.
The company continues to incorporate innovations in fabric, construction and
detail that add value and excitement and differentiate Lands' End from the
competition. In order to ensure that products are manufactured to the
company's quality standards at reasonable prices, product managers, designers
and quality assurance specialists develop the company's own product. They also
specify the fibers, fabric construction and manufacturing source for each item
and are responsible for the styling and quality features of the products.
As part of its "direct merchant" philosophy, Lands' End seeks to deal directly
with its suppliers and to avoid intermediaries. All goods are produced by
independent manufacturers, except for the majority of our soft luggage which is
assembled at the company's own facilities. During fiscal 1998, the company
purchased merchandise from about 440 domestic and foreign manufacturers, with
one manufacturer accounting for about 11 percent of company purchases in fiscal
1998. The company would be subject to minimal risk to the extent of finding
alternative sourcing if this manufacturer experiences prolonged work stoppages
or economic problems. In fiscal 1998, about 50 percent of our merchandise was
made in the United States, and 50 percent was imported, mainly from Asia,
Central America, South America and Europe. The company will continue to take
advantage of worldwide sourcing without sacrificing customer service or quality
standards. The availability and cost of certain foreign products may be
affected by United States trade policies, economic events and the value of the
United States dollar relative to foreign currencies.
6
Order Entry and Fulfillment
The company attempts to simplify catalog shopping as much as possible and
believes that its fulfillment systems are among the best in the United States.
Lands' End utilizes toll-free telephone numbers which may be called 24 hours a
day, seven days a week (except Christmas Day) to place orders, to request a
catalog or to seek assistance. Approximately 85 - 90 percent of catalog orders
are placed by telephone. Telephone calls were answered by as many as 3,000
well-trained sales representatives who utilize on-line computer terminals to
enter customer orders and to retrieve information about product characteristics
and availability. Additional services are provided through the use of AT&T
language lines to serve foreign customers and TDD (telephone device for the
deaf). The company's three U.S. telephone centers are located in Dodgeville,
Cross Plains and Reedsburg, Wisconsin. International telephone centers are
located in Oakham, England, Yokohama, Japan and Mettlach, Germany.
The company has achieved efficiencies in order entry and fulfillment that
permits the shipment of in-stock orders on the following day, except orders
requiring monogramming or inseaming, which typically require one or two extra
days. The company's sales representatives enter orders into an on-line order
entry and inventory control system. Computer processing of orders is performed
each night on a batch basis, at which time picking tickets are printed with bar
codes for optical scanning. Inventory is picked based on the location of
individual products rather than orders, followed by computerized sorting and
transporting of goods to multiple packing stations and shipping zones. The
computerized inventory control system also handles the receipt of shipments
from manufacturers, permitting faster access to newly arrived merchandise, as
well as the handling of customer return items.
Orders are generally shipped by United Parcel Service (UPS) at various tiered
rates dependent upon the total dollar value of each customer's order. Other
expedited delivery services are available at additional charges. The company
utilizes a two-day UPS service at standard rates, enhancing its customer
service.
Merchandise Liquidation
Liquidations, sales of overstocks and end-of-season merchandise at reduced
prices, were approximately 8 percent, 9 percent and 11 percent of net sales in
fiscal 1998, 1997 and 1996, respectively. A majority of liquidation sales were
made through catalogs and other print media. The balance was sold principally
through the company's outlet and inlet retail stores.
Competition
The company's principal competitors are other catalog companies and retail
stores, including specialty shops and department stores. The company may also
face increased competition from other retailers as the number of television
shopping channels and the variety of merchandise offered through electronic
media increase. The apparel retail business in general is intensely
competitive. Lands' End competes principally on the basis of merchandise value
(quality and price), its established customer list and customer service,
including fast order fulfillment and its unqualified guarantee.
7
The company is one of the leading catalog companies in the U.S. The company
attributes the growth in the catalog industry to many factors including
customer convenience, widespread use of credit cards, the use of toll-free
telephone lines, customers having less time to shop in stores, and purchasing
of product on-line through various computer networks. At the same time, the
catalog business is subject to uncertainties in the economy, which result in
fluctuating levels of overall consumer spending. Due to the lead times
required for catalog production and distribution and product development,
catalog retailers may not be able to respond as quickly as traditional
retailers in an environment of rapidly changing prices.
Trademarks
The company uses the trademarks of "Lands' End" and "Coming Home" on products
and catalogs. Some of the trademarks used in the catalogs include "Super-T"
shirts, "Squall" jackets and "Drifter" sweaters. With the exception of "Lands'
End" and "Coming Home", the company believes that loss or abandonment of any
particular trademark would not significantly affect its business.
Seasonality of Business
The company's business is highly seasonal. Historically, a disproportionate
amount of the company's net sales and a majority of its profits have been
realized during the fourth quarter. If the company's sales were materially
different from seasonal norms during the fourth quarter, the company's annual
operating results could be materially affected. In addition, as the company
continues to refine its marketing efforts by experimenting with the timing of
its catalog mailings, quarterly results may fluctuate. Accordingly, results
for the individual quarters are not necessarily indicative of the results to be
expected for the entire year.
Employees
The company believes that its skilled and dedicated workforce is one of its key
resources. Employees are not covered by collective bargaining agreements, and
the company considers its employee relations to be excellent. As a result of
the highly seasonal nature of the company's business, the size of the company's
workforce varies, ranging from approximately 6,600 to 9,200 individuals in
fiscal 1998. During the peak winter season of fiscal 1998, approximately 4,700
of the company's approximately 9,200 employees were temporary employees.
Executive Officers of the Registrant
The following are the executive officers of the company:
Michael J. Smith, 37, is President and Chief Executive Officer of the company.
In 1983, Mr. Smith entered the employ of the company as a Market Research
Analyst, became Circulation Manager of Planning in 1985, and was promoted to
Manager of Merchandise Planning and Research in 1988. In 1990, he was named
Managing Director of Coming Home and was elected Vice President of that
business in 1991. He assumed his present position and was elected as director
of the company in December 1994.
William E. Ferry, 57, is Vice Chairman of Sales since rejoining the company in
July 1996. Mr. Ferry served as Executive Vice President, Merchandising, with
the company between 1981 and 1986. Mr. Ferry was the President and Chief
Executive Officer for Eastern Mountain Sports from 1986 until 1996. He has
been serving as a director of the company since November 1996.
8
Stephen A. (Chip) Orum, 52, is Executive Vice President and Chief Operating
Officer. Mr. Orum joined the company as Vice President and Chief Financial
Officer in June 1991, and was appointed Senior Vice President and Chief
Financial Officer in February 1993. He was promoted to his present position in
October 1994. Mr. Orum was employed by Jos. A. Bank Clothiers, Inc. since 1982
in various capacities, reaching the position of Executive Vice President and
Chief Financial Officer.
Bradley K. Johnson, 41, is Senior Vice President, Chief Administrative
Officer and Chief Financial Officer. Mr. Johnson joined the company in May
1996 assuming his current position. He was employed by Wilsons The Leather
Experts, a subsidiary of Melville Co. since 1989 in various capacities,
reaching the position of Vice President of Operations and Chief Financial
Officer.
Francis P. Schaecher, 50, is Senior Vice President of Operations. Mr.
Schaecher joined the company in 1982 as Operations Manager. He served as Vice
President of Operations from 1983 until 1990, at which time he assumed his
present position.
All executive officers serve at the pleasure of the Board of Directors.
There is no family relationship between any of the executive officers of the
company. None of the company's directors or executive officers were involved
in any criminal proceeding (excluding traffic violations or similar
misdemeanors) nor was any such person a party to any civil proceeding of a
judicial or administrative body of competent jurisdiction as a result of which
such person was or is subject to a judgment decree or final order enjoining
future violations of or prohibiting or mandating activities subject to federal
or state securities laws or finding any violation with respect to such laws.
9
Item 2. Properties
The following table sets forth certain information of the company and its
subsidiaries relating to their principal facilities as of January 30, 1998.
None of these properties is subject to mortgage or collateral assignment.
Type of
Location Interest
Domestic Properties:
Wisconsin:
Warehouses in Dodgeville and Reedsburg Owned
Phone centers and offices in Dodgeville,
Cross Plains and Reedsburg Owned
Activity Center in Dodgeville Owned
Hangars in Madison and Mineral Point Owned
Inlet (A) stores in Brookfield, Fox Point
and Madison Leased
Outlet stores in Madison, Oshkosh, and Dodgeville Leased
Offices in Madison Leased
Iowa:
Manufacturing plants in West Union and Elkader Owned
Outlet stores in Iowa City and West Des Moines Leased
Illinois:
Outlet stores in Chicago, Evanston, Lombard,
Niles, Schaumburg, Vernon Hills, Champaign,
Springfield, and Rockford Leased
Minnesota:
Inlet (A) stores in Richfield and Minnetonka
and Woodbury Leased
Travelers Inlet Store (B) at the Minneapolis/
St. Paul International Airport Leased
New York:
Inlet (A)-store in Rochester Leased
International Properties:
United Kingdom:
Warehouse, phone center, outlet store, and offices
in Oakham Leased
Land in Oakham (building construction in progress) Owned
Outlet stores in Bicester Village and Hatfield Leased
Sourcing office in London Leased
Japan:
Warehouse in Fujieda City Leased
Offices and phone center in Yokohama Leased
Germany:
Offices and phone center in Mettlach Leased
Portugal:
Sourcing office in Maia Leased
The company believes that its facilities are in good condition, well
maintained and suitable for their intended uses. The company is expanding its
facilities in Dodgeville and Reedsburg, Wisconsin, and the United Kingdom to
allow for future growth.
