LE 2014.10.31 10Q


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 quarterly period ended October 31, 2014
-OR-
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to                      to                     .
Commission File Number: 001-09769

Lands’ End, Inc.
(Exact name of registrant as specified in its charter)

 
Delaware
 
36-2512786
(State or Other Jurisdiction of
Incorporation of Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1 Lands' End Lane
Dodgeville, Wisconsin
 
53595
(Address of Principal Executive Offices)
 
(Zip Code)
Issuer’s Telephone Number, Including Area Code: (608) 935-9341
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    YES  x    NO  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  
Large accelerated filer
 
¨
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
 
x  
Smaller Reporting Company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x
As of December 10, 2014, the registrant had 31,956,521 shares of common stock, $0.01 par value, outstanding.



LANDS’ END, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
 
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Condensed Consolidated and Combined Statements of Comprehensive Operations for the 13 and 39 Weeks Ended October 31, 2014 and November 1, 2013
 
 
 
 
 
 
 
Condensed Consolidated and Combined Balance Sheets at October 31, 2014, November 1, 2013 and January 31, 2014
 
 
 
 
 
 
 
Condensed Consolidated and Combined Statements of Cash Flows for the 39 Weeks Ended October 31, 2014 and November 1, 2013
 
 
 
 
 
 
 
Condensed Consolidated and Combined Statements of Stockholders’ Equity For the 39 Weeks Ended October 31, 2014 and November 1, 2013
 
 
 
 
 
 
 
Notes to Condensed Consolidated and Combined Financial Statements
 
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4.
 
Controls and Procedures
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
Item 6.
 
Exhibits
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDS’ END, INC.
Condensed Consolidated and Combined Statements of Comprehensive Operations
(Unaudited)
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands except per share data)
 
October 31, 2014
 
November 1, 2013
 
October 31, 2014
 
November 1, 2013
REVENUES
 
 
 
 
 
 
 
 
Merchandise sales and services, net
 
$
373,082

 
$
383,851

 
$
1,050,787

 
$
1,032,447

COSTS AND EXPENSES
 
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization)
 
189,787

 
209,401

 
537,064

 
553,735

Selling and administrative
 
143,370

 
145,917

 
419,859

 
408,782

Depreciation and amortization
 
4,802

 
5,255

 
14,629

 
16,253

Other operating expense, net
 
25

 
7

 
45

 
59

Total costs and expenses
 
337,984

 
360,580

 
971,597

 
978,829

Operating income
 
35,098

 
23,271

 
79,190

 
53,618

Interest expense
 
6,194

 

 
14,324

 

Other income, net
 
507

 
10

 
847

 
33

Income before income taxes
 
29,411

 
23,281

 
65,713

 
53,651

Income tax expense
 
11,420

 
9,002

 
25,009

 
20,747

NET INCOME
 
$
17,991

 
$
14,279

 
$
40,704

 
$
32,904

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(2,698
)
 
1,273

 
(2,316
)
 
104

COMPREHENSIVE INCOME
 
$
15,293

 
$
15,552

 
$
38,388

 
$
33,008

NET INCOME PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS (Note 4)
 
 
 
 
 
 
 
 
Basic:
 
$
0.56

 
$
0.45

 
$
1.27

 
$
1.03

Diluted:
 
$
0.56

 
$
0.45

 
$
1.27

 
$
1.03

 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
31,957

 
31,957

 
31,957

 
31,957

Diluted weighted average common shares outstanding
 
31,971

 
31,957

 
31,965

 
31,957

 


See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
1


LANDS’ END, INC.
Condensed Consolidated and Combined Balance Sheets
(Unaudited)
(in thousands, except share data)
 
October 31,
2014
 
November 1,
2013
 
January 31, 2014
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
105,574

 
$
16,331

 
$
22,411

Restricted cash
 
3,300

 
3,300

 
3,300

Accounts receivable, net
 
39,459

 
38,648

 
33,617

Inventories, net
 
403,938

 
463,957

 
369,928

Prepaid expenses and other current assets
 
40,361

 
37,602

 
21,993

Total current assets
 
592,632

 
559,838

 
451,249

Property and equipment, net
 
99,070

 
99,162

 
101,096

Goodwill
 
110,000

 
110,000

 
110,000

Intangible assets, net
 
529,369

 
531,999

 
531,342

Other assets
 
22,942

 
617

 
588

TOTAL ASSETS
 
$
1,354,013

 
$
1,301,616

 
$
1,194,275

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
Accounts payable
 
$
157,674

 
$
139,393

 
$
115,387

Deferred tax liabilities
 
2,850

 
7,954

 
4,019

Other current liabilities
 
121,924

 
97,086

 
83,955

Total current liabilities
 
282,448

 
244,433

 
203,361

Long-term debt
 
507,275

 

 

Long-term deferred tax liabilities
 
172,930

 
194,966

 
195,534

Other liabilities
 
17,439

 
3,233

 
3,066

TOTAL LIABILITIES
 
980,092

 
442,632

 
401,961

Commitments and contingencies (Note 11)
 

 

 

STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Common stock, par value $0.01- authorized: 480,000,000 shares; issued and outstanding: 31,956,521
 
320

 

 

Additional paid-in capital
 
342,130

 

 

Retained earnings
 
35,782

 

 

Net parent company investment
 

 
862,041

 
794,309

Accumulated other comprehensive loss
 
(4,311
)
 
(3,057
)
 
(1,995
)
Total stockholders’ equity
 
373,921

 
858,984

 
792,314

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,354,013

 
$
1,301,616

 
$
1,194,275



See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
2


LANDS’ END, INC.
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)

 
 
39 Weeks Ended
(in thousands)
 
October 31, 2014
 
November 1, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
40,704

 
$
32,904

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
14,629

 
16,253

Amortization of debt issuance costs
 
1,092

 

Loss on disposal of property and equipment
 
45

 
59

Stock-based compensation
 
1,954

 

Deferred income taxes
 
7,730

 
3,407

Change in operating assets and liabilities:
 
 
 
 
Inventories
 
(36,306
)
 
(84,982
)
Accounts payable
 
44,989

 
30,010

Other operating assets
 
(23,402
)
 
(22,991
)
Other operating liabilities
 
34,123

 
14,394

Net cash provided by (used in) operating activities
 
85,558

 
(10,946
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Proceeds from sale of property and equipment
 

 
9

Purchases of property and equipment
 
(11,141
)
 
(3,629
)
Net cash used in investing activities
 
(11,141
)
 
(3,620
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Contributions from / (distributions to) Sears Holdings, net
 
8,784

 
2,739

Proceeds from issuance of long-term debt
 
515,000

 

Payments on term loan facility
 
(2,575
)
 

Debt issuance costs
 
(11,433
)
 

Dividend paid to a subsidiary of Sears Holdings Corporation
 
(500,000
)
 

Net cash provided by financing activities
 
9,776

 
2,739

Effects of exchange rate changes on cash
 
(1,030
)
 
(99
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
83,163

 
(11,926
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
22,411

 
28,257

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
105,574

 
$
16,331

SUPPLEMENTAL INFORMATION:
 
 
 
 
Supplemental Cash Flow Data:
 
 
 
 
Unpaid liability to acquire property and equipment
 
$
2,030

 
$
1,584

Income taxes paid
 
$
13,013

 
$
4,659

Interest paid
 
$
13,020

 
$


See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
3


LANDS’ END, INC.
Condensed Consolidated and Combined Statements of Changes in Stockholders’ Equity
(Unaudited)


 
Common Stock Issued
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Net Parent Company Investment
 
Total Stockholders' Equity
(in thousands except share data)
Shares
 
Amount
 
Balance at February 1, 2013

 
$

 
$

 
$

 
$
(3,161
)
 
$
826,398

 
$
823,237

Net income

 

 

 

 

 
32,904

 
32,904

Cumulative translation adjustment, net of tax

 

 

 

 
104

 

 
104

Distributions to parent company, net

 

 

 

 

 
2,739

 
2,739

Balance at November 1, 2013

 
$

 
$

 
$

 
$
(3,057
)
 
$
862,041

 
$
858,984

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 31, 2014

 
$

 
$

 
$

 
$
(1,995
)
 
$
794,309

 
$
792,314

Net income

 

 

 
35,782

 

 
4,922

 
40,704

Cumulative translation adjustment, net of tax

 

 

 

 
(2,316
)
 

 
(2,316
)
Stock-based compensation expense

 

 
1,954

 

 

 

 
1,954

Contribution from parent company, net

 

 

 

 

 
8,784

 
8,784

Dividend paid to parent company

 

 

 

 

 
(500,000
)
 
(500,000
)
Separation related adjustments

 

 

 

 

 
32,481

 
32,481

Reclassification of net parent company investment to common stock and additional paid-in capital in conjunction with the separation
31,956,521

 
320

 
340,176

 

 

 
(340,496
)
 

Balance at October 31, 2014
31,956,521

 
$
320

 
$
342,130

 
$
35,782

 
$
(4,311
)
 
$

 
$
373,921





See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
4


LANDS’ END, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business and Separation
Lands' End, Inc. (“Lands’ End,” “we,” “us,” “our” or the “Company”) is a leading multi-channel retailer of casual clothing, accessories and footwear, as well as home products. We offer products through catalogs, online at www.landsend.com and affiliated specialty and international websites, and through retail locations, primarily at Lands’ End Shops at Sears, stand-alone Lands’ End Inlet stores and international shop-in-shops that sell merchandise in various retail department stores.
On March 14, 2014, the board of directors of Sears Holdings Corporation (inclusive of all of its subsidiaries, “Sears Holdings”) approved the distribution of the issued and outstanding shares of Lands’ End common stock on the basis of 0.300795 shares of Lands’ End common stock for each share of Sears Holdings Corporation common stock held on March 24, 2014, the record date. Sears Holdings Corporation distributed 100 percent of the outstanding common stock of Lands’ End to its shareholders on April 4, 2014 (the “Separation”).
A Registration Statement on Form 10 relating to the Separation was filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”), and was subsequently amended by the Company and declared effective by the SEC on March 17, 2014. The Company’s common stock began “regular way” trading on the NASDAQ Stock Market after the distribution date under the symbol “LE”.
Prior to the completion of the Separation, Sears Holdings transferred all the remaining assets and liabilities of Lands’ End that were held by Sears Holdings to Lands’ End or its subsidiaries. Lands’ End also paid a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation.
Basis of Presentation
The financial statements presented herein represent (i) periods prior to April 4, 2014 when we were a wholly owned subsidiary of Sears Holdings Corporation (referred to as “Condensed Combined Financial Statements”) and (ii) the period as of and subsequent to April 4, 2014 when we became a separate publicly-traded company (referred to as “Condensed Consolidated Financial Statements”).
The accompanying unaudited Condensed Consolidated and Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands' End Annual Report on Form 10-K filed with the SEC on March 25, 2014.
Our historical Condensed Combined Financial Statements (constituting the periods prior to April 4, 2014) have been prepared on a stand-alone basis and have been derived from the consolidated financial statements and accounting records of Sears Holdings. The Condensed Combined Financial Statements include Lands’ End, Inc. and subsidiaries and certain other items related to the Lands’ End business which were held by Sears Holdings prior to the Separation - primarily the Lands’ End Shops at Sears. These items were contributed by Sears Holdings to Lands’ End, Inc. prior to the Separation. These historical Condensed Combined Financial Statements reflect our financial position, results of operations and cash flows in conformity with GAAP.
The Condensed Combined Balance Sheets (constituting periods prior to April 4, 2014) include the allocation of certain assets and liabilities that have historically been held by Sears Holdings but which are specifically identifiable or allocable to Lands’ End. All intracompany transactions and accounts have been eliminated. Prior to the Separation, all intercompany transactions between Sears Holdings and Lands’ End were considered to be effectively settled in the Condensed Combined Financial Statements at the time the transactions were recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Condensed Combined

