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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 July 27, 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 August 29, 2001:
Common stock, $.01 par value 29,486,706 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 27, 2001, and
July 28, 2000..................................... 3
Consolidated Statements of Operations for the
Six Months Ended July 27, 2001 and
and July 28, 2000................................ 4
Consolidated Balance Sheets at July 27, 2001,
and January 26, 2001.............................. 5
Consolidated Statements of Cash Flows for the
Six Months Ended July 27, 2001, and
July 28, 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
July 27, July 28,
2001 2000
(Unaudited)
Revenue
Net merchandise sales $262,874 $255,545
Shipping and handling revenue 22,947 20,080
Total revenue 285,821 275,625
Cost of sales
Cost of merchandise sales 137,389 132,674
Shipping and handling costs 23,575 21,683
Total cost of sales 160,964 154,357
Gross profit 124,857 121,268
Selling, general and
administrative expenses 119,654 123,995
Income (loss) from operations 5,203 (2,727)
Other income (expense):
Interest expense (250) (217)
Interest income 289 500
Other (378) (542)
Total other expense, net (339) (259)
Income (loss) before income taxes 4,864 (2,986)
Income tax provision (benefit) 1,824 (1,105)
Net income (loss) $ 3,040 $ (1,881)
Basic earnings (loss) per share $ 0.10 $ (0.06)
Diluted earnings (loss) per share $ 0.10 $ (0.06)
Basic weighted average shares
outstanding 29,415 30,295
Diluted weighted average shares
outstanding 29,992 30,722
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 27, July 28,
2001 2000
(unaudited)
Revenue
Net merchandise sales $549,991 $521,590
Shipping and handling revenue 46,950 39,875
Total revenue 596,941 561,465
Cost of sales
Cost of merchandise sales 292,302 277,820
Shipping and handling costs 47,838 42,609
Total cost of sales 340,140 320,429
Gross profit 256,801 241,036
Selling, general and
administrative expenses 241,092 242,443
Income (loss) from operations 15,709 (1,407)
Other income (expense):
Interest expense (483) (347)
Interest income 925 1,219
Other (1,914) (1,987)
Total other expense (1,472) (1,115)
Income (loss) before income taxes 14,237 (2,522)
Income tax provision (benefit) 5,339 (933)
Net income (loss) $ 8,898 $ (1,589)
Basic earnings (loss) per share $ 0.30 $ (0.05)
Diluted earnings (loss) per share $ 0.30 $ (0.05)
Basic weighted average shares outstanding 29,398 30,246
Diluted weighted average shares outstanding 29,804 30,791
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 27, January 26,
2001 2001
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 10,211 $ 75,351
Receivables, net 13,531 19,808
Inventory 232,041 188,211
Prepaid advertising 15,710 17,627
Other prepaid expenses 10,636 9,715
Income taxes receivable 1,655 -
Deferred income tax benefits 10,973 10,973
Total current assets 294,757 321,685
Property, plant and equipment, at cost:
Land and buildings 105,004 104,815
Fixtures and equipment 104,242 103,866
Computer hardware and software 109,063 99,979
Leasehold improvements 4,646 4,630
Construction in progress 10,346 4,289
Total property, plant and equipment 333,301 317,579
Less-accumulated depreciation
and amortization 143,775 132,286
Property, plant and equipment, net 189,526 185,293
Intangibles, net 645 651
Total assets $484,928 $507,629
Liabilities and shareholders' investment
Current liabilities:
Lines of credit $ 20,354 $ 16,940
Accounts payable 76,437 96,168
Reserve for returns 5,512 9,061
Accrued liabilities 39,209 41,135
Accrued profit sharing 1,507 2,357
Income taxes payable - 13,213
Total current liabilities 143,019 178,874
Deferred income taxes 16,790 14,567
Shareholders' investment:
Common stock, 40,221 shares issued 402 402
Donated capital 8,400 8,400
Additional paid-in capital 32,506 31,908
Deferred compensation (82) (121)
Accumulated other comprehensive income 3,710 5,974
Retained earnings 497,985 489,087
Treasury stock, 10,782 and 10,945
shares at cost, respectively (217,802) (221,462)
Total shareholders' investment 325,119 314,188
Total liabilities and shareholders'
investment $484,928 $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)
Six Months Ended
July 27, July 28,
2001 2000
(unaudited)
Cash flows from (used for) operating activities:
Net income (loss) $ 8,898 $ (1,589)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation and amortization 12,469 11,629
Deferred compensation expense 39 58
Loss on disposal of fixed assets 24 -
Deferred income taxes 2,223 -
Tax benefit of stock options 598 1,832
Changes in current assets and liabilities:
Receivables, net 6,277 1,767
Inventory (43,830) (44,661)
Prepaid advertising 1,917 (1,146)
Other prepaid expenses (921) (2,398)
Accounts payable (19,731) 5,312
Reserve for returns (3,549) (2,481)
Accrued liabilities (626) (6,896)
Accrued profit sharing (850) (2,580)
Income taxes payable (14,868) (11,499)
Other (2,264) 1,149
Net cash flows used for operating activities (54,194) (51,503)
Cash flows used for investing activities:
Cash paid for capital additions (18,020) (15,546)
Net cash flows used for investing activities (18,020) (15,546)
Cash flows from (used for) financing activities:
Proceeds from short-term debt 3,414 7,476
Purchases of treasury stock (14) (1,019)
Issuance of treasury stock 3,674 4,229
Net cash flows from financing activities 7,074 10,686
Net decrease in cash and cash equivalents (65,140) (56,363)
Beginning cash and cash equivalents 75,351 76,413
Ending cash and cash equivalents $ 10,211 $ 20,050
Supplemental cash flow disclosures:
Interest paid $ 483 $ 347
Income taxes paid 19,800 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
stockholders' equity. 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 July 27, 2001 and July 28, 2000, losses of $0.6
million and $1.0 million were recorded, respectively. For the six months
ended July 27, 2001, and July 28, 2000, there was a loss of 1.1 million and
$2.0 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
second quarter of fiscal 2002, a gain of $0.1 million was recorded in other
income, compared with a loss of $0.1 million in the second quarter of
fiscal 2001. A loss of $0.2 million was realized in the six months ended
July 27, 2001, compared to a loss of $0.6 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 $3.0 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 July 28, 2001 and August 2, 2002.
5. Earnings per share
The following table discloses the computation of diluted earnings (loss)
per share and basic earnings (loss) per share.
Three months ended Six months ended
July 27, July 28, July 27, July 28,
(In thousands, except per 2001 2000 2001 2000
share data)
Net income (loss) $ 3,040 $ (1,881) $ 8,898 $(1,589)
Average shares of common
stock outstanding 29,415 30,295 29,398 30,246
Incremental shares from assumed
exercise of stock options 577 427 406 545
Diluted weighted average shares
of common stock outstanding 29,992 30,722 29,804 30,791
Basic earnings (loss) per share $ 0.10 $ (0.06) $ 0.30 $ (0.05)
Diluted earnings (loss)
per share $ 0.10 $ (0.06) $ 0.30 $ (0.05)
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 (loss)(in thousands):
Three months ended Six months ended
July 27, July 28, July 27, July 28,
2001 2000 2001 2000
Net income (loss) $ 3,040 $(1,881) $ 8,898 $(1,589)
Other comprehensive income
(loss):
Foreign currency translation
adjustments (67) (236) (686) (907)
Net unrealized gain (loss) on
forward contracts and
options (700) 647 (1,578) 2,056
Comprehensive income (loss) $ 2,273 $(1,470) $ 6,634 $ (440)
8
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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 July 27, 2001 and July 28, 2000 (1).
Three months ended July 27, 2001
Inter- Consoli-
(In thousands) Core Specialty national Other dated
Net merchandise sales $159,851 $ 72,453 $ 30,570 $ - $262,874
Income before
income taxes 5,107 983 450 (1,676) 4,864
Identifiable assets 289,616 138,294 57,018 - 484,928
Depreciation and
amortization 3,871 1,792 571 - 6,234
Capital expenditures 5,882 2,715 62 - 8,659
Interest expense 39 19 192 - 250
Interest income 153 67 69 - 289
Three months ended July 28, 2000
Inter- Consoli-
Core Specialty national Other dated
Net merchandise sales $150,722 $ 72,019 $ 32,804 $ - $255,545
Income (loss) before
income taxes (2,889) 852 (219) (730) (2,986)
Identifiable assets 265,046 128,251 57,018 - 450,315
Depreciation and
amortization 3,420 1,628 591 - 5,639
Capital expenditures 6,584 3,161 759 - 10,504
Interest expense 25 11 181 - 217
Interest income 313 149 38 - 500
9
LANDS' END, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six months ended July 27, 2001
Inter- Consoli-
Core Specialty national Other dated
Net merchandise sales $332,518 $158,773 $ 58,700 $ - $549,991
Income before
income taxes 13,675 4,654 (753) (3,339) 14,237
Identifiable assets 289,616 138,294 57,018 - 484,928
Depreciation and
amortization 7,658 3,657 1,154 - 12,469
Capital expenditures 12,083 5,769 168 - 18,020
Interest expense 60 29 394 - 483
Interest income $ 428 $ 204 $ 293 $ - $ 925
Six months ended July 28, 2000
Inter- Consoli-
Core Specialty national Other dated
Net merchandise sales $311,320 $151,046 $ 59,224 $ - $521,590
Income (loss) before
Income taxes (689) 2,830 (2,077) (2,586) (2,522)
Identifiable assets 265,046 128,251 57,018 - 450,315
Depreciation and
amortization 7,038 3,406 1,185 - 11,629
Capital expenditures 9,884 4,783 879 - 15,546
Interest expense 51 24 272 - 347
Interest income $ 788 $ 382 $ 49 $ - $ 1,219
(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 July 27, 2001, compared with
Three Months Ended July 28, 2000
Total revenue for the second quarter just ended was $285.8 million, up 3.7
percent from $275.6 million in the prior year's quarter. Merchandise sales
in the core business segment, represented by the primary monthly,
prospecting and tailored clothing catalogs, were up 6 percent, led by
strength in our coed and women's divisions. In the specialty business
segment, Kids and Coming Home showed sales growth in the mid single digits,
while Corporate Sales showed a single digit decline, primarily due to the
continued slowdown in national business spending. In their local
currencies, the U.K. and Germany had increased sales compared to last
year's second quarter, while Japan's sales were down, primarily due to
their lower level of liquidation sales this year compared with last year.
However, when measured in U.S. dollars, the international business segment
was down about 7 percent, primarily due to the effect of the strong dollar
against weaker foreign currencies.
During the first four weeks of the current quarter, total revenue is up
1 percent, compared with the similar period a year ago. Full-price sales
increased 8 percent, and lower margin liquidation sales declined 22 percent.
As stated in our Business Outlook, in the current third quarter we anticipate
$15 million fewer liquidation sales as a result of the improved quality of our
inventory position. This lower level of liquidation sales will have a positive
effect on gross profit margin during this time period.
Gross profit for the quarter just ended was $124.9 million, or 43.7 percent
of total revenue, compared with $121.3 million, or 44.0 percent of total
revenue, in the same quarter last year. During the quarter, we had higher
initial merchandise margins, primarily associated with sourcing
improvements. However, this improvement was more than offset by a 90 basis
point reduction in gross margin due to the current second quarter's LIFO
charge of $750,000, versus last year's second quarter LIFO credit of $1.5
million.
Liquidation of excess inventory was about 8 percent of net merchandise
sales during this year's second quarter, about flat with last year.
Inventory at the end of the quarter was $232 million, up 12 percent from
$207 million in the prior year. This reflects the planned earlier receipt
of fall merchandise this year relative to last year. Inventory is
currently in line with planned levels, and the quality of inventory is
improved from the prior year. Our first-time fulfillment rate for the
quarter just ended was about 88 percent, the same as last year's second
quarter and consistent with our annual goal.
11
For the second quarter just ended, selling, general and administrative
expenses were $119.7 million, or 41.9 percent of total revenue, compared
with $124.0 million, or 45.0 percent, in the similar period last year. The
improvement in the SG&A ratio was due to a significant reduction in
national TV advertising expenses, partially offset by an increase in
magazine advertising, bringing our overall advertising spending more in line
with recent historical levels. Additionally, stronger customer response
resulted in increased productivity per catalog page, resulting in relatively
lower catalog costs. These improvements were partially offset by higher
bonus and profit-sharing expense, due to improved profitability.
Net income for the quarter just ended was $3.0 million, and diluted
earnings per share were $0.10, compared with a net loss of $1.9 million, or
a diluted loss per share of $0.06, in the prior year.
Segment results
The company has three business segments consisting of Core (regular monthly
and prospecting catalogs, First Person and Lands' End for 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 7.)
The core segment's net merchandise sales were $159.9 million, representing
60.8 percent of the company's net merchandise sales and an increase of $9.1
million from the prior year. The coed and women's divisions accounted for
the strong growth in the core segment. The core segment's pretax income
increased $8.0 million from the prior year.
The specialty segment's net merchandise sales were $72.5 million, which was
27.6 percent of the company's net merchandise sales and $0.4 million above
the prior year. This sales increase was from our Kids' and Coming Home
divisions, offset by Corporate Sales decline. The specialty segment's
pretax income increased $0.1 million from the prior year.
The international segment's net merchandise sales were $30.6 million, which
was 11.6 percent of total net merchandise sales and $2.2 million below the
prior year. The decrease was primarily due to the effect of the strong
dollar against the weaker foreign currencies. In their local currencies,
the U.K. and Germany had increased sales compared to the prior year. The
international segment's pretax income increased $0.7 million from the prior
year.
Segment net merchandise sales (1)
(Amounts in thousands)
Net Merchandise Sales
Three months ended Three months ended
July 27, 2001 July 28, 2000
Amount % of Net Sales Amount % of Net Sales
Core $159,851 60.8% $150,722 59.0%
Specialty 72,453 27.6% 72,019 28.2%
International 30,570 11.6% 32,804 12.8%
Total net sales $262,874 100.0% $255,545 100.0%
(1) Shipping and handling revenue is excluded.
12
Income (loss) before income taxes (2)
(Amounts in thousands)
Three months ended Three months ended
July 27, 2001 July 28, 2000
Amount % of Revenue Amount % of Revenue
Core $ 5,107 1.8% $(2,889) (1.0%)
Specialty 983 0.3% 852 0.3%
International 450 0.2% (219) (0.1%)
Other (1,676) (0.6%) (730) (0.3%)
Income (loss) before
income taxes $ 4,864 1.7% $(2,986) (1.1%)
(2) Percentages are based on total revenue.
Consolidated results for the six months ended July 27, 2001,
compared with six months ended July 28, 2000
Total revenue for the six months ended was $596.9 million, up 6.3 percent
from $561.5 million during the first half of 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 low-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 was down slightly compared to the first
half of last year, mainly due to the effect of the strong dollar against
the weaker foreign currencies.
Gross profit for the first six months of fiscal 2002 was $256.8 million,
or 43.0 percent of total revenue, compared with $241.0 million, or 42.9
percent of total revenue in the prior year. Merchandise gross profit
margin rose due to higher initial margins from improved sourcing.
Liquidation of excess inventory was about 10 percent of net merchandise
sales for the first six months of both years.
For the first six months of fiscal 2002, selling, general and administrative
expenses were $241.1 million, down 0.6 percent from $242.4 million in the
prior year. As a percentage of total revenue, SG&A was 40.4 percent,
compared with 43.2 percent in the prior year. The improvement in the SG&A
ratio was due to a significant reduction in national advertising expenses,
bringing overall advertising expenses more in line with historical levels of
spending. In addition, higher sales productivity per page resulted in
relatively lower catalog costs. These improvements were partially offset by
higher bonus and profit sharing expense, due to improved profitability.
Net income for the six months just ended was $8.9 million, and diluted
earnings per share were $0.30, compared with a net loss of $1.6 million, or
a loss of $0.05 per share, for the same period last year.
13
Segment results
The core segment's net merchandise sales were $332.5 million, representing
60.5 percent of the company's net merchandise sales and an increase of
$21.2 million from the prior year. Although all divisions in the core
segment had increased sales, the coed and women's divisions accounted for
the strongest growth. The core segment's pretax income increased $14.4
million from the prior year.
The specialty segment's net merchandise sales were $158.8 million, which
was 28.9 percent of the company's net merchandise sales and $7.7 million
above the prior year. This sales increase was principally from our Kids'
division. The specialty segment's pretax income increased $1.8 million
from the prior year.
The international segment's net merchandise sales were $58.7 million, which
was 10.6 percent of total net merchandise sales and $0.5 million below the
prior year. The decrease was primarily in Japan, due to their lower level
of liquidation sales this year compared with last year. The international
segment's pretax income improved by $1.3 million from the prior year.
Segment net merchandise sales (1)
(Amounts in thousands)
Net Merchandise Sales
Six months ended Six months ended
July 27, 2001 July 28, 2000
Amount % of Net Sales Amount % of Net Sales
Core $332,518 60.5% $311,320 59.7%
Specialty 158,773 28.9% 151,046 28.9%
International 58,700 10.6% 59,224 11.4%
Total net sales $549,991 100.0% $521,590 100.0%
(1) Shipping and handling revenue is excluded.
Income (loss) before income taxes (2)
(Amounts in thousands)
July 27, 2001 July 28, 2000
Amount % of Revenue Amount % of Revenue
Core $13,675 2.3% $ (689) (0.1%)
Specialty 4,654 0.8% 2,830 0.5%
International (753) (0.1%) (2,077) (0.4%)
Other (3,339) (0.6%) (2,586) (0.5%)
Income (loss) before
income taxes $14,237 2.4% $(2,522) (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 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 July 27, 2001, the company had unsecured domestic credit facilities
totaling $200 million, of which nearly $4.0 million had been used, along
with a reduction of about $41 million for outstanding letters of credit.
The company also maintains foreign credit lines for use in foreign
operations totaling the equivalent of approximately $43 million as of July
27, 2001, of which about $16 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 August 29, 2001, 12.7 million shares have been
purchased, and there is a balance of 2.0 million shares available to the
company.
Capital investment
Capital expenditures for fiscal 2002 are currently planned to be about $45
million, of which about $18 million had been expended through July 27,
2001. Major projects to date are related primarily to investing in our
information technology and in building 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.
15
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 is 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
for an additional five years, until 2006, and greater uniformity and
simplification of the state sales and use tax systems. Following the
Advisory Commission's final report, there have been several initiatives at
the congressional and state levels to implement the recommendations of the
Advisory Commission or otherwise adjust the 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 expects that sales will increase in the single digit range, and we
expect gross profit margin to show continued improvement compared to the
prior year. As a result, we expect an increase in diluted earnings per
share of at least 20 percent for the year as a whole.
Because of our performance improvement for the first half, we are more
confident that we can achieve the overall results stated in our guidance.
With respect to our internal management plans, we expect to exceed last
year's second half financial performance.
Last year's third quarter saw the benefit of an early, cold fall/winter
season and higher liquidation sales. In the third quarter of the current
year, we anticipate about $15 million fewer liquidation sales as a result of
the quality of our inventory position. In addition, compared with the prior
year, we plan to somewhat reduce page circulation in the third quarter and
somewhat increase it in the fourth quarter, resulting in flat circulation
for the second half overall. Our sales and profit levels for the year are
dependent on customer response and buying levels during our all-important
November and December holiday season. Additionally, our optimism is somewhat
guarded due to the continuing uncertainty in the U.S. economy, especially in
the retail environment, and we have seen the direct effects of this in our
Corporate Sales business-to-business division. In light of these facts, we
are tightly managing our expenses while focusing on our best sales
opportunities.
Statement regarding forward-looking information
Statements in this report that are not historical, including,
without limitation, statements regarding our plans, expectations,
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assumptions, and estimations for fiscal 2002, gross profit margin, and
earnings, as well as anticipated sales trends and future development of
our business strategy, are considered forward-looking. 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 July 27, 2001, the company had outstanding foreign currency forward
contracts totaling about $42 million and options totaling nearly $24
million, compared in the prior year of nearly $43 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
July 27, 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 July 27, 2001, other than those disclosed in the
Form 10-Q for the quarter ended April 27, 2001, 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
The following reports were filed on Form 8-K during the
three-month period ended July 27, 2001:
Form 8-K was filed on May 15, 2001, announcing Cheryl A.
Francis was elected to the company's board of directors.
Form 8K was filed on May 16, 2001, announcing the company's
first quarter results as of April 27, 2001.
Form 8-K was filed on May 17, 2001, of excerpted slides from
the company's meeting with members of the financial community
in New York, New York on Thursday, May 17, 2001.
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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: August 29, 2001 By /s/ DONALD R. HUGHES
Donald R. Hughes
Senior Vice President,
and Chief Financial Officer
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