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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarter Ended JULY 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ...... to ......
Commission file number 1-9769
LANDS' END, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2512786
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Lands' End Lane, Dodgeville, WI 53595
(Address of principal executive (Zip code)
offices)
Registrant's telephone number, 608-935-9341
including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 10, 1998:
Common stock, $.01 par value 30,239,300 shares outstanding
LANDS' END, INC. & SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three Months Ended July 31, 1998, and
August 1, 1997.................................... 3
Consolidated Statements of Operations for the
Six Months Ended July 31, 1998, and
August 1, 1997.................................... 4
Consolidated Balance Sheets at July 31, 1998
January 30, 1998, and August 1, 1997.............. 5
Consolidated Statements of Cash Flows for the
Six Months Ended July 31, 1998, and
August 1, 1997.................................... 6
Notes to Consolidated Financial Statements........... 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 9-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 12
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 12
Item 6. Exhibits and Reports on Form 8-K..................... 12
Signature..................................................... 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended
July 31, Aug. 1,
1998 1997
(Unaudited)
Net sales $239,194 $219,883
Cost of sales 123,716 117,350
Gross profit 115,478 102,533
Selling, general and
administrative expenses 114,794 96,780
Income from operations 684 5,753
Other income (expense):
Interest expense (1,993) (204)
Interest income - 552
Other 1,212 (346)
Total other income
(expense), net (781) 2
Income (loss) before income taxes (97) 5,755
Income tax provision (benefit) (36) 2,327
Net income (loss) $ (61) $ 3,428
Basic earnings per share $ 0.00 $ 0.11
Diluted earnings per share $ 0.00 $ 0.11
Basic weighted average shares
outstanding 30,504 32,220
Diluted weighted average shares
outstanding 30,801 32,461
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
3
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six months ended
July 31, Aug. 1,
1998 1997
(unaudited)
Net sales $507,781 $464,603
Cost of sales 267,563 249,338
Gross profit 240,218 215,265
Selling, general and
administrative expenses 231,077 198,945
Income from operations 9,141 16,320
Other income (expense):
Interest expense (2,999) (346)
Interest income 1 1,508
Gain on sale of subsidiary - 7,805
Other 2,026 (688)
Total other income (expense), net (972) 8,279
Income before income taxes 8,169 24,599
Income tax provision 3,022 9,865
Net income $ 5,147 $ 14,734
Basic earnings per share $ 0.17 $ 0.46
Diluted earnings per share $ 0.17 $ 0.46
Basic weighted average shares outstanding 30,724 32,304
Diluted weighted average shares outstanding 31,069 32,538
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
4
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31, Jan. 30, Aug. 1,
1998 1998 1997
(unaudited) (audited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,016 $ 6,338 $ 5,781
Receivables 12,087 15,443 7,033
Inventory 318,439 241,154 217,104
Prepaid advertising 22,364 18,513 12,728
Other prepaid expenses 5,459 5,085 5,103
Deferred income tax benefit 12,613 12,613 11,522
Total current assets 375,978 299,146 259,271
Property, plant and equipment, at cost:
Land and buildings 94,256 81,781 71,767
Fixtures and equipment 139,780 118,190 105,518
Leasehold improvements 5,551 5,443 5,149
Construction in progress 5,126 12,222 8,028
Total property, plant and equipment 244,713 217,636 190,462
Less-accumulated depreciation
and amortization 92,544 84,227 79,854
Property, plant and equipment, net 152,169 133,409 110,608
Intangibles, net 937 917 888
Total assets $529,084 $433,472 $370,767
Liabilities and shareholders' investment
Current liabilities:
Lines of credit $177,256 $ 32,437 $ 17,622
Accounts payable 85,524 83,743 85,013
Reserve for returns 3,610 6,128 3,280
Accrued liabilities 26,688 34,942 22,295
Accrued profit sharing 246 4,286 812
Income taxes payable 3,159 20,477 4,262
Total current liabilities 296,483 182,013 133,284
Deferred income taxes 8,747 8,747 8,814
Shareholders' investment:
Common stock, 40,221 shares issued 402 402 402
Donated capital 8,400 8,400 8,400
Additional paid-in capital 26,661 26,457 26,359
Deferred compensation (912) (1,047) (1,216)
Currency translation adjustments 56 875 1,088
Retained earnings 380,358 375,211 325,795
Treasury stock, 9,984, 9,281 and
8,123 shares at cost, respectively (191,111) (167,586) (132,159)
Total shareholders' investment 223,854 242,712 228,669
Total liabilities and shareholders'
investment $529,084 $433,472 $370,767
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
5
LANDS' END, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
July 31, Aug. 1,
1998 1997
(unaudited)
Cash flows from (used for) operating activities:
Net income $ 5,147 $ 14,734
Adjustments to reconcile net income to net
cash flows from operating activities-
Depreciation and amortization 9,582 8,022
Deferred compensation expense 135 154
Pre-tax gain on sale of subsidiary - (7,805)
Loss on disposal of fixed assets 1,217 64
Changes in current assets and liabilities
excluding the effects of acquisitions
and divestitures:
Receivables 3,356 1,391
Inventory (77,285) (80,495)
Prepaid advertising (3,851) (1,662)
Other prepaid expenses (374) (1,384)
Accounts payable 1,781 12,886
Reserve for returns (2,518) (1,904)
Accrued liabilities (8,655) (3,977)
Accrued profit sharing (4,040) (2,125)
Income taxes payable (17,318) (17,262)
Other (615) 179
Net cash flows used for operating activities (93,438) (79,184)
Cash flows from (used for) investing activities:
Cash paid for capital additions (29,178) (16,576)
Proceeds from sale of subsidiary - 12,350
Net cash flows used for investing activities (29,178) (4,226)
Cash flows from (used for) financing activities:
Proceeds from short-term debt 144,819 6,427
Purchases of treasury stock (23,525) (10,063)
Net cash flows from (used for) financing activities 121,294 (3,636)
Net decrease in cash and cash equivalents (1,322) (87,046)
Beginning cash and cash equivalents 6,338 92,827
Ending cash and cash equivalents $ 5,016 $ 5,781
Supplemental cash flow disclosures:
Interest paid $ 2,674 $ 345
Income taxes paid 20,033 27,552
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
6
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim financial statements
The condensed consolidated financial statements included herein have been
prepared by Lands' End, Inc. (the company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission, and in the
opinion of management contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the company believes that the disclosures are adequate
to make the information presented not misleading. The results of operations
for the interim periods disclosed within this report are not necessarily
indicative of future financial results. These consolidated financial
statements are condensed and should be read in conjunction with the financial
statements and the notes thereto included in the company's latest Annual
Report on Form 10-K, which includes financial statements for the year ended
January 30, 1998.
2. Reclassification
Certain financial statement amounts have been reclassified to be consistent
with the current presentation.
3. Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting For Derivative Instruments and Hedging Activities." This
statement addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. The provisions of SFAS No. 133 are effective for fiscal years
beginning after June 15, 1999. The company will adopt this standard in fiscal
2000, and is currently assessing its impact.
4. Earnings per share
In accordance with SFAS No. 128, "Earnings Per Share", the following table
discloses the computation of the diluted earnings per share and the basic
earnings per share. The common stock equivalents do not significantly dilute
earnings per share.
Three months ended Six months ended
July 31, Aug. 1, July 31, Aug. 1,
(In thousands, except per 1998 1997 1998 1997
share data)
Net income (loss) $ (61) $ 3,428 $ 5,147 $14,734
Average shares of common
stock outstanding 30,504 32,220 30,724 32,304
Incremental shares from assumed
exercise of stock options 297 241 345 234
30,801 32,461 31,069 32,538
Diluted earnings per share $ 0.00 $ 0.11 $ 0.17 $ 0.46
Basic earnings per share $ 0.00 $ 0.11 $ 0.17 $ 0.46
7
5. Comprehensive income
During fiscal 1999, the company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income
and its components. The following table presents the company's comprehensive
income (000's):
Three months ended Six months ended
July 31, Aug. 1, July 31, Aug. 1,
1998 1997 1998 1997
Net income (loss) $ (61) $ 3,428 $ 5,147 $14,734
Change in cumulative
translation adjustments, net (691) 379 (819) 710
Total comprehensive income
(loss) $ (752) $ 3,807 $ 4,328 $15,444
8
Item 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS
Results of Operations
Three Months Ended July 31, 1998, compared with
Three Months Ended August 1, 1997
The company's net sales in the second quarter of fiscal 1999 increased 8.8
percent to $239.2 million from $219.9 million in the same quarter last year.
The growth in sales during the quarter just ended came from the company's
specialty businesses, while sales from the core U.S. business and foreign-
based operations were relatively flat. Sales from the core U.S. business
continued the inconsistent trend seen in the first quarter and were
particularly soft in the month of June. The sales increase during the quarter
just ended was primarily due to an overall increase in the number of catalogs
and pages mailed. The company's foreign-based and export businesses have been
disappointing in both sales and earnings, due to weakness in certain
international economies and the relative strength of the U.S. dollar. Net
sales for the first five weeks of the third quarter of fiscal 1999 were weaker
than the 8.8 percent increase in the second quarter.
Gross profit in this year's second quarter was $115.5 million, or 48.3 percent
of net sales, compared with $102.5 million, or 46.6 percent of net sales, in
the second quarter of the prior year. The improvement in gross profit margin
was mainly due to higher initial margins and less steep markdowns on
liquidated merchandise. Liquidations of excess inventory were about seven
percent of net sales in the quarter just ended, compared with six percent in
the prior year.
Selling, general and administrative expenses in the quarter just ended
increased 18.6 percent to $114.8 million, compared with $96.8 million for last
year's second quarter. As a percentage of sales, SG&A was 48.0 percent,
compared with 44.0 percent in the same period last year. The increase in the
SG&A ratio during the quarter was principally the result of lower
productivity, or sales per page, especially in the month of June. Other
factors that increased relative costs were increased spending on national
advertising, Year-2000 compliance efforts, expanding and promoting the
company's website, and higher depreciation expenses due to increased capital
projects. This was partially offset by lower bonus and profit sharing
expenses due to lower profitability.
During the quarter just ended, interest expense was $2 million, compared with
interest income of $0.3 million in the same quarter last year. Higher
inventory, coupled with planned capital expenditures and purchases of treasury
stock, resulted in an increase in the company's borrowing on short-term lines
of credit, which stood at $177 million at the end of the quarter, compared
with $18 million a year ago.
Inventory at the end of the quarter was $318 million, up 47 percent from $217
million in the prior year. In fall of last year, the company increased
inventory in its efforts to provide an annualized first-time fulfillment rate
of at least 90 percent of all items ordered by customers. Much of the current
inventory consists of basic products carried over from last fall that the
company plans to sell at full price, as well as fall/winter merchandise that
has arrived earlier than usual. However, higher inventory levels may result
in greater product liquidations at lower margins in future periods.
9
The company had a net loss of $61 thousand in its second quarter ended July
31, 1998, compared with net income of $3.4 million earned in the second
quarter last year. Diluted earnings per share were at break-even, or $0.00,
for the quarter just ended, compared with $0.11 in the prior year. The
quarter just ended includes $1.3 million in foreign currency exchange gains,
recorded as other income, compared with a loss of $0.4 million in the same
quarter last year. Foreign currency exchange gains or losses occur due to
currency market movements and the company's hedging strategy.
Six Months Ended July 31, 1998, compared with
Six Months Ended August 1, 1997
The company's net sales in the first six months of fiscal 1999 increased 9.3
percent to $507.8 million from $464.6 million in the same period last year.
The increase in net sales was due primarily to the same factors disclosed
above for the three months ended July 31, 1998.
Gross profit of $240.2 million for the first six months of fiscal 1999
increased 11.6 percent from $215.3 million in the same six-month period last
year. As a percentage of net sales, gross profit increased from 46.3 percent
in fiscal 1998 to 47.3 percent in fiscal 1999. The increase in gross profit
was due principally to the same factors disclosed above for the second quarter
ended July 31, 1998. Year-to-date liquidation sales were about eight percent,
compared with seven percent during the same period last year.
Selling, general and administrative expenses increased 16.2 percent to $231.1
million in the first six months of fiscal 1999 from $198.9 million in the same
period last year. As a percentage of net sales, selling, general and
administrative expenses increased to 45.5 percent in fiscal 1999 from 42.8
percent in fiscal 1998. The increase in the SG&A ratio was the result of
relatively higher catalog advertising costs along with the same factors listed
above for the second quarter ended July 31, 1998.
Net income in the first half of fiscal 1999 was $5.1 million, or $0.17 per
share, compared with $10.1 million, or $0.31 per share in the first six months
of the prior year. This excludes last year's after-tax gain of $4.7 million,
or $0.15 per share, from the sale of the company's majority interest in The
Territory Ahead. Including that one-time gain, net income in the first half
of fiscal 1998 was $14.7 million, or $0.46 per share.
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.
10
Liquidity and capital resources
To date, the bulk of the company's working capital needs have been met through
funds generated from operations and from short-term bank loans. The company's
principal need for working capital has been to meet peak inventory
requirements associated with its seasonal sales pattern. In addition, the
company's resources have been used to purchase treasury stock and make asset
additions.
The company will continue to explore investment opportunities arising from the
expansion of its international businesses and the development of new
businesses. While this investment spending has had some negative short term
impact on earnings, it is not expected to have a material effect on liquidity.
At July 31, 1998, the company had unsecured domestic credit facilities
totaling $175 million, of which about $151 million had been used. As of the
date of filing, the company increased its unsecured domestic bank credit lines
to $205 million. The company also maintains foreign credit lines for use in
foreign operations totaling the equivalent of approximately $47 million as of
July 31, 1998, of which $26 million was used.
Since fiscal 1990, the company's board of directors has authorized the company
from time to time to purchase a total of 12.7 million shares of treasury
stock. As of September 10, 1998, 11.0 million shares have been purchased, and
there is a balance of 1.7 million shares available to the company.
Capital expenditures for fiscal 1999 are currently planned to be about $55
million, of which about $29 million had been expended through July 31, 1998.
Major projects as of July 31, include a new distribution and phone center in
Oakham, England, expansion of office facilities in Dodgeville, Wisconsin,
expansion of distribution facilities in Reedsburg, Wisconsin, and new computer
hardware and software. The company believes that its cash flow from
operations and borrowings under its current credit facilities will provide
adequate resources to meet its capital requirements, treasury stock purchases
and operational needs for the foreseeable future.
Year 2000
The company is progressing as planned with its Year 2000 initiatives with no
material changes anticipated. Major areas that are being addressed include
the mainframe and mid-range computer environments, personal computers, third
party vendors and suppliers, common facilities, equipment and warehouse
automation and communications. Costs pertaining to the Year 2000 project are
estimated between $16 and $20 million. The total amount expended as of
July 31, 1998, was about $7 million, of which $4.0 million was expended during
the current fiscal year.
Due to the general uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the company's results of operations, liquidity or financial condition. The
company believes that, with the implementation of new business systems and
completion of projects as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings presently pending, except for
routine litigation incidental to the business, to which Lands' End,
Inc., is a party or of which any of its property is the subject.
Items 2 and 3 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders for
the quarter ended July 31, 1998, other than those disclosed in the
Form 10-Q dated May 1, 1998, reporting the results of the company's
annual meeting.
Item 5. is not applicable and has been omitted
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There were no exhibits filed as part of this report.
(b) Reports on Form 8-K
A report on Form 8-K was filed June 29, 1998,
reporting a meeting with members of the
financial community in New York, New York,
on Thursday, May 21, 1998.
12
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its duly authorized officer and chief financial officer.
LANDS' END, INC.
Date: September 10, 1998 By /s/ BRADLEY K. JOHNSON
Bradley K. Johnson
Senior Vice President,
Chief Administrative Officer
and Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JAN-29-1999 JAN-30-1998
<PERIOD-END> JUL-31-1998 AUG-01-1997<F2>
<CASH> 5016 5781
<SECURITIES> 0 0
<RECEIVABLES> 12087 7033
<ALLOWANCES> 0 0
<INVENTORY> 318439 217104
<CURRENT-ASSETS> 375978 259271
<PP&E> 244713 190462
<DEPRECIATION> 92544 79854
<TOTAL-ASSETS> 529084 370767
<CURRENT-LIABILITIES> 296483 133284
<BONDS> 0 0
0 0
0 0
<COMMON> 402 402
<OTHER-SE> 223452 228267
<TOTAL-LIABILITY-AND-EQUITY> 529084 370767
<SALES> 507781 464603
<TOTAL-REVENUES> 507781 464603
<CGS> 267563 249338
<TOTAL-COSTS> 267563 249338
<OTHER-EXPENSES> 234 497
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2999 346
<INCOME-PRETAX> 8169 24599
<INCOME-TAX> 3022 9865
<INCOME-CONTINUING> 5147 14734
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5147 14734
<EPS-PRIMARY> 0.17<F1> 0.46<F1>
<EPS-DILUTED> 0.17 0.46
<FN>
<F1>Per SFAS 128 the EPS is Basic
<F2>Restated due to SFAS 128 EPS
</FN>
</TABLE>