    
5



Statements of Cash Flows as a financing activity and in the Condensed Combined Balance Sheets as Net parent company investment.
Through April 4, 2014, Sears Holdings Corporation’s investment in Lands’ End is shown as Net parent company investment in the Condensed Combined Balance Sheet. Upon completion of the Separation, the Company had 31,956,521 shares of common stock outstanding at a par value of $0.01 per share. After Separation adjustments were recorded, the remaining Net parent company investment, which includes all earnings prior to Separation, was transferred to Additional paid-in capital.
As a business operation of Sears Holdings, we did not maintain our own tax and certain other corporate support functions prior to the Separation. We entered into agreements with Sears Holdings for the continuation of certain of these services, as well as to support the Lands' End Shops at Sears. These expenses had been allocated to Lands’ End based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis based upon revenue, headcount, square footage or other measures. Lands’ End considers the expense allocation methodology and results to be reasonable for all periods presented. However, the costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. The historical Condensed Combined Financial Statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future, or what they would have been if it had been a stand-alone company during all periods presented. See Note 9 - Related Party Agreements and Transactions.
Prior to the Separation, Sears Holdings provided financing, cash management and other treasury services to Lands' End. Sears Holdings used a centralized approach to its U.S. domestic cash management and financing of its operations. The majority of our cash was transferred to Sears Holdings on a daily basis. Sears Holdings was also our only source of funding for our operating and investing activities. Upon Separation, cash and restricted cash held by Sears Holdings were not allocated to Lands’ End unless the cash or restricted cash was held by an entity that was transferred to Lands’ End. Sears Holdings’ third-party debt, and the related interest expense, was not allocated to us for any of the periods presented as we were not the legal obligor of the debt and the Sears Holdings' borrowings were not directly attributable to our business.
NOTE 2. INCOME TAXES
Lands’ End and Sears Holdings Corporation entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Separation which governs Sears Holdings Corporation’s and Lands’ End’s respective rights, responsibilities and obligations after the Separation with respect to liabilities for U.S. federal, state, local and foreign taxes attributable to the Lands’ End business. In addition to the allocation of tax liabilities, the Tax Sharing Agreement addresses the preparation and filing of tax returns for such taxes and dispute resolution with taxing authorities regarding such taxes. Generally, Sears Holdings Corporation is liable for all pre-Separation U.S. federal, state and local income taxes. Lands’ End generally is liable for all other taxes attributable to its business, including all foreign income taxes.
As of October 31, 2014, the Company had gross unrecognized tax benefits (“UTBs”) of $9.0 million. Of this amount, $5.8 million would, if recognized, impact our effective tax rate. The Company does not expect that UTBs will fluctuate in the next 12 months for tax audit settlements and the expiration of the statute of limitations for certain jurisdictions. Pursuant to the Tax Sharing Agreement, Sears Holdings Corporation is generally responsible for all U.S. federal, state and local UTBs through the date of the Separation and, as such, the UTBs are recorded in Other liabilities in the Condensed Consolidated and Combined Balance Sheets, and an indemnification asset from Sears Holdings Corporation for the $8.8 million pre-Separation UTBs recorded in Other assets in the Condensed Consolidated and Combined Balance Sheets.
The Company classifies interest expense and penalties related to UTBs and interest income on tax overpayments as components of income tax expense. As of October 31, 2014, the total amount of interest expense and penalties recognized on our balance sheet was $5.3 million ($3.4 million net of federal benefit). The total amount of net interest expense recognized in the Condensed Consolidated and Combined Statements of Comprehensive Operations were insignificant for the 13 and 39 weeks ended October 31, 2014 and November 1, 2013. Sears Holdings and we file income tax returns in both the United States and various foreign jurisdictions. The Internal Revenue Service has completed its examination of all federal income tax returns of Sears Holdings through the 2009 return, and all matters arising from such examinations have been resolved. Sears Holdings and the Company are under examination by various state income tax jurisdictions for the years 2002–2012.

    
6



Impacts of Separation
Prior to the Separation, the tax provision and related tax accounts represented the tax attributable to the Company as if the Company filed a separate tax return.  However, the computed obligations were settled through Sears Holdings Corporation. Accordingly, the taxes payable and related tax payments were reflected directly in Net parent company investment in the Condensed Consolidated and Combined Balance Sheets. 
As a result of the Separation, the Company will be filing its own income tax returns and, as a result certain tax attributes previously included in Net parent company investment have been reclassified.  Specifically, subsequent to the Separation the Company reclassified (i) $30.1 million of deferred tax assets related primarily to foreign tax credits; and (ii) a $13.7 million reserve for uncertain tax positions (including penalties and interest) out of Net parent company investment and into Deferred tax liabilities and Other liabilities, respectively, in the Condensed Consolidated and Combined Balance Sheets.  In addition, pursuant to the Tax Sharing Agreement, a $13.7 million receivable was recorded by the Company to reflect the indemnification by Sears Holdings Corporation of the pre-Separation uncertain tax positions (including penalties and interest) for which Sears Holdings is responsible.  This receivable has been included in Other assets in the Condensed Consolidated and Combined Balance Sheets.
NOTE 3. STOCK-BASED COMPENSATION
Accounting standards require, among other things, that (i) the fair value of all stock awards be expensed over their respective vesting periods; (ii) the amount of cumulative compensation cost recognized at any date must at least be equal to the portion of the grant-date value of the award that is vested at that date and (iii) compensation expense include a forfeiture estimate for those shares not expected to vest. Also in accordance with these provisions, for awards that only have a service requirement with multiple vest dates, the Company is required to recognize compensation cost on a straight-line basis over the requisite service period for the entire award.
The Company has granted time vesting stock awards ("Deferred Awards") and performance-based stock awards ("Performance Awards") to employees at management levels and above. Deferred Awards were granted in the form of restricted stock units that only require each recipient to complete a service period. Deferred Awards generally vest ratably over three years. Performance Awards were granted in the form of restricted stock units which have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. Performance Awards have annual vesting, but due to the performance criteria, are not eligible for straight-line expensing. Therefore, Performance Awards are amortized using a graded expense process. The fair value of all awards is based on the closing price of the Company’s common stock on the grant date. Compensation expense is reduced for estimated forfeitures of those awards not expected to vest due to employee turnover.
The following table summarizes the Company’s stock-based compensation expense, which is primarily included in Selling and administrative expense in the Condensed Consolidated and Combined Statements of Comprehensive Income:
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
October 31, 2014

 
November 1, 2013
 
October 31, 2014

 
November 1, 2013
Performance Awards
$
1,086

 
$

 
$
1,804

 
$

Deferred Awards
86

 

 
150

 

Total stock-based compensation expense
$
1,172

 
$

 
$
1,954

 
$

Awards Granted Year to Date October 31, 2014
The Company granted Deferred Awards and Performance Awards to various employees during the 13 and 39 weeks ended October 31, 2014. Generally, the Deferred Awards have a three year vesting period with 25% of the award vesting in both the first and second years and 50% vesting in the third year. In general, the Performance Awards granted to executives vest over a 3-year service period and have a performance measure at the end of the first year of service. If earned, 25% of the awards vest in the first and second years and 50% vests in the third year.

    
7



Changes in the Company’s Unvested Stock Awards Year to Date October 31, 2014
Deferred Awards
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested Deferred Awards, beginning of period

 
$

Granted
45

 
26.80

Forfeited
(3
)
 
26.73

Unvested Deferred Awards, end of period
42

 
26.81

Total unrecognized stock-based compensation expense related to unvested Deferred Awards approximated $1.0 million as of October 31, 2014, which will be recognized over a weighted average period of approximately 2.6 years.
Performance Awards
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested Performance Awards, beginning of period

 
$

Granted
300

 
27.30

Forfeited
(23
)
 
26.73

Unvested Performance Awards, end of period
277

 
27.35

Total unrecognized stock-based compensation expense related to unvested Performance Awards approximated $5.8 million as of October 31, 2014, which will be recognized over a weighted average period of approximately 2.6 years.
NOTE 4. EARNINGS PER SHARE
The numerator for both basic and diluted earnings per share (“EPS”) is net income attributable to Lands’ End. The denominator for basic EPS is based upon the number of weighted average shares of Lands’ End common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of Lands’ End common stock and common stock equivalents outstanding during the reporting periods. For periods ended April 4, 2014 and prior, basic earnings per share are computed using the number of shares of Lands’ End common stock outstanding on April 4, 2014, the date on which the Lands’ End common stock was distributed to the stockholders of Sears Holdings Corporation. The same number of shares was used to calculate basic and diluted earnings per share for the 13 and 39 weeks ended November 1, 2013 as there were no dilutive securities during these periods. The following table summarizes the components of basic and diluted earnings per share:

    
8



 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands, except per share amounts)
 
October 31, 2014
 
November 1, 2013
 
October 31, 2014
 
November 1, 2013
Net income
 
$
17,991

 
$
14,279

 
$
40,704

 
$
32,904

 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
31,957

 
31,957

 
31,957

 
31,957

Dilutive effect of stock awards
 
14

 

 
8

 

Diluted weighted average shares outstanding
 
31,971

 
31,957

 
31,965

 
31,957

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.56

 
$
0.45

 
$
1.27

 
$
1.03

Diluted earnings per share
 
$
0.56

 
$
0.45

 
$
1.27

 
$
1.03

There were no anti-dilutive securities excluded from the diluted weighted average shares outstanding for the 13 and 39 weeks ended October 31, 2014 or November 1, 2013.

NOTE 5. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) encompasses all changes in equity other than those arising from transactions with stockholders, and is comprised solely of foreign currency translation adjustments and net income.
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 31, 2014
 
November 1, 2013
 
October 31, 2014
 
November 1, 2013
Beginning balance: Accumulated other comprehensive loss (net of tax of $988, $2,653, $1,211, and $1,938, respectively)
 
$
(1,613
)
 
$
(4,330
)
 
$
(1,995
)
 
$
(3,161
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Foreign currency translation adjustments (net of tax (expense) benefit of $1,654, $(780), $1,431, and $(65), respectively)
 
(2,698
)
 
1,273

 
(2,316
)
 
104

Ending balance: Accumulated other comprehensive loss (net of tax of $2,642, $1,873, $2,642, and $1,873, respectively)
 
$
(4,311
)
 
$
(3,057
)
 
$
(4,311
)
 
$
(3,057
)
Comprehensive income—no amounts were reclassified out of Accumulated other comprehensive loss during any of the periods presented.
NOTE 6. DEBT
Debt Arrangements
In connection with the Separation, Lands’ End entered into an asset-based senior secured credit agreement, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders, which provides for maximum borrowings of $175.0 million (“ABL Facility”) for Lands’ End, subject to a borrowing base, with a $30.0 million sub facility for a United Kingdom subsidiary borrower of Lands’ End (the “UK Borrower”). The ABL Facility has a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The ABL Facility is available for working capital and other general corporate purposes, and was undrawn at the Separation and at October 31, 2014, other than for letters of credit. The Company had borrowing availability under the ABL Facility of $161.5 million as of October 31, 2014, net of outstanding letters of credit of $13.5 million.
Also on April 4, 2014, Lands’ End entered into a term loan credit agreement with Bank of America, N.A. and certain other lenders, which provided a senior secured term loan facility of $515.0 million (the “Term Loan Facility” and, together with the ABL Facility, the “Facilities”), the proceeds of which were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and

    
9



expenses associated with the Facilities of approximately $11.4 million, with the remaining proceeds used for general corporate purposes. The fees were capitalized as debt issuance costs, and are included in Other assets on the Condensed Consolidated and Combined Balance Sheets and are being amortized as an adjustment to Interest expense over the remaining life of the Facilities.
Maturity; Amortization and Prepayments
The ABL Facility will mature on April 4, 2019. The Term Loan Facility will mature on April 4, 2021 and will amortize at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events. The Company’s aggregate scheduled maturities of the Term Loan Facility as of October 31, 2014 are as follows:
(in thousands)
 
 
Less than 1 year
 
$
5,150

1 - 2 years
 
5,150

2 - 3 years
 
5,150

3 - 4 years
 
5,150

4 - 5 years
 
5,150

Thereafter
 
486,675

 
 
$
512,425

The current portion of the Term Loan Facility is included Other current liabilities on the Condensed Consolidated Balance Sheet.
Guarantees; Security
All domestic obligations under the Facilities are unconditionally guaranteed by Lands’ End and, subject to certain exceptions, each of its existing and future direct and indirect domestic subsidiaries. In addition, the obligations of the UK Borrower under the ABL Facility are guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The ABL Facility is secured by a second priority security interest in the same collateral.
Interest; Fees
The interest rate on the Term Loan Facility was 4.25% at October 31, 2014. The interest rates per annum applicable to the loans under the Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted London inter-bank offered rate (“LIBOR”) plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL Facility is subject to adjustment based on the average excess availability under the ABL Facility for the preceding fiscal quarter, and will range from 1.50% to 2.00% in the case of LIBOR borrowings and will range from 0.50% to 1.00% in the case of base rate borrowings.
Customary agency fees are payable in respect of both Facilities. The ABL Facility fees also include (i) commitment fees, based on a percentage ranging from approximately 0.25% to 0.375% of the daily unused portions of the ABL Facility, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
The Facilities contain various representations and warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of Lands’ End and its subsidiaries to incur indebtedness

    
10



(including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business. In addition, if excess availability under the ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Facilities as of October 31, 2014.
The Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance, and providing additional guarantees and collateral in certain circumstances.
Events of Default
The Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, and material judgments and change of control.
NOTE 7. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The Company determines fair value of financial assets and liabilities based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:
Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.
Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.
Level 3 inputs—unobservable inputs for the asset or liability.
Restricted cash is reflected on the Condensed Consolidated and Combined Balance Sheets at fair value. The fair value of Restricted cash as of October 31, 2014, November 1, 2013 and January 31, 2014 was $3.3 million, based on Level 1 inputs. Restricted cash amounts are valued based upon statements received from financial institutions.
Cash, Accounts receivable, Accounts payable and Other current liabilities are reflected on the Condensed Consolidated and Combined Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments.
Carrying values and fair values of other financial instruments in the Condensