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UNITED STATES
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 October 26, 2001
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 November 29, 2001:
Common stock, $.01 par value 29,761,422 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 October 26, 2001 and
October 27, 2000.................................. 3
Consolidated Statements of Operations for the
Nine Months Ended October 26, 2001 and
and October 27, 2000............................. 4
Consolidated Balance Sheets at October 26, 2001
and January 26, 2001.............................. 5
Consolidated Statements of Cash Flows for the
Nine Months Ended October 26, 2001 and
October 27, 2000................................... 6
Notes to Consolidated Financial Statements............ 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................... 11-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 18
Item 4. Submission of Matters to a Vote of
Security Holders................................... 18
Item 6. Exhibits and Reports on Form 8-K...................... 18
Signature...................................................... 19
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
Oct. 26, Oct. 27,
2001 2000
(Unaudited)
Revenue
Net merchandise sales $348,357 $336,391
Shipping and handling revenue 27,758 25,870
Total revenue 376,115 362,261
Cost of sales
Cost of merchandise sales 185,247 190,663
Shipping and handling costs 25,952 26,389
Total cost of sales 211,199 217,052
Gross profit 164,916 145,209
Selling, general and
administrative expenses 144,050 135,713
Income from operations 20,866 9,496
Other income (expense):
Interest expense (658) (801)
Interest income 59 235
Other (843) (1,878)
Total other expense, net (1,442) (2,444)
Income before income taxes 19,424 7,052
Income tax provision 7,284 2,609
Net income $ 12,140 $ 4,443
Basic earnings per share $ 0.41 $ 0.15
Diluted earnings per share $ 0.41 $ 0.15
Basic weighted average shares
outstanding 29,335 30,290
Diluted weighted average shares
outstanding 29,782 30,491
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)
Nine months ended
Oct. 26, Oct. 27,
2001 2000
(unaudited)
Revenue
Net merchandise sales $898,348 $857,981
Shipping and handling revenue 74,708 65,745
Total revenue 973,056 923,726
Cost of sales
Cost of merchandise sales 477,549 468,483
Shipping and handling costs 73,790 68,998
Total cost of sales 551,339 537,481
Gross profit 421,717 386,245
Selling, general and
administrative expenses 385,142 378,156
Income from operations 36,575 8,089
Other income (expense):
Interest expense (1,141) (1,148)
Interest income 984 1,454
Other (2,757) (3,865)
Total other expense, net (2,914) (3,559)
Income before income taxes 33,661 4,530
Income tax provision 12,623 1,676
Net income $ 21,038 $ 2,854
Basic earnings per share $ 0.72 $ 0.09
Diluted earnings per share $ 0.71 $ 0.09
Basic weighted average shares outstanding 29,376 30,261
Diluted weighted average shares outstanding 29,798 30,681
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)
Oct. 26, January 26,
2001 2001
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 12,339 $ 75,351
Receivables, net 18,390 19,808
Inventory 294,344 188,211
Prepaid advertising 34,266 17,627
Other prepaid expenses 10,755 9,715
Deferred income tax benefits 11,628 10,973
Total current assets 381,722 321,685
Property, plant and equipment, at cost:
Land and buildings 116,949 104,815
Fixtures and equipment 106,554 103,866
Computer hardware and software 116,744 99,979
Leasehold improvements 4,675 4,630
Construction in progress - 4,289
Total property, plant and equipment 344,922 317,579
Less-accumulated depreciation
and amortization 150,517 132,286
Property, plant and equipment, net 194,405 185,293
Intangibles, net 654 651
Total assets $576,781 $507,629
Liabilities and shareholders' investment
Current liabilities:
Lines of credit $ 53,885 $ 16,940
Accounts payable 108,386 96,168
Reserve for returns 10,472 9,061
Accrued liabilities 51,763 41,135
Accrued profit sharing 3,508 2,357
Income taxes payable 9,025 13,213
Total current liabilities 237,039 178,874
Deferred income taxes 12,304 14,567
Shareholders' investment:
Common stock, 40,221 shares issued 402 402
Donated capital 8,400 8,400
Additional paid-in capital 33,060 31,908
Deferred compensation (69) (121)
Accumulated other comprehensive income 3,417 5,974
Retained earnings 510,125 489,087
Treasury stock, 11,091 and 10,945
shares at cost, respectively (227,897) (221,462)
Total shareholders' investment 327,438 314,188
Total liabilities and shareholders'
investment $576,781 $507,629
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)
Nine Months Ended
Oct. 26, Oct. 27,
2001 2000
(unaudited)
Cash flows from (used for) operating activities:
Net income $ 21,038 $ 2,854
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 19,578 17,220
Deferred compensation expense 52 89
Loss on disposal of fixed assets 364 40
Deferred income taxes (2,918) -
Tax benefit of stock options 1,152 1,832
Changes in current assets and liabilities:
Receivables, net 1,418 (4,239)
Inventory (106,133) (98,310)
Prepaid advertising (16,639) (26,014)
Other prepaid expenses (1,040) (2,953)
Accounts payable 12,218 35,430
Reserve for returns 1,411 652
Accrued liabilities 12,536 (2,611)
Accrued profit sharing 1,151 (2,576)
Income taxes payable (4,188) (9,119)
Other (2,557) 1,013
Net cash flows used for operating activities (62,557) (86,692)
Cash flows used for investing activities:
Cash paid for capital additions (30,965) (30,185)
Net cash flows used for investing activities (30,965) (30,185)
Cash flows from (used for) financing activities:
Proceeds from short-term debt 36,945 58,515
Purchases of treasury stock (12,388) (2,249)
Issuance of treasury stock 5,953 4,229
Net cash flows from financing activities 30,510 60,495
Net decrease in cash and cash equivalents (63,012) (56,382)
Beginning cash and cash equivalents 75,351 76,413
Ending cash and cash equivalents $ 12,339 $ 20,031
Supplemental cash flow disclosures:
Interest paid $ 852 $ 954
Income taxes paid 21,167 8,841
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 primarily of
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 26, 2001.
2. Reclassifications
Certain financial statement amounts have been reclassified to be consistent
with the current presentation.
3. Foreign currency translations and transactions
Financial statements of the foreign subsidiaries and foreign-denominated
assets are translated into U.S. dollars in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 52. Translation
adjustments of the financial statements of the foreign subsidiaries are
recorded in accumulated other comprehensive income, which is a component of
shareholders' investment. Gains and losses resulting from the translation
of foreign-denominated assets and foreign currency transactions are
recorded as other income and expense on the consolidated statements of
operations. For the quarter ended October 26, 2001 and October 27, 2000,
losses of $0.9 million and $2.1 million were recorded, respectively. For
the nine months ended October 26, 2001 and October 27, 2000, there were
losses of $1.9 million and $4.1 million, respectively.
4. Derivative instruments and hedging activities
The company has adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which establish
accounting and reporting standards for forward contracts, options, other
derivative instruments and related hedging activities. Statements
No. 133 and No. 138 require, in part, that the company report all
derivative instruments on the consolidated balance sheets as assets or
liabilities at their fair value. The treatment of subsequent changes in
fair value depends on whether hedge accounting is available. For the third
quarter of fiscal 2002, a gain of $0.5 million was recorded in other income
on the consolidated statements of operations, compared with a gain of $0.2
million in the third quarter of fiscal 2001. A gain of $0.3 million was
realized in the nine months ended October 26, 2001, compared to a loss of
$0.4 million for the same time period last year.
7
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company currently has foreign exchange forward contracts and options
that mitigate the company's exposure to the variability in future cash
flows on forecasted transactions with the company's foreign subsidiaries.
To reduce risk, the company enters into foreign currency forward contracts
and put options with a maximum hedging period of 24 months. The company
estimates that net hedging gains of approximately $4.7 million will be
reclassified from accumulated other comprehensive income into earnings
through lower cost of sales and other income and expense within the 12
months between October 27, 2001 and November 1, 2002.
5. Earnings per share
The following table discloses the computation of diluted earnings per share
and basic earnings per share.
Three months ended Nine months ended
Oct. 26, Oct. 27, Oct. 26, Oct. 27,
(In thousands, except per 2001 2000 2001 2000
share data)
Net income $ 12,140 $ 4,443 $ 21,038 $ 2,854
Average shares of common
stock outstanding 29,335 30,290 29,376 30,261
Incremental shares from assumed
exercise of stock options 447 201 422 420
Diluted weighted average shares
of common stock outstanding 29,782 30,491 29,798 30,681
Basic earnings per share $ 0.41 $ 0.15 $ 0.72 $ 0.09
Diluted earnings per share $ 0.41 $ 0.15 $ 0.71 $ 0.09
6. Comprehensive income
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," the following table presents the
company's comprehensive income (in thousands):
Three months ended Nine months ended
Oct. 26, Oct. 27, Oct. 26, Oct. 27,
2001 2000 2001 2000
Net income $12,140 $ 4,443 $21,038 $ 2,854
Other comprehensive income:
Foreign currency translation
adjustments 75 (467) (611) (1,374)
Net unrealized gain (loss) on
forward contracts and
options (369) 331 (1,947) 2,387
Comprehensive income $11,846 $ 4,307 $18,480 $ 3,867
8
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. New accounting pronouncements
On June 30, 2001 the Financial Accounting Standards Board ("FASB")
finalized SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to use the purchase method of
accounting. SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The company does not anticipate
any significant impact from adoption of SFAS Nos. 141 and 142.
Additionally, SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived
Assets," have been issued by the FASB. The company does not anticipate any
significant impact from their adoption.
8. Segment disclosure
Segment net merchandise sales represent sales to external parties. Sales
from the Internet, export sales shipped from the United States and
liquidation sales are included in the respective business segments.
Segment income before income taxes is net merchandise sales less direct and
allocated operating expenses, which includes interest expense and interest
income. Segment identifiable assets are those that are directly used in or
identified with segment operations. "Other" includes currency gains and
losses, corporate expenses, intercompany eliminations, and other income and
expense items that are not allocated to segments.
The following tables include pertinent financial data by operating segment
for the periods ended October 26, 2001 and October 27, 2000 (1).
Three months ended October 26, 2001
Inter- Consoli-
(In thousands) Core Specialty national Other dated
Net merchandise sales $187,880 $128,548 $ 31,929 $ - $348,357
Income (loss) before
income taxes 10,126 11,484 708 (2,894) 19,424
Identifiable assets 334,298 184,567 57,916 - 576,781
Depreciation and
amortization 3,848 2,696 565 - 7,109
Capital expenditures 7,568 5,081 296 - 12,945
Interest expense 316 178 164 - 658
Interest income 6 35 18 - 59
9
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended October 27, 2000
Inter- Consoli-
Core Specialty national Other dated
Net merchandise sales $184,977 $123,286 $ 28,128 $ - $336,391
Income (loss) before
income taxes 200 9,650 (671) (2,127) 7,052
Identifiable assets 303,521 167,404 71,909 - 542,834
Depreciation and
amortization 2,918 2,085 588 - 5,591
Capital expenditures 8,756 5,497 386 - 14,639
Interest expense 414 233 154 - 801
Interest income 78 96 61 - 235
Nine months ended October 26, 2001
Inter- Consoli-
Core Specialty national Other dated
Net merchandise sales $520,398 $287,321 $90,629 $ - $898,348
Income (loss) before
income taxes 23,801 16,138 (45) (6,233) 33,661
Identifiable assets 334,298 184,567 57,916 - 576,781
Depreciation and
amortization 11,506 6,353 1,719 - 19,578
Capital expenditures 19,651 10,850 464 - 30,965
Interest expense 376 207 558 - 1,141
Interest income $ 434 $ 239 $ 311 $ - $ 984
Nine months ended October 27, 2000
Inter- Consoli-
Core Specialty national Other dated
Net merchandise sales $496,297 $274,332 $ 87,352 $ - $857,981
Income (loss) before
income taxes (489) 12,480 (2,748) (4,713) 4,530
Identifiable assets 303,521 167,404 71,909 - 542,834
Depreciation and
amortization 9,956 5,491 1,773 - 17,220
Capital expenditures 18,640 10,280 1,265 - 30,185
Interest expense 465 257 426 - 1,148
Interest income $ 866 $ 478 $ 110 $ - $ 1,454
(1) Fiscal 2001 has been restated to conform to fiscal 2002 presentation.
10
Item 2.
Management's Discussion
and Analysis
Results of Operations
Three Months Ended October 26, 2001, compared with
Three Months Ended October 27, 2000
Total revenue for the third quarter just ended was $376.1 million, up 3.8
percent from $362.3 million in the prior year's quarter. For the third
quarter, sales of full-price merchandise to the U.S. consumer rose 16
percent, while as previously announced, liquidation sales declined about
$15 million. In the core business segment, women's and coed showed
significant growth. In the specialty segment, Kids had strong double-digit
sales increases, while Corporate Sales, the non-consumer division that is
part of the specialty segment, showed a double-digit decline, mainly due to
the continued slowdown in national business spending. In local currencies,
the U.K. and Germany had double-digit growth compared with the prior year,
while Japan's sales were slightly down. When measured in U.S. dollars, the
international business segment was up by about 14 percent.
During the first four weeks of the current quarter, total revenue was up
approximately 3 percent, compared with the similar period a year ago.
While our fourth quarter results are highly dependent on the next few
weeks, we believe we have a good opportunity to exceed last year's strong
fourth quarter sales and earnings.
Gross profit in the quarter just ended was $164.9 million, or 43.8 percent
of total revenue, compared with $145.2 million, or 40.1 percent of total
revenue, in the similar quarter last year. The strong improvement in gross
profit margin was attributable to the $15.4 million reduction in
liquidation sales and continued improvements in vendor sourcing.
As expected, liquidations of excess inventory were 12 percent of net
merchandise sales in the quarter just ended, compared with 17 percent in
the prior year. Third quarter ending inventory was $294 million, up 13
percent from $261 million a year ago, reflecting the planned earlier
receipts of fall merchandise and greater investment in key styles.
Inventory is in excellent condition, significantly improved from the prior
year. We shipped about 92 percent of items at the time of order placement
during the quarter just ended, consistent with our high standards of
customer service and an improvement over last year's 90 percent first time
fulfillment rate.
For the third quarter this year, selling, general and administrative
expenses totaled $144.1 million, compared with $135.7 million last year.
As a percentage of total revenue, SG&A was 38.3 percent, compared with 37.5
percent in the similar period last year. The change in the SG&A ratio
resulted from higher employee incentives and profit sharing expense, as
well as higher depreciation and opening costs for our Stevens Point
complex. When measured as a percent of total revenue, these were mostly
offset by reductions in catalog circulation cost, national advertising and
all other operating expenses.
Net income for the quarter was $12.1 million, compared with $4.4 million
earned in the same quarter last year. Diluted earnings per share were
$0.41, compared with $0.15 in the prior year, representing a new third
quarter company record.
11
Segment results
The company has three business segments consisting of Core (regular monthly
and prospecting catalogs, Lands' End Women, formerly First Person, and
Lands' End Men), Specialty (Kids, Corporate Sales and Coming Home catalogs)
and International (foreign-based operations in Japan, United Kingdom and
Germany). "Other" includes currency gains and losses, corporate expenses,
intercompany eliminations, and other income and deduction items that are
not allocated to segments. (See Note 8.)
The core segment's net merchandise sales were $187.9 million, representing
53.9 percent of the company's net merchandise sales and an increase of $2.9
million from the prior year. The coed and women's divisions accounted for
the growth in the core segment. The core segment's pretax income increased
$9.9 million from the prior year.
The specialty segment's net merchandise sales were $128.5 million, which
was 36.9 percent of the company's net merchandise sales and $5.3 million
above the prior year. This increase resulted from double-digit sales
growth from Kids, partially offset by Corporate Sales decline. The
specialty segment's pretax income increased $1.8 million from the prior
year.
The international segment's net merchandise sales were $31.9 million, which
was 9.2 percent of total net merchandise sales and $3.8 million above the
prior year. The increase was driven by double-digit sales growth in the
United Kingdom and Germany. In their local currencies, the U.K. and
Germany had increased sales compared to the prior year. The international
segment's pretax income increased $1.4 million from the prior year.
Segment net merchandise sales (1)
(Amounts in thousands)
Net Merchandise Sales
Three months ended Three months ended
October 26, 2001 October 27, 2000
Amount % of Net Sales Amount % of Net Sales
Core $187,880 53.9% $184,977 55.0%
Specialty 128,548 36.9% 123,286 36.7%
International 31,929 9.2% 28,128 8.3%
Total net sales $348,357 100.0% $336,391 100.0%
(1) Shipping and handling revenue is excluded.
12
Income (loss) before income taxes (2)
(Amounts in thousands)
Three months ended Three months ended
October 26, 2001 October 27, 2000
Amount % of Revenue Amount % of Revenue
Core $10,126 2.7% $ 200 0.1%
Specialty 11,484 3.1% 9,650 2.7%
International 708 0.2% (671) (0.2%)
Other (2,894) (0.8%) (2,127) (0.6%)
Income before income
taxes $19,424 5.2% $ 7,052 2.0%
(2) Percentages are based on total revenue.
Consolidated results for the nine months ended October 26, 2001,
compared with nine months ended October 27, 2000
Total revenue for the nine months ended October 26 was $973.1 million, up
5.3 percent from $923.7 million during the same period last year. Growth
of merchandise sales in the core business segment was led by strength in
the coed and women's divisions. In the specialty segment, the Kids
division showed the strongest growth; Coming Home was relatively flat and
Corporate Sales had a decline in the high-single digits, reflecting a
slowdown in national business spending. The U.K. and Germany had double-
digit sales increases when measured in their local currencies, while
Japan showed a single digit decrease. When measured in U.S. dollars, the
international business segment had a low-single digit increase.
Gross profit for the first nine months of fiscal 2002 was $421.7 million,
or 43.3 percent of total revenue, compared with $386.2 million, or 41.8
percent of total revenue in the prior year. Merchandise gross profit
margin rose due to higher initial margins from improved sourcing and a
reduction in liquidation sales. Liquidation of excess inventory was
about 11 percent of net merchandise sales for the first nine months of
this year, compared to 13 percent in the prior year.
For the first nine months of fiscal 2002, selling, general and
administrative expenses were $385.1 million, up 1.9 percent from $378.2
million in the prior year. As a percentage of total revenue, SG&A was 39.6
percent, compared with 40.9 percent in the prior year. The improvement in
the SG&A ratio was mainly due to lower national advertising and relatively
lower catalog circulation cost. This was offset by higher employee
incentives and profit sharing expense, due to improved profitability.
Net income for the nine months just ended was $21.0 million, and diluted
earnings per share were $0.71, compared with a net income of $2.9 million,
or $0.09 per share, for the same period last year.
13
Segment results
The core segment's net merchandise sales were $520.4 million, representing
57.9 percent of the company's net merchandise sales, an increase of $24.1
million from the prior year. The coed and women's divisions accounted for
the growth in the core segment. The core segment's pretax income increased
$24.3 million from the prior year.
The specialty segment's net merchandise sales were $287.3 million, which
was 32.0 percent of the company's net merchandise sales and $13.0 million
above the prior year. This sales increase was principally from our Kids'
division, offset by Corporate Sales. The specialty segment's pretax income
increased $3.7 million from the prior year.
The international segment's net merchandise sales were $90.6 million, which
was 10.1 percent of total net merchandise sales and $3.3 million above the
prior year. The sales increase was from the United Kingdom and Germany.
The international segment's pretax income improved by $2.7 million from the
prior year.
Segment net merchandise sales (1)
(Amounts in thousands)
Net Merchandise Sales
Nine months ended Nine months ended
October 26, 2001 October 27, 2000
Amount % of Net Sales Amount % of Net Sales
Core $520,398 57.9% $496,297 57.8%
Specialty 287,321 32.0% 274,332 32.0%
International 90,629 10.1% 87,352 10.2%
Total net sales $898,348 100.0% $857,981 100.0%
(1) Shipping and handling revenue is excluded.
Income (loss) before income taxes (2)
(Amounts in thousands)
October 26, 2001 October 27, 2000
Amount % of Revenue Amount % of Revenue
Core $ 23,801 2.5% $ (489) (0.1%)
Specialty 16,138 1.7% 12,480 1.4%
International (45) - (2,748) (0.3%)
Other (6,233) (0.6%) (4,713) (0.5%)
Income before income
taxes $ 33,661 3.6% $ 4,530 0.5%
(2) Percentages are based on total revenue.
14
Seasonality of business
The company's business is highly seasonal. Historically, a
disproportionate amount of the company's revenue 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 type and 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.
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 make asset additions
and purchase treasury stock.
At October 26, 2001, the company had unsecured domestic credit facilities
totaling $200 million, of which nearly $35 million had been used, along
with a reduction of about $31 million for outstanding letters of credit.
On November 5, 2001, the company entered into a 3-year $200 million senior
unsecured revolving credit agreement ("Credit facility") with a syndicate
of banks to provide funding for working capital for operations and general
corporate purposes. This agreement replaces the company's $200 million,
364-day unsecured credit agreement. The Credit facility will mature on
November 4, 2004, with a provision for a one-year extension, subject to
lender approval. Additionally, the company may request that the lenders
increase the total commitment to an amount not to exceed $250 million.
Indebtedness under the Credit facility bears interest calculated, at the
company's option, at either defined base rate, LIBOR plus a margin based on
the company's fixed charge coverage ratio or competitive bid rates. Under
the Credit facility, the company is required to pay a facility fee based on
the total commitment and to maintain certain financial ratios, including
fixed charge coverage and total indebtedness to earnings before interest,
taxes, depreciation and amortization (EBITDA).
The company also maintains foreign credit lines for use of foreign
operations totaling the equivalent of approximately $43 million as of
October 26, 2001, of which about $19 million was outstanding.
Since fiscal 1990, the company's board of directors has authorized the
company from time to time to purchase a total of 14.7 million shares of
treasury stock. As of November 29, 2001, 13.1 million shares have been
purchased, and there is a balance of 1.6 million shares available to the
company.
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Capital investment
Capital expenditures for fiscal 2002 are currently planned to be between
$42 million and $45 million, of which about $31 million had been expended
through October 26, 2001. Major projects to date are investments in our
information technology and the construction of our new Stevens Point,
Wisconsin facility. 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 and operational needs
for the foreseeable future.
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.
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, can not be reasonably estimated.
The Supreme Court decision also established that Congress has the power to
enact legislation that 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.
In October 1998, The Internet Tax Freedom Act was signed into law. Among
the provisions of this Act was a three-year moratorium on multiple and
discriminatory taxes on electronic commerce. An Advisory Commission was
appointed to study electronic commerce tax issues and submitted its final
report to Congress on April 3, 2000. Among other recommendations, the
majority of the Advisory Commission favored the extension of the moratorium
and greater uniformity and simplification of the state sales and use tax
systems. The moratorium has since been extended until November 1, 2003.
Also, there have been several other initiatives at the congressional and
state levels to implement the Advisory Commission's recommendations to
modify current sales and use tax laws and policies. We continue to monitor
this activity and its potential effect on the company's collection
obligations.
Business Outlook
For fiscal 2002, a 53-week year that will end on February 1, 2002, the
company, given its recent experience, has a good opportunity to exceed last
year's fourth quarter sales and earnings. Last year's strong fourth quarter
sales and earnings present a challenging point of comparison, especially
given the current economic environment. We are more cautious about post-
Christmas performance and the general softness of consumer spending.
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Statement regarding forward-looking information
Statements in this release that are not historical, including, without
limitation, statements regarding our plans, expectations, assumptions, and
estimations for fiscal 2002 revenues, gross profit margin, and earnings, as
well as anticipated sales trends and future development of our business
strategy, are considered forward-looking and speak only as of today's date.
As such, these statements are subject to a number of risks and
uncertainties. Future results may be materially different from those
expressed or implied by these statements due to a number of factors.
Currently, we believe that the principal factors that create uncertainty
about our future results are the following: customer response to our
merchandise offerings, circulation changes and other initiatives; the mix
of our sales between full price and liquidation merchandise; overall
consumer confidence and general economic conditions, both domestic and
foreign; effects of weather on customer purchasing behavior; effects of
shifting patterns of e-commerce versus catalog purchases; costs associated
with printing and mailing catalogs and fulfilling orders; dependence on
consumer seasonal buying patterns; fluctuations in foreign currency
exchange rates; and changes that may have different effects on the various
sectors in which we operate (e.g., rather than individual consumers, the
Corporate Sales Division, included in the specialty segment, sells to
numerous corporations, and certain of these sales are for their corporate
promotional activities). Our future results could, of course, be affected
by other factors as well. More information about these risks and
uncertainties may be found in the company's 10-K filings with the S.E.C.
The company does not undertake to publicly update or revise its forward-
looking statements even if experience or future changes make it clear that
any projected results expressed or implied therein will not be realized.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
The company attempts to reduce its exposure to the effects of currency
fluctuations on cash flows by using derivative instruments to hedge. The
company is subject to foreign currency risk related to its transactions
with operations in Japan, Germany and United Kingdom and with foreign
third-party vendors. The company's foreign currency risk management policy
is to hedge the majority of merchandise purchases by foreign operations and
from foreign third-party vendors, which includes forecasted transactions,
through the use of foreign exchange forward contracts and options to
minimize this risk. The company's policy is not to speculate in derivative
instruments for profit on the exchange rate price fluctuation, trade in
currencies for which there are no underlying exposures or enter into trades
for any currency to intentionally increase the underlying exposure.
Derivative instruments used as hedges must be effective at reducing the
risk associated with the exposure being hedged and must be designated as a
hedge at the inception of the contract.
As of October 26, 2001, the company had outstanding foreign currency
forward contracts totaling about $65 million and options totaling nearly
$11 million, compared in the prior year of nearly $59 million for foreign
currency forward contracts and no option contracts outstanding.
The company is subject to the risk of fluctuating interest rates in the
normal course of business, primarily as a result of its short-term
borrowing and investment activities at variable interest rates. As of
October 26, 2001, the company had no outstanding financial instruments
related to its debt or investments.
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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 October 26, 2001.
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 on August 10, 2001, announcing
the company's second quarter results.
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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: November 29, 2001 By /s/ DONALD R. HUGHES
Donald R. Hughes
Senior Vice President,
and Chief Financial Officer
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