10
(A) The company introduced its "inlet" (originally known only as outlet)
concept during fiscal 1997. The "inlet" store enhances the traditional
outlet "overstock" store and offers face-to-face catalog shopping
within a store. The "inlet" stores carry a limited selection of Lands'
End signature items at regular catalog prices, along with expanded
customer service that catalog customers have come to expect.
(B) The Traveler's Inlet is located at the Minneapolis/St. Paul
International Airport and carries only full-price merchandise and offers
special services to travelers.
Item 3. Legal Proceedings
There are no material legal proceedings presently pending, except for routine
litigation incidental to the business, to which the company is a party or of
which any of its property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended January 30, 1998.
11
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
The common stock of the company is listed and traded on the New York Stock
Exchange. The stock tables in most daily newspapers list the company as
"LandsE". Ticker symbol: LE. See Item 12 "Consolidated quarterly analysis"
for information on the high and low stock prices of the company's common
stock. The closing price of the company's stock on the New York Stock
Exchange on March 20, 1998, (record date) was $37 7/16 per share.
Shareholders
As of March 20, 1998, the number of shareholders of record of common stock of
the company was 2,427. This number excludes shareholders whose stock is held
in nominee or street name by brokers.
Dividends
See Item 7 "Liquidity and capital resources" of Management's Discussion and
Analysis for the company's decision not to pay cash dividends during fiscal
years 1998, 1997 and 1996.
12
Item 6. Selected Consolidated Financial Data
FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY (unaudited)
(In thousands, except per share data)
Fiscal Year 1998 1997 1996 1995 19943
Income statement data:
Net sales $1,263,629 $1,118,743 $1,031,548 $992,106 $869,975
Pretax income 101,825 84,919 50,925 59,663 69,870
Percent to net sales 8.1% 7.6% 4.9% 6.0% 8.0%
Net income before
cumulative effect of
change in accounting 64,150 50,952 30,555 36,096 42,429
Cumulative effect of
accounting change - - - - 1,300
Net income 64,150 50,952 30,555 36,096 43,729
Per share of common stock: (1)(2)
Basic earnings per share
before cumulative
effect of change in
accounting $2.01 $1.54 $0.89 $1.03 $1.18
Cumulative effect of
change in accounting - - - - .04
Basic earnings per
share $2.01 $1.54 $0.89 $1.03 $1.22
Diluted earnings per
share $2.00 $1.53 $0.89 $1.02 $1.21
Cash dividends per share - - - - $0.10
Common shares outstanding 30,979 32,442 33,659 34,826 35,912
Balance sheet data:
Current assets $ 299,146 $272,039 $222,089 $198,168 $192,276
Current liabilities 182,013 145,566 114,744 102,717 91,049
Property, plant, equipment
and intangibles, net 134,326 106,006 101,408 99,444 81,554
Total assets 433,472 378,045 323,497 297,612 273,830
Noncurrent liabilities 8,747 9,474 7,561 5,767 5,496
Shareholders'
investment 242,712 223,005 201,192 189,128 177,285
Other data:
Net working capital $ 117,133 $126,473 $107,345 $ 95,451 $101,227
Capital expenditures 48,228 17,992 14,780 27,005 16,958
Depreciation and
amortization expense 15,127 13,558 12,456 10,311 8,286
Return on average
shareholders'
investment 28% 24% 16% 20% 28%
Return on average assets 16% 15% 10% 13% 18%
1. Share data reflects the two-for-one stock split declared in May 1994.
2. In the fourth quarter of fiscal 1998, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
3. Effective January 30, 1993, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes" which
was recorded as a change in accounting principle at the beginning of
fiscal 1994 with an increase to net income of $1.3 million or $0.04 per
share.
13
Item 7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
Results of operations for fiscal 1998, compared with fiscal 1997
Fiscal 1998 was a good year. Sales growth was strong throughout the year.
Gross profit margin improved, mainly due to higher initial margins, while
selling, general and administrative expenses rose due primarily to a higher
number of pages mailed, which reduced productivity, or sales per page. In
fiscal 1997, inventory levels were too low, and we disappointed more customers
than in prior years. Higher inventory levels in the last half of fiscal 1998
increased our first-time fulfillment rate and resulted in fewer lost sales and
backorders. Sales in the United States from our core business, represented by
our monthly and prospecting catalogs, accounted for about 53 percent of total
net sales in fiscal 1998. Sales from our foreign-based operations in Japan,
the United Kingdom and Germany accounted for just above 10 percent of total net
sales. Net income increased 25.9 percent this year compared to last year. Net
income in fiscal 1998 included an after-tax gain of $4.9 million on the sale of
our majority interest in The Territory Ahead.
Consolidated statements of operations presented as a percentage of net sales:
For the period ended
January 30, January 31, February 2,
1998 1997 1996
Net sales 100.0% 100.0% 100.0%
Cost of sales 53.4 54.5 57.0
Gross profit 46.6 45.5 43.0
Selling, general and
administrative expenses 38.8 37.9 38.0
Charges from sale of subsidiary - 0.1 0.2
Income from operations 7.8 7.5 4.8
Interest income (expense), net - 0.1 (0.3)
Gain on sale of subsidiary 0.6 - -
Other (0.3) 0.0 0.4
Income before income taxes 8.1 7.6 4.9
Income tax provision 3.0 3.0 1.9
Net income 5.1% 4.6% 3.0%
14
Net sales grew by 13 percent
Net sales for the year just ended totaled $1.264 billion, compared with $1.119
billion in the prior year, an increase of 13.0 percent. Our sales increase in
fiscal 1998 came mainly from growth in our specialty businesses, as well as
from our core business, represented by the monthly and prospecting catalogs,
and from our foreign-based operations. Our sales growth can be attributed to
increases in the number of pages and catalogs mailed. In fiscal 1998,
worldwide, we mailed 230 million full-price catalogs, compared to the prior
year's 211 million. The total number of pages mailed increased about 26
percent. The company had a majority interest in The Territory Ahead for the
first two months of fiscal 1998 and throughout all of fiscal 1997. Net sales
for fiscal 1998 and 1997 included $5.1 million and $30.1 million, respectively,
from The Territory Ahead. Excluding these amounts from both fiscal years'
revenues, net sales for fiscal 1998 increased 15.6 percent.
Our inventory balance at the end of fiscal 1998 was $241 million, up 69 percent
from fiscal 1997 ending inventory of $142 million. In fiscal 1997, many
customers were disappointed when their orders could not be filled during the
late fall and holiday seasons. This year we increased inventory, especially in
the last half of the year, resulting in higher fulfillment rates for the most
recent holiday period and reaching an annualized first-time fulfillment rate of
88 percent. This compares to an 86 percent rate in fiscal 1997, but is below
our goal of shipping at least 90 percent of all items when the customer places
an order. Higher inventory levels may result in greater product liquidations
at lower margins in future periods.
Gross profit margin improved
Gross profit increased 15.5 percent to $588 million in fiscal 1998, compared
with $510 million in fiscal 1997. As a percentage of net sales, gross profit
rose to 46.6 percent in fiscal 1998, compared with 45.5 percent in fiscal 1997.
The increase in gross profit margin was primarily due to higher initial markups
and less steep markdowns on fewer liquidated sales. Liquidation of out-of-
season and overstocked merchandise was 8 percent of net sales in fiscal 1998,
compared with 9 percent in the prior year.
In fiscal 1998, inflationary pressure was low, and costs of inventory purchases
increased 1.2 percent, compared with 1.0 percent in fiscal 1997.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses rose 15.4 percent in fiscal
1998 to $490 million, from $424 million in fiscal 1997. As a percentage of
sales, SG&A was 38.8 percent in fiscal 1998, compared with 37.9 percent in
fiscal 1997. The increase in the SG&A ratio was mainly the result of lower
productivity, or sales per page, in the core catalogs due to an increase in the
number of pages mailed, partially offset by lower paper prices. An additional
factor increasing the SG&A ratio was relatively higher spending on information
systems development. The cost of producing and mailing catalogs represented
about 41 percent and 42 percent of total SG&A in fiscal 1998 and 1997,
respectively.
Depreciation and amortization expense was $15.1 million, up 11.6 percent from
the prior year, primarily because of additional equipment, computer hardware
and software, and buildings. Rental expense was $13.5 million, up 5.4 percent,
due mainly to increased computer-related rentals and building rentals.
15
Utilization of credit lines increased
Because of higher inventory levels throughout the year, there was additional
borrowing under our short-term lines of credit, increasing our interest expense
by nearly $1.5 million from fiscal 1997. In addition, we spent $48 million in
capital expenditures and purchased about $46 million in treasury stock. Our
lines of credit peaked at $118 million in October 1997, compared with a peak of
$27 million in the prior year. At January 30, 1998, we had short-term debt
outstanding for foreign subsidiaries of $25 million, and domestic operations of
$7.0 million and no long-term debt outstanding.
Net income increased
Net income for fiscal 1998 was $64.2 million, up 25.9 percent from the $51.0
million earned in fiscal 1997. Diluted earnings per share for the year just
ended were $2.00, compared with $1.53 per share for the prior year. Fiscal
1998 net income includes an after-tax foreign currency exchange loss of $2.4
million, recorded as other expense. The diluted weighted average number of
common shares outstanding was 32.1 million for fiscal 1998 and 33.2 million for
fiscal 1997.
As previously reported, in the first quarter of fiscal 1998, we had an after-
tax gain of $4.9 million, or $0.15 per share, from the sale of our majority
interest in The Territory Ahead. In the third quarter of fiscal 1997, we took
an after-tax charge to earnings of $840,000, or $0.03 per share, in connection
with the sale of our wholly owned subsidiary MontBell America, Inc. Before the
effect of these after-tax adjustments, net income for fiscal 1998 was $59.2
million, or $1.85 per share, compared with $51.8 million, or $1.56 per share,
in fiscal 1997.
In August 1997, United Parcel Service (UPS), which delivers almost all packages
to our customers, was on strike for 15 days. During this period, the company
was able to deliver all orders in a timely fashion through the United States
Postal Service (USPS). The cumulative costs of lost sales, increased shipping
through USPS and advertising to notify customers that orders would be shipped
were estimated to have a negative impact of $0.04 to $0.08 per share.
Fiscal 1997, compared with fiscal 1996
Fiscal 1997 was a year of marked improvement. Sales began to improve strongly
in the last part of the third quarter. Because of this, we began the holiday
season with lower than optimal inventory levels and had to disappoint more
customers than in past seasons. Gross profit margins improved throughout the
year, as did the performance of the catalogs, resulting in a 67 percent
increase in net income for the year.
Net sales increased
Net sales for the 52-week year totaled $1.119 billion, compared with $1.032
billion in the prior 53-week year, an increase of 8.5 percent. Our sales
increase in fiscal 1997 came mainly from growth in our specialty and
international businesses, as well as from growth in our core business,
represented by the monthly and prospecting catalogs. This is primarily the
result of improvements in overall catalog productivity, or sales per page,
especially in our specialty catalogs. Productivity improvements and growth in
the core U.S. business were the result of stronger creative presentations and
more compelling products. The core U.S. business accounted for about 60
percent of total net sales in fiscal 1997. For the year, worldwide, we had
16
mailed 211 million full-price catalogs, compared to the prior year's 200
million. However, the total number of pages mailed was reduced by about 3
percent. Because of continuing high paper prices through most of the year,
prospecting for new customers took place mostly in the final quarter.
Our inventory balance at the end of fiscal 1997 was $142 million, down 14
percent from fiscal 1996 ending inventory of $165 million. Because of strong
sales in the third quarter of fiscal 1997, we entered the holiday season with
lower inventory levels and were unable to fill orders at our usual seasonal
rate in the fourth quarter. For the year, we shipped 86 percent of items
ordered by customers at the time the order was placed, compared with 90 percent
in the prior year. This resulted in disappointing many of our customers and
increased both lost sales and the cost of shipping a higher level of
backorders.
Gross profit margin improved
Gross profit increased 15 percent to $510 million in fiscal 1997, compared with
$444 million in fiscal 1996. As a percentage of net sales, gross profit rose
to 45.5 percent in fiscal 1997, compared with 43.0 percent in fiscal 1996. Our
gross profit margin improvement was due primarily to lower costs associated
with liquidating overstocked product, as well as from lower merchandise costs
through improvements in sourcing and from a greater proportion of sales from
higher margin businesses. Liquidation of out-of-season and overstocked
merchandise was 9 percent of net sales in fiscal 1997, compared with 11 percent
in the prior year.
In fiscal 1997, inflationary pressure was low, and costs of inventory purchases
increased 1.0 percent, compared with 1.8 percent in fiscal 1996.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses rose 8 percent in fiscal
1997 to $424 million, from $392 million in fiscal 1996. As a percentage of
sales, SG&A was 37.9 percent in fiscal 1997, compared with 38.0 percent in
fiscal 1996. Increased productivity of the catalogs, as well as a larger
number of orders and higher average order volume, benefited our SG&A expenses.
This was mostly offset by increased bonus and profit sharing expenses
associated with our improved profitability. For the year as a whole, paper
prices were flat. The cost of producing and mailing catalogs represented about
42 percent and 43 percent of total SG&A in fiscal 1997 and 1996, respectively.
Depreciation and amortization expense was $13.6 million, up 9 percent from the
prior year, primarily because of equipment, buildings, computer hardware, and
computer software. Rental expense was $12.8 million, up 11 percent, due mainly
to increased computer-related rentals and building rentals. In fiscal 1997, we
opened two additional stores in Minnesota and one in New York to liquidate
excess inventory.
17
Utilization of credit lines decreased
Because of lower inventory levels throughout the year, borrowing under our
short-term lines of credit decreased, reducing our interest expense by more
than $2 million from fiscal 1996. With more cash to invest, our interest
income increased to $1.1 million in fiscal 1997 from $0.3 million in fiscal
1996. In addition, we purchased about $30 million in treasury stock and spent
$18 million in capital expenditures. Our lines of credit peaked at $27 million
in October 1996, compared with a peak of $104 million in the prior year. At
January 31, 1997, we had short-term debt outstanding for foreign subsidiaries
of $11.2 million and no long-term debt outstanding.
Net income increased
Net income in fiscal 1997 was $51.0 million, up 67 percent from the $30.6
million earned in the prior year. Diluted earnings per common share for the
year just ended were $1.53, compared with $0.89 per share in fiscal 1996.
As previously reported, we had taken after-tax charges to earnings in the third
quarter of fiscal 1997 of $840,000, or a reduction of $0.03 per share, and in
the fourth quarter of fiscal 1996 of $1.1 million, also a reduction of $0.03
per share. These charges were in connection with the fiscal 1996 sale of our
wholly owned subsidiary MontBell America, Inc. Before the effect of these
after-tax charges, net income for fiscal 1997 was $51.8 million, or $1.56 per
share, compared with $31.7 million, or $0.92 per share in fiscal 1996. The
company's investment in MontBell America, Inc. was zero as of January 31, 1997.
The Christmas season is our busiest
Our business is highly seasonal. The fall/winter season is a five-month period
ending in December. In the longer spring/summer season, orders are fewer and
the merchandise offered generally has lower unit selling prices than products
offered in the fall/winter season. As a result, net sales are usually
substantially greater in the fall/winter season, and SG&A as a percentage of
net sales is usually higher in the spring/summer season. Additionally, as we
continue to refine our marketing efforts by experimenting with the timing of
our catalog mailings, quarterly results may fluctuate.
Nearly 40 percent of our annual sales came in the fourth quarter of the fiscal
years 1998 and 1997. About 63 percent and 75 percent of before-tax profit was
realized in the same quarter of fiscal 1998 and 1997, respectively.
Liquidity and capital resources
To date, the bulk of our working capital needs have been met through funds
generated from operations and from short-term bank loans. Our principal need
for working capital has been to meet peak inventory requirements associated
with our seasonal sales pattern. In addition, our resources have been used to
make asset additions and purchase treasury stock.
During fiscal 1995, the board of directors evaluated its dividend practice
whereby it had paid annual dividends. Given our intent to buy back additional
shares, the payment of a cash dividend is not planned for the foreseeable
future.
We will continue to explore investment opportunities arising from the expansion
of our international businesses and the development of new businesses. While
this investment spending has had some negative impact on earnings, it is not
expected to have a material effect on liquidity.
18
At January 30, 1998, we had unsecured domestic credit facilities totaling $110
million, of which $7.0 million was used. The company also maintains foreign
credit lines for use in foreign operations totaling the equivalent of
approximately $50 million, of which $25.4 million was used at January 30, 1998.
The company has a separate $20 million bank facility available to fund treasury
stock purchases and capital expenditures. This facility runs through May 31,
1998, at which time the company expects to renew it.
The company's board of directors authorized the purchase of up to 1.0 million
shares, 1.5 million shares and 2.0 million shares of the company's common stock
in July 1996, January 1997 and January 1998, respectively. Of the total of 4.5
million shares, 2.1 million shares had been purchased as of January 30, 1998.
Since fiscal 1990, the company's board of directors has authorized the purchase
of a total of 12.7 million shares of the company's common stock. A total of
1.5 million, 1.3 million, and 1.3 million shares have been purchased in the
fiscal years ended January 30, 1998, January 31, 1997, and February 2, 1996,
respectively. The total cost of the purchases was $45.9 million, $30.1
million, and $20.0 million for fiscal 1998, 1997 and 1996, respectively.
Capital investment
Capital investment was about $48 million in fiscal 1998. Major projects
included expansion of distribution and office facilities in Dodgeville,
Wisconsin, and a new distribution and phone center in Oakham, England, new
computer hardware and software, and replacement of a corporate aircraft.
In the coming year, we plan to invest about $60 million in capital
improvements. Major projects will include completion of the new distribution
and phone center in Oakham, England, completion of office facilities in
Dodgeville, Wisconsin, expansion of distribution facilities in Reedsburg,
Wisconsin, new computer hardware and software, and material handling equipment.
We believe that our cash flow from operations and borrowings under our current
credit facilities will provide adequate resources to meet our capital
requirements and operational needs for the foreseeable future.
Other matters
Segment disclosure
During the fourth quarter of fiscal 1998, the company initially met
requirements for segment disclosure as required by Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business."
Based on such disclosure requirements, the company has determined that it is
composed of only one industry segment, but has identifiable domestic and
foreign geographic segments. Geographic information pertaining to net sales,
operating profit and identifiable assets is provided in the Notes to
Consolidated Financial Statements.
Year 2000
Lands' End has created a Year 2000 project office responsible for providing
direction, coordinating activities and communicating with management as to the
overall status of Lands' End Year 2000 efforts. The project team has developed
a detailed strategic plan that addresses Lands' End's enterprise-wide Year 2000
efforts. Every functional area within the company will play a role in
preparing the company for the turn of the century.
19
We currently estimate that the total cost of our Year 2000 efforts will range
between $16 to $20 million, the majority of which will be incurred in fiscal
1999. This includes all costs related to hardware and software issues found on
our mainframe, mid-range and PC environments, as well as costs related to
issues found in common facilities, such as printers, heating, air conditioning,
security, photo copiers, fax machines, phone systems, etc. Most of our
business-critical functions will be Year 2000-ready by the end of December
1998. The majority of 1999 is being reserved for integrated testing to ensure
that the interaction among our various systems and computing environments, as
well as internal and external interfaces, will all function together properly.
We do not sell any products that must be brought into Year 2000 compliance.
However, we do rely upon many vendors and suppliers for their products and
services. We are in the process of corresponding with all of our key vendors
and suppliers and evaluating their preparedness for the turn of the century.
The company plans to complete that evaluation by December 1998, including the
development of contingency plans to manage areas of high identified risk.
Exchange rate sensitivity (derivatives)
The table below provides information about the company's derivative financial
instruments and related underlying transactions that are sensitive to foreign
exchange rates, summarized by currency in U.S. dollar equivalents. As of
January 30, 1998, the company estimates a net foreign currency transaction
exposure of $74.6 million of which $68.3 is hedged with foreign currency
forward and option contracts. The table shows the impact to the company from a
plus/minus 10 percent change in exchange rates on the company's net currency
exposure. The company believes it has no material sensitivity to changes in
foreign currency exchange rates on its net exposed derivative financial
instrument position.
As of January 30, 1998
(Dollars in millions)
U.S. Dollar Net Net Foreign Foreign
Value of Net Underlying Exposed Exchange Exchange
Foreign Foreign Long/ Loss From Gain From
Exchange Currency (Short) 10% Appre- 10% Depre-
and Option Transaction Currency ciation of ciation of
Currency Contracts Exposures Position U.S. Dollar U.S. Dollar
Japanese yen $ 34.8 $ 38.0 $ 3.2 $ (0.3) $ 0.3
British pound $ 17.1 $ 18.0 $ 0.9 $ (0.1) $ 0.1
German mark $ 13.1 $ 15.3 $ 2.2 $ (0.2) $ 0.2
Canadian dollar $ 3.3 $ 3.3 $ 0.0 $ 0.0 $ 0.0
Total $ 68.3 $ 74.6 $ 6.3 $ (0.6) $ 0.6
Possible future changes
A 1992 Supreme Court decision confirmed that the Commerce Clause of the United
States Constitution prevents a state from requiring the collection of its use
tax by a mail order company unless the company has a physical presence in the
state. However, there continues to be uncertainty due to inconsistent
application of the Supreme Court decision by state and federal courts. The
company attempts to conduct its operations in compliance with its
interpretation of the applicable legal standard, but there can be no assurance
that such compliance will not be challenged.
20
In recent challenges, various states have sought to require companies to begin
collection of use taxes and/or pay taxes from previous sales. The company has
not received assessments from any state.
The Supreme Court decision also established that Congress has the power to
enact legislation which would permit states to require collection of use taxes
by mail order companies. Congress has from time to time considered proposals
for such legislation. The company anticipates that any legislative change, if
adopted, would be applied only on a prospective basis.
The possible future changes discussed above are forward looking, subject to
numerous uncertainties and accordingly, not necessarily indicative of actual
future results.
21
Item 8. Consolidated Financial Statement and Supplementary Data
Consolidated Statement of Operations
Lands' End, Inc. & Subsidiaries
(In thousands, except per share data)
For the period ended
January 30, January 31, February 2,
1998 1997 1996
Net sales $1,263,629 $1,118,743 $1,031,548
Cost of sales 675,138 609,168 588,017
Gross profit 588,491 509,575 443,531
Selling, general and
administrative expenses 489,923 424,390 392,484
Charges from sale of subsidiary - 1,400 1,882
Income from operations 98,568 83,785 49,165
Other income (expense):
Interest expense (1,995) (510) (2,771)
Interest income 1,725 1,148 253
Gain on sale of subsidiary 7,805 - -
Other (4,278) 496 4,278
Total other income, net 3,257 1,134 1,760
Income before income taxes 101,825 84,919 50,925
Income tax provision 37,675 33,967 20,370
Net income $ 64,150 $ 50,952 $ 30,555
Basic earnings per share $ 2.01 $ 1.54 $ 0.89
Diluted earnings per share $ 2.00 $ 1.53 $ 0.89
Basic weighted average shares
outstanding 31,851 33,078 34,230
Diluted weighted average shares
outstanding 32,132 33,237 34,285
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
22
Consolidated Balance Sheets
Lands' End, Inc. & Subsidiaries
(In thousands) January 30, January 31,
1998 1997
Assets
Current assets:
Cash and cash equivalents $ 6,338 $ 92,827
Receivables, net 15,443 8,739
Inventory 241,154 142,445
Prepaid advertising 18,513 11,066
Other prepaid expenses 5,085 5,440
Deferred income tax benefits 12,613 11,522
Total current assets 299,146 272,039
Property, plant and equipment, at cost:
Land and buildings 81,781 72,360
Fixtures and equipment 118,190 98,642
Leasehold improvements 5,443 4,291
Construction in progress 12,222 1,337
Total property, plant and equipment 217,636 176,630
Less-accumulated depreciation and amortization 84,227 72,946
Property, plant and equipment, net 133,409 103,684
Intangibles, net 917 2,322
Total assets $433,472 $378,045
Liabilities and shareholders' investment
Current liabilities:
Lines of credit $ 32,437 $ 11,195
Accounts payable 83,743 76,585
Reserve for returns 6,128 5,184
Accrued liabilities 34,942 28,141
Accrued profit sharing 4,286 2,937
Income taxes payable 20,477 21,524
Total current liabilities 182,013 145,566
Deferred income taxes 8,747 8,814
Long-term liabilities - 660
Shareholders' investment:
Common stock, 40,221 shares issued 402 402
Donated capital 8,400 8,400
Additional paid-in capital 26,457 26,230
Deferred compensation (1,047) (1,370)
Currency translation adjustments 875 378
Retained earnings 375,211 311,061
Treasury stock, 9,281 and 7,778
shares at cost, respectively (167,586) (122,096)
Total shareholders' investment 242,712 223,005
Total liabilities and shareholders' investment $433,472 $378,045
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
23
Consolidated Statement of Shareholders' Investment
Lands' End, Inc. & Subsidiaries
(In thousands)
For the period ended
Jan. 30, 1998 Jan. 31, 1997 Feb. 2, 1996
Common Stock $ 402 $ 402 $ 402
Donated Capital Balance $ 8,400 $ 8,400 $ 8,400
Additional Paid-in Capital
Beginning balance $ 26,230 $ 26,165 $ 25,817
Tax benefit of stock
options exercised 227 65 348
Ending balance $ 26,457 $ 26,230 $ 26,165
Deferred Compensation
Beginning balance $ (1,370) $ (1,193) $ (1,421)
Issuance of treasury stock - (494) -
Amortization of deferred
compensation 323 317 228
Ending balance $ (1,047) $ (1,370) $ (1,193)
Foreign Currency Translation
Beginning balance $ 378 $ 360 $ 284
Adjustment for the year 497 18 76
Ending balance $ 875 $ 378 $ 360
Retained Earnings
Beginning balance $ 311,061 $ 260,109 $229,554
Net income 64,150 50,952 30,555
Ending balance $ 375,211 $ 311,061 $260,109
Treasury Stock
Beginning balance $(122,096) $ (93,051) $(73,908)
Purchase of treasury stock (45,899) (30,143) (20,001)
Issuance of treasury stock 409 1,098 858
Ending balance $(167,586) $(122,096) $(93,051)
Total Shareholders' Investment $ 242,712 $ 223,005 $201,192
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
24
Consolidated Statements of Cash Flows
Lands' End, Inc. & Subsidiaries For the period ended
(In thousands) Jan. 30, Jan. 31, Feb. 2,
1998 1997 1996
Cash flows from operating activities:
Net income $ 64,150 $ 50,952 $ 30,555
Adjustments to reconcile net income to net
cash flows from operating activities-
Depreciation and amortization 15,127 13,558 12,456
Deferred compensation expense 323 317 228
Deferred income taxes (1,158) 994 (669)
Pre-tax gain on sale of subsidiary (7,805) - -
Loss on disposal of fixed assets 1,127 325 1,544
Changes in assets and liabilities excluding the
effects of acquisitions and divestitures:
Receivables (7,019) (675) (4,888)
Inventory (104,545) 22,371 1,423
Prepaid advertising (7,447) 4,758 (8,318)
Other prepaid expenses (1,366) (145) (1,611)
Accounts payable 11,616 14,205 9,618
Reserve for returns 944 629 (456)
Accrued liabilities 8,755 4,390 (2,208)
Accrued profit sharing 1,349 1,454 (196)
Income taxes payable (1,047) 8,268 3,877
Other 64 394 37
Net cash flows from (used for) operating
activities (26,932) 121,795 41,392
Cash flows from (used for) investing activities:
Cash paid for capital additions (47,659) (18,481) (13,904)
Proceeds from sale of subsidiaries 12,350 - 1,665
Net cash flows used for investing activities (35,309) (18,481) (12,239)
Cash flows from (used for) financing activities:
Proceeds from short-term borrowings 21,242 1,876 1,780
Payment of long-term debt - - (40)
Purchases of treasury stock (45,899) (30,143) (20,001)
Issuance of treasury stock 409 604 858
Net cash flows used for financing activities (24,248) (27,663) (17,403)
Net increase (decrease) in cash
and cash equivalents (86,489) 75,651 11,750
Beginning cash and cash equivalents 92,827 17,176 5,426
Ending cash and cash equivalents $ 6,338 $ 92,827 $ 17,176
Supplemental cash flow disclosures:
Interest paid $ 1,995 $ 517 $ 2,833
Income taxes paid 39,337 25,261 16,896
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
25
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
Note 1. Summary of significant accounting policies
Nature of business
Lands' End, Inc., (the company) is a direct marketer of traditionally
styled apparel, domestics (primarily bedding and bath items), soft
luggage, and other products. The company's primary market is the United
States, and other markets include the Pacific Basin area, Europe and Canada.
Principles of consolidation
The consolidated financial statements include the accounts of the company
and its subsidiaries after elimination of intercompany accounts and
transactions.
Year-end
The company's fiscal year is comprised of 52-53 weeks ending on the Friday
closest to January 31. Fiscal 1998 ended on January 30, 1998, and fiscal
1997 ended on January 31, 1997, and both years were comprised of a 52-week
year. Fiscal 1996 was a 53-week year that ended on February 2, 1996. The
additional week was added in the fourth quarter of fiscal 1996.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Inventory
Inventory, primarily merchandise held for sale, is stated at last-in,
first-out (LIFO) cost, which is lower than market. If the first-in,
first-out (FIFO) method of accounting for inventory had been used,
inventory would have been approximately $25.1 million and $23.1 million
higher than reported at January 30, 1998 and January 31, 1997,
respectively.
26
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
Advertising
The company expenses the costs of advertising for magazines, television,
radio, and other media the first time the advertising takes place, except
for direct-response advertising, which is capitalized and amortized over
its expected period of future benefits.
Direct-response advertising consists primarily of catalog production and
mailing costs which are generally amortized within three months from the
date catalogs are mailed.
Advertising costs reported as prepaid assets were $18.5 million and $11.1
million as of January 30, 1998 and January 31, 1997, respectively.
Advertising expense was $226.7 million, $195.7 million and $188.3 million
for fiscal years ended January 30, 1998, January 31, 1997 and February 2,
1996, respectively.
Depreciation
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets, which are 20 to 30 years for
buildings and land improvements and five to 10 years for leasehold
improvements and furniture, fixtures, equipment, and software. The
company provides one-half year of depreciation in the year of addition
and retirement.
Intangibles
Intangible assets consist primarily of goodwill which is being amortized
over 40 years on a straight-line basis. Other intangibles are amortized
up to a period of five years. Total accumulated amortization of these
intangibles as reflected on the Consolidated Balance Sheets was $0.4
million and $0.8 million at January 30, 1998 and January 31, 1997,
respectively.
Reserve for losses on customer returns
At the time of sale, the company provides a reserve equal to the gross
profit on projected merchandise returns, based on its prior returns
experience.
Financial instruments with off-balance-sheet risk
The company is party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to fluctuations
in foreign currency exchange rates and to meet financing needs.
27
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
The company enters into forward exchange contracts and options to hedge
anticipated foreign currency transactions during the upcoming seasons.
The purpose of the company's foreign currency hedging activities is to
protect the company from the risk that the eventual dollar cash flows
resulting from these transactions will be adversely affected by changes in
exchange rates. At January 30, 1998, the company had forward exchange
contracts, maturing through January 1999, to sell approximately 1.6 billion
Japanese yen, 10.5 million British pounds and 8.0 million Deutsche marks and
to purchase approximately 4.5 million Canadian dollars. In addition, as of
January 30, 1998, the company had outstanding forward currency options to sell
2.4 billion Japanese yen and 15.0 million Deutsche marks. The gains and
losses on the outstanding forward exchange contracts are reflected in the
financial statements in the period in which the currency fluctuation occurs.
The premiums on options are amortized over the life of the option.
The company also uses import letters of credit to purchase foreign-sourced
merchandise. The letters of credit are primarily U.S. dollar-denominated
and are issued through third-party financial institutions to guarantee
payment for such merchandise within agreed-upon time periods. At
January 30, 1998, the company had outstanding letters of credit of
approximately $25 million, all of which had expiration dates of less than one
year.
The counterparties to the financial instruments discussed above are primarily
large financial institutions; management believes the risk of counterparty
nonperformance on these financial instruments is not significant.
Foreign currency and transactions
Financial statements of the foreign subsidiaries are translated into U.S.
dollars in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 52. Translation adjustments are accumulated
in a separate component of stockholders' equity. Foreign currency transaction
gains and losses, recorded as other income and expense on the Consolidated
Statements of Operations, included a loss of $3.8 million, and gains of $0.2
million and $4.1 million in fiscal 1998, 1997 and 1996, respectively.
Fair values of financial instruments
The fair value of financial instruments does not materially differ from
their carrying values.
Reclassifications
Certain financial statement amounts have been reclassified to be
consistent with the fiscal 1998 presentation.
28
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
Accounting standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its
components. The company will adopt this standard in the first quarter of
fiscal 1999.
In June 1997, the Financial Accounting Standards Board also issued
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." This statement supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise" and utilizes the "management approach"
for segment reporting. The management approach is based on the way the chief
operating decision maker(s) organizes segments within a company for making
operating decisions and assessing performance. The provisions of SFAS 131 are
effective for fiscal years beginning after December 15, 1997. The company
will adopt this standard in the fourth quarter of fiscal 1999.
Note 2. Shareholders' investment
Capital stock
The company currently has 160 million shares of $0.01 par value common
stock. The company is authorized to issue 5 million shares of preferred
stock, $0.01 par value. The company's board of directors has the
authority to issue shares and to fix dividend, voting and conversion
rights, redemption provisions, liquidation preferences, and other rights
and restrictions of the preferred stock. No preferred shares have been
issued.
Treasury stock
The company's board of directors has authorized the purchase of a total of
12.7 million shares of the company's common stock. A total of 10.3
million, 8.8 million and 7.5 million shares had been purchased as of
January 30, 1998, January 31, 1997 and February 2, 1996, respectively.
Treasury stock summary:
For the period ended
Jan. 30, 1998 Jan. 31, 1997 Feb. 2, 1996
Beginning balance 7,778,258 6,561,298 5,394,972
Purchase of stock 1,533,880 1,284,270 1,282,326
Issuance of stock (31,000) (67,310) (116,000)
Ending Balance 9,281,138 7,778,258 6,561,298
29
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
Earnings per share
The company has adopted the disclosure provisions of SFAS No. 128, "Earnings
Per Share." This statement replaces primary earnings per share (EPS) with
basic earnings per share (basic EPS). Basic EPS is computed by dividing net
income available to common shareholders by the weighted-average number of
common shares outstanding for the period. The weighted average common shares
outstanding were 31.9 million, 33.1 million and 34.2 million for fiscal years
1998, 1997 and 1996, respectively. Common stock equivalents include awards,
grants and stock options which have been issued by the company. This
statement also requires presentation of EPS assuming full dilution, which is
similar to the computation for fully diluted EPS under current reporting
conventions. The common stock equivalents do not significantly dilute
earnings per share.
Jan. 30, Jan. 31, Feb.2,
(In thousands, except per share data) 1998 1997 1996
Net income $64,150 $50,952 $30,555
Average shares of common stock
outstanding 31,851 33,078 34,230
Incremental shares from assumed
exercise of stock options 281 159 55
32,132 33,237 34,285
Diluted earnings per share $ 2.00 $ 1.53 $ 0.89
Basic earnings per share $ 2.01 $ 1.54 $ 0.89
Stock awards and grants
The company has a restricted stock award plan. Under the provisions of
the plan, a committee of the company's board of directors may award shares
of the company's common stock to its officers and key employees. Such
shares vest over a five- or 10-year period on a straight-line basis from
the date of the award.
In addition, the company granted shares of its common stock to individuals
as an inducement to enter the employ of the company.
30
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
The following table reflects the activity under the stock award and stock
grant plans:
Awards Grants
Balance at January 27, 1995 115,360 0
Granted - -
Forfeited (2,700) -
Vested (15,980) -
Balance at February 2, 1996 96,680 0
Granted - 25,000
Forfeited (6,560) -
Vested (15,000) -
Balance at January 31, 1997 75,120 25,000
Granted - -
Forfeited (980) -
Vested (17,140) 5,000
Balance at January 30, 1998 57,000 20,000
The granting of these awards and grants has been recorded as deferred
compensation based on the fair market value of the shares at the date of
grant. Compensation expense under these plans is recorded as shares
vest.
Stock options
The company has 2.5 million and 0.4 million shares of common stock, either
authorized and unissued or treasury shares, that may be issued pursuant to the
exercise of options granted under the company's Stock Option Plan (for
employees) and the Non-Employee Director Stock Option Plan, respectively.
Under the company's Stock Option Plan, options are granted at the discretion
of a committee of the company's board of directors to officers and key
employees of the company. In fiscal 1998, the board of directors of the
company adopted the Non-Employee Director Stock Option Plan to encourage stock
ownership by members of the board of directors of the company who are not also
employed by the company in order to further align the interests of the non-
employee directors with those of the shareholders. No option may have an
exercise price less than the fair market value per share of the common stock
at the date of the grant.
31
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
Activity under the stock option plan is as follows:
Average
Exercise Exercisable
Options Price Options
Balance at January 27, 1995 466,400 $13.56 195,480
Granted 342,100 $16.50
Exercised (116,000) $ 7.40
Forfeited (70,800) $17.55
Balance at February 2, 1996 621,700 $15.87 150,240
Granted 647,000 $20.52
Exercised (42,310) $14.28
Forfeited (75,990) $16.69
Balance at January 31, 1997 1,150,400 $18.49 193,140
Granted 347,917 $33.45
Exercised (31,000) $13.21
Forfeited - -
Balance at January 30, 1998 1,467,317 $21.42 350,107
The range of options outstanding as of January 30, 1998 is as follows:
Weighted
Average
Remaining
Number of Options Weighted Average Contractual
Price Range Shares Exercise Price Life
Per Share Outstanding/Exercisable Outstanding/Exercisable (In years)
$12.00-$19.99 924,600/256,350 $17.41/$ 15.61 7.4
$20.00-$29.99 274,800/ 90,840 25.64/ 25.00 8.5
$30.00-$35.00 267,917/ 2,917 30.94/ 30.94 9.8
1,467,317/350,107 $ 21.42/$ 18.18 8.0
The options above generally have a 10-year term. Options granted under the
company's Stock Option Plan generally vest over five years; options granted
under the Non-Employee Director Stock Option Plan vest over a period from zero
to two years.
Stock-based compensation
During fiscal 1996 the company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by the statement, the company
will continue to account for its stock-based compensation plans as
presented by APB Opinion No. 25 and related interpretations. Accordingly,
compensation costs related to the stock awards and grants were $0.3
million, $0.3 million and $0.2 million in fiscal 1998, 1997, and 1996,
respectively. The pro forma impact of determining compensation cost based on
the fair value of stock options is not material.
32
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
Had compensation cost for the company's options granted after January 27,
1995, been determined consistent with SFAS No. 123, the company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
(In thousands, except per Jan. 30, Jan. 31, Feb. 2,
share data) 1998 1997 1996
Net income
As reported $64,150 $50,952 $30,555
Pro forma $62,511 $50,402 $30,379
Basic earnings per share
As reported $ 2.01 $ 1.54 $ 0.89
Pro forma $ 1.96 $ 1.52 $ 0.89
Diluted earnings per share
As reported $ 2.00 $ 1.53 $ 0.89
Pro forma $ 1.95 $ 1.52 $ 0.89
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes pricing model. The resulting compensation cost was
amortized over the vesting period.
The grant-date fair values and assumptions used to determine such value are as
follows:
Options granted during 1998 1997 1996
Weighted average grant-date fair value $33.45 $20.52 $16.50
Assumptions:
Risk-free interest rates 6.10% 6.57% 7.60%
Expected volatility 37.30% 42.21% 42.76%
Expected term (in years) 7.0 7.0 7.0
Note 3. Income taxes
Earnings before income taxes consisted of the following (in thousands):
1998 1997 1996
United States $ 95,909 $ 80,807 $ 48,598
Foreign 5,916 4,112 2,327
Total $101,825 $ 84,919 $ 50,925
33
Notes to Consolidated Financial Statements
Lands' End, Inc. & Subsidiaries
The components of the provision for income taxes for each of the periods
presented are as follows (in thousands):
Period ended,
January 30, January 31, February 2,
1998 1997 1996
Current:
Federal $ 31,335 $ 26,291 $ 17,996
State 4,449 4,993 3,043
Foreign 3,049 1,689 -
Deferred (1,158) 994 (669)
$ 37,675 $ 33,967 $ 20,370
The difference between income taxes at the statutory federal income tax
rate of 35 percent and income tax reported in the statements of
operations is as follows (in thousands):
Period ended,
January 30, January 31, February 2,
1998 1997 1996
Tax at statutory
federal tax rate $ 35,640 $ 29,720 $ 17,825
State income taxes,
net of federal benefit 3,999 3,314 2,018
Foreign taxes
(excess over statutory rate) 1,130 551 -
Tax credits (2,127) (662) -
Other (967) 1,044 527
$ 37,675 $ 33,967 $ 20,370
Under the liability method prescribed by the SFAS No. 109, "Accounting for
Income Taxes," deferred taxes are provided based upon enacted tax laws and
rates applicable to the periods in which taxes become payable.
34
Notes to Consolidated Financial Statements
Lands' End, Inc., & Subsidiaries
Temporary differences which give rise to deferred tax assets and
liabilities as of January 30, 1998 and January 31, 1997 are as follows
(in thousands):
Jan. 30, 1998 Jan. 31, 1997
Deferred tax assets:
Catalog advertising $ (1,810) $ (2,180)
Inventory 7,016 7,315
Employee benefits 3,891 3,244
Reserve for returns 2,451 2,074
Foreign operating
loss carryforwards (1,271) (843)
Valuation allowance 1,271 843
Other 1,065 1,069
Total $ 12,613 $ 11,522
Deferred tax liabilities:
Depreciation $ 8,857 $ 9,201
Other (110) (387)
Total $ 8,747 $ 8,814
The valuation allowance required under SFAS No. 109 has been established
for the deferred income tax benefits related to certain subsidiary loss
carryforwards, which management currently estimates may not be realized.
These carryforwards do not expire.
Note 4. Lines of credit
The company has unsecured domestic lines of credit with various U.S. banks
totaling $110 million. There was $7.0 million outstanding at January 30,
1998, compared with no amount outstanding at January 31, 1997.
In addition, the company has unsecured lines of credit with various foreign
banks totaling the equivalent of approximately $50 million for its wholly
owned subsidiaries. There was $25.4 million outstanding at January 30,
1998, compared with $11.2 million as of January 31, 1997.
35
Notes to Consolidated Financial Statements
Lands' End, Inc., & Subsidiaries
The following table summarizes certain information regarding these short-term
borrowings (dollars in millions):
1998 1997 1996
Maximum amount of borrowings $ 118 $ 27 $ 104
Average amount of borrowings $ 38 $ 15 $ 49
Weighted average interest rate
during year 5.25% 3.50% 5.44%
Weighted average interest rate
at year-end 5.27% 3.60% 1.63%
Note 5. Long-term debt
There was no long-term debt as of January 30, 1998 and January 31, 1997.
The company has an agreement which expires May 31, 1998 with a bank
for a $20 million credit facility available to fund treasury stock
purchases and capital expenditures. The company intends to renew this
facility. As of January 30, 1998, the company was in compliance with
lending conditions and covenants related to this debt facility.
Note 6. Leases
The company leases store and office space and equipment under various
leasing arrangements. The leases are accounted for as operating leases.
Total rental expense under these leases was $13.5 million, $12.8 million
and $11.6 million for the years ended January 30, 1998, January 31, 1997
and February 2, 1996, respectively.
Total future fiscal year commitments under these leases as of January 30,
1998 are as follows (in thousands):
1999 $ 10,776
2000 7,873
2001 3,466
2002 2,650
2003 2,341
After 2003 1,984
$ 29,090
Note 7. Retirement plan
The company has a retirement plan which covers most regular employees and
provides for annual contributions at the discretion of the board of
directors. Also included in the plan is a 401(k) feature that allows
employees to make contributions, and the company matches a portion of
those contributions. Total expense provided under this plan was $6.6
million, $5.0 million and $3.2 million for the years ended January 30,
1998, January 31, 1997 and February 2, 1996, respectively.
36
Notes to Consolidated Financial Statements
Lands' End, Inc., & Subsidiaries
Note 8. Postretirement benefits
In January 1998, the company implemented a plan to provide health insurance
benefits for eligible retired employees. These insurance benefits will be
funded through insurance contracts, a group benefit trust or general assets of
the company. The cost of these insurance benefits is recognized as the
eligible employees render service.
The components of postretirement benefit cost for the year ended January 30,
1998, were as follows:
(In thousands) 1998
Service cost $ 53
Interest cost 25
Net amortization and deferral 22
Postretirement benefit cost $ 100
The following table presents the change in the postretirement benefit
obligation in fiscal 1998:
(In thousands) 1998
Postretirement benefit obligation,
beginning of year $ 0
Service cost 53
Interest cost 25
Actuarial gain (3)
Implementation of plan 4,344
Benefit obligation, end of year $ 4,419
Unrecognized actuarial gain 3
Unrecognized prior service cost (4,322)
Postretirement benefit obligation,
end of year $ 100
The assumed weighted average annual rate of increase in the per capita cost of
health benefits is 7.5 percent for fiscal 1999 and is assumed to decrease 0.5
percent each year from fiscal 1999 to fiscal 2004 and remain at 5 percent
thereafter. The weighted average discount rate was 7 percent at January 30,
1998.
A 1 percent change in the health care cost trend rates would have the
following effects on the amounts reported:
Service and Postretirement
(In thousands) Interest Costs Benefit Obligation
1 percent increase $ 4 $ 209
1 percent decrease $ (4) $ (177)
37
Notes to Consolidated Financial Statements
Lands' End, Inc., & Subsidiaries
Note 9. Divestitures
The Territory Ahead
During the first quarter of fiscal 1998, the company sold its majority
interest in The Territory Ahead to The International Cornerstone Group,
Inc. of Boston, Massachusetts, resulting in an after-tax gain of $4.9
million. The after-tax gain was recorded in the first quarter of fiscal
1998.
MontBell
In July 1994, the company formed a wholly owned subsidiary that acquired
the marketing rights and assets of MontBell America, Inc. In fiscal 1996,
the company sold those marketing rights and assets to a wholly owned
subsidiary of Outdoor Industry Group, Inc. In connection with this sale,
the company has taken after-tax charges to earnings of $0.8 million and
$1.1 million in fiscal 1997 and 1996, respectively.
Sales and results of operations of MontBell America, Inc. and The Territory
Ahead were not material to the consolidated financial statements.
Note 10. Sales and use tax
A 1992 Supreme Court decision confirmed that the Commerce Clause of the
United States Constitution prevents a state from requiring the collection
of its use tax by a mail order company unless the company has a physical
presence in the state. However, there continues to be uncertainty due to
inconsistent application of the Supreme Court decision by state and
federal courts. The company attempts to conduct its operations in
compliance with its interpretation of the applicable legal standard, but
there can be no assurance that such compliance will not be challenged.
In recent challenges various states have sought to require companies to
begin collection of use taxes and/or pay taxes from previous sales. The
company has not received assessments from any state. The amount of
potential assessments, if any, cannot be reasonably estimated.
The Supreme Court decision also established that Congress has the power to
enact legislation which would permit states to require collection of use
taxes by mail order companies. Congress has from time to time considered
proposals for such legislation. The company anticipates that any
legislative change, if adopted, would be applied only on a prospective
basis.
38
Notes to Consolidated Financial Statements
Lands' End, Inc., & Subsidiaries
Note 11. Segment disclosure
The company's business is concentrated entirely in one product area --
traditionally styled apparel, domestics (primarily bedding and bath items),
and soft luggage. It is not possible, therefore, to divide the company's
business into meaningful industry segments.
However, the company's operations consist of domestic and foreign operations
and can be grouped into two geographic segments. The company's primary
segment is Domestic, which consists of United States-based operations. The
Foreign segment includes foreign-based operations conducted mainly in
Japan, the United Kingdom and Germany.
Pertinent financial data by geographical segments for the three years
ended January 30, 1998, are as follows (in thousands):
Fiscal year ended January 30, 1998
Domestic Foreign Eliminations Consolidated
Net sales $1,131,840* $131,789 $ 0 $1,263,629
Intercompany 31,775 0 (31,775) 0
Total net sales $1,163,615 $131,789 $ (31,775) $1,263,629
Operating profit $ 91,579 $ 6,989 $ 0 $ 98,568
Other income and expenses, net 3,257
Income before income taxes $ 101,825
Identifiable assets $ 378,394 $ 55,078 $ 0 $ 433,472
Fiscal year ended January 31, 1997
Domestic Foreign Eliminations Consolidated
Net sales $1,023,035* $ 95,708 $ 0 $1,118,743
Intercompany 27,885 0 (27,885) 0
Total net sales $1,050,920 $ 95,708 $ (27,885) $1,118,743
Operating profit $ 79,475 $ 4,310 $ 0 $ 83,785
Other income and expenses, net 1,134
Income before income taxes $ 84,919
Identifiable assets $ 345,923 $ 32,122 $ 0 $ 378,045
Fiscal year ended February 2, 1996
Domestic Foreign Eliminations Consolidated
Net sales $ 957,914* $ 73,634 $ 0 $1,031,548
Intercompany 22,471 0 (22,471) 0
Total net sales $ 980,385 $ 73,634 $ (22,471) $1,031,548
Operating profit $ 46,323 $ 2,842 $ 0 $ 49,165
Other income and expenses, net 1,760
Income before income taxes $ 50,925
Identifiable assets $ 301,299 $ 22,198 $ 0 $ 323,497
*Export sales were less than 10 percent of total net sales and are included in
the Domestic segment.
39
Note 12. Consolidated quarterly analysis (unaudited)
(In thousands, except per share data)
Fiscal 1998
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Net Sales $244,720 $219,883 $318,608 $480,418
Gross profit 112,732 102,533 146,749 226,477
Pretax income 18,844 5,755 13,562 63,664
Net income $ 11,306 $ 3,428 $ 8,162 $ 41,254
Basic earnings per share $ 0.35 $ 0.11 $ 0.26 $ 1.33
Diluted earnings per share $ 0.35 $ 0.11 $ 0.26 $ 1.32
Common shares outstanding 32,350 32,144 31,328 30,979
(In dollars)
Market price of shares
outstanding:
- Market high 29 1/8 30 7/8 32 7/8 39 7/16
- Market low 25 1/8 25 5/8 26 3/16 31 13/16
Fiscal 1997
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Net Sales $211,835 $196,160 $287,420 $423,328
Gross profit 94,737 89,469 126,087 199,282
Pretax income 7,348 4,926 10,319 62,326
Net income $ 4,409 $ 2,950 $ 6,157 $ 37,436
Basic earnings per share $ 0.13 $ 0.09 $ 0.19 $ 1.15
Diluted earnings per share $ 0.13 $ 0.09 $ 0.19 $ 1.14
Common shares outstanding 33,609 32,994 32,831 32,442
(In dollars)
Market price of shares
outstanding:
- Market high 19 7/8 24 3/4 23 1/8 30 1/4
- Market low 14 5/8 18 1/8 19 7/8 21 1/8
Quarterly earnings per share amounts are based on the weighted average common
shares outstanding for each quarter and, therefore, might not equal the amount
computed for the total year.
40
RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The management of Lands' End, Inc. and its subsidiaries has the responsibility
for preparing the accompanying financial statements and for their integrity
and objectivity. The statements were prepared in accordance with generally
accepted accounting principles applied on a consistent basis. The
consolidated financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
The company's consolidated financial statements have been audited by Arthur
Andersen LLP, independent certified public accountants. Management has made
available to Arthur Andersen LLP all the company's financial records
and related data, as well as the minutes of shareholders' and directors'
meetings. Furthermore, management believes that all representations made to
Arthur Andersen LLP during its audit were valid and appropriate.
Management of the company has established and maintains a system of internal
control that provides for appropriate division of responsibility, reasonable
assurance as to the integrity and reliability of the consolidated financial
statements, the protection of assets from unauthorized use or disposition, the
prevention and detection of fraudulent financial reporting, and the
maintenance of an active program of internal audits. Management believes
that, as of January 30, 1998, the company's system of internal control is
adequate to accomplish the objectives discussed herein.
Two directors of the company, not members of management, serve as the audit
committee of the board of directors and are the principal means through which
the board supervises the performance of the financial reporting duties of
management. The audit committee meets with management, the internal audit
staff and the company's independent auditors to review the results of the
audits of the company and to discuss plans for future audits. At these
meetings, the audit committee also meets privately with the internal audit
staff and the independent auditors to assure its free access to them.
/s/ MICHAEL J. SMITH /s/ BRADLEY K. JOHNSON
Michael J. Smith Bradley K. Johnson
Chief Executive Officer Senior Vice President and
Chief Financial Officer
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Lands' End, Inc.:
We have audited the accompanying consolidated balance sheets of Lands' End,
Inc. (a Delaware corporation) and its subsidiaries as of January 30, 1998, and
January 31, 1997, and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended January 30, 1998. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lands' End, Inc. and
subsidiaries as of January 30, 1998, and January 31, 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended January 30, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
March 6, 1998
42
Part II continued
Item 9. Changes in and Disagreements on Accounting and Consolidated Financial
Disclosure
The company has had no change in, or disagreements with, its independent
certified public accountants on accounting and financial disclosure.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors of the
company is incorporated herein by reference to pages 1 through 4 of
the Lands' End, Inc. Notice of 1998 Annual Meeting and Proxy Statement
dated April 13, 1998 (the "Proxy Statement").
The information required by this item with respect to executive
officers of the company is included on pages 8 and 9 in Part I of this
Form 10-K report.
Item 11. Executive Compensation
The information required by this item is incorporated herein by
reference to pages 5 through 9 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by
reference to page 11 and 12 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to pages 3 and 4 of the Proxy Statement.
43
PART IV.
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports
on Form 8-K
(a) 1. Consolidated Financial Statements
See index on page 2.
2. Exhibits
Table Exhibit
Number Description Number
------ ----------- -------
(23) Consent of Arthur Andersen LLP 1
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
three-month period ended January 30, 1998.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on April 28, 1998.
LANDS' END, INC.
By /s/ BRADLEY K. JOHNSON
---------------------------
Bradley K. Johnson
Senior Vice President,
Chief Administrative Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities shown, as of April 28, 1998.
/s/ GARY C. COMER Chairman of the Board and Director
- ---------------------------
Gary C. Comer
/s/ RICHARD C. ANDERSON Vice Chairman of the Board and Director
- ---------------------------
Richard C. Anderson
/s/ MICHAEL J. SMITH President and Chief Executive Officer
- --------------------------- and Director
Michael J. Smith
/s/ WILLIAM E. FERRY Vice Chairman of Sales and Director
- ---------------------------
William E. Ferry
/s/ JOHN N. LATTER Director
- ---------------------------
John N. Latter
/s/ DAVID B. HELLER Director
- ---------------------------
David B. Heller
/s/ HOWARD G. KRANE Director
- ---------------------------
Howard G. Krane
/s/ DANIEL OKRENT Director
- ---------------------------
Daniel Okrent
45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in the Lands' End, Inc. annual
report to shareholders included in this Form 10-K and have issued our report
thereon dated March 6, 1998. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule on page 47 of this
Form 10-K is the responsibility of the company's management and is presented
for the purpose of complying with the Securities and Exchange Commission's
rules and is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein
in relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
April 28, 1998
46
LANDS' END, INC. & SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Balance, Amounts Write-Offs Balance,
Beginning Charged to Against End of
of Period Net Income Reserve Period
--------- ---------- ------- ------
Reserve for Returns:
Year Ended January 30, 1998 $ 5,184 $179,096 $178,152 $ 6,128
======= ======== ======== ========
Year Ended January 31, 1997 $ 4,555 $150,820 $150,191 $ 5,184
======= ======== ======== ========
Year Ended February 2, 1996 $ 5,011 $145,626 $146,082 $ 4,555
======= ======== ========= ========
47
LIST OF DOCUMENTS INCORPORATED BY REFERENCE
In addition to the exhibits filed with this report, the exhibits listed
below have been heretofore filed with the Securities and Exchange
Commission as exhibits to the company's registration statement on Form S-8
(File No. 033-63461) and on Form S-1 (File No. 33-08217) or to other filings
with the Commission and are incorporated herein as exhibits by reference,
pursuant to Rule 24 of the SEC Rules of Practice. The exhibit number of the
document so filed is stated next to the description of such exhibit. The file
number for all other documents is 1-9769.
Table Description Exhibit Doc
Number of Item Number Desc
------ ----------- ------- ----
(3) Articles of Incorporation and By-laws:
Certificate of Incorporation of the company, 1 S-1
as amended through October 3, 1986.
Amendment to Certification of Incorporation of 3 10-Q
the company, dated August 10, 1987. Oct 1987
Amendment to Certificate of Incorporation of 4 10-Q
the company, dated May 20, 1994. July 1994
Amended and Restated By-laws of the company. 2 10-K
1993
(4) Equity Instrument and Agreements relating
to Debt Obligations:
Form of Stock Certificate to evidence the 1 10-Q
Common stock. Aug 1990
First Amendment to the Lands' End 2 S-8
Retirement Plan Oct 1995
(10) Material Contracts:
Form of letter from bank approving the 7 10-K
company's unsecured line of credit 1992
and corresponding note.
Term Loan Note and Loan Agreement between 11 10-Q
the company and the American National Aug 1990
Bank and Trust Company of Chicago.
Eighth Amendment to Loan Agreement between the 1 10-Q
company and the American National Bank May 1997
and Trust Company of Chicago, dated
May 31, 1997
48
Table Description Exhibit Doc
Number of Item Number Desc
------ ----------- ------- -----
(10) Buying Agreement between the company and 7 10-Q
the European Buying Agency, Ltd. Nov 1990
Salaried Incentive Bonus Plan 9 S-1
Annual Incentive Plan and Long-Term Proxy
Incentive Plan 1996
Stock Option Plan of the company 1 10-K
1995
Non-Employee Director Stock Option Plan Proxy
1997
Amended and Restated Retirement Plan, 3 10-K
dated February 1, 1992 1994
Form of Director Deferred Compensation 1 10-Q
Agreement July 1995
49
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
Registration Statement on Form S-8 (File No. 033-63461).
/s/ ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
April 28, 1998
* * * * *
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-30-1998 JAN-31-1997<F3> FEB-02-1996<F3>
<PERIOD-END> JAN-30-1998 JAN-31-1997 FEB-02-1996
<CASH> 6338 92827 17176
<SECURITIES> 0 0 0
<RECEIVABLES> 15443 8739 8064
<ALLOWANCES> 0 0 0
<INVENTORY> 241154 142445 164816
<CURRENT-ASSETS> 299146 272039 222089
<PP&E> 217636 176630 159040
<DEPRECIATION> 84227 72946 60055
<TOTAL-ASSETS> 433472 378045 323497
<CURRENT-LIABILITIES> 182013 145566 114744
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 402 402 402
<OTHER-SE> 242310 222603 200790
<TOTAL-LIABILITY-AND-EQUITY> 433472 378045 323497
<SALES> 1263629 1118743 1031548
<TOTAL-REVENUES> 1263629 1118743 1031548
<CGS> 675138 609168 588017
<TOTAL-COSTS> 675138 609168 588017
<OTHER-EXPENSES> 4906<F2> 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1995 510 2771
<INCOME-PRETAX> 101825 84919 50925
<INCOME-TAX> 37675 33967 20370
<INCOME-CONTINUING> 64150 50952 30555
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 64150 50952 30555
<EPS-PRIMARY> 2.01<F1> 1.54<F1> 0.89<F1>
<EPS-DILUTED> 2.00 1.53 0.89
<FN>
<F1>Per SFAS 128 the EPS is Basic
<F2>Mainly net foreign currency gains and losses
<F3>Restated due to SFAS 128 EPS
</FN>
</TABLE>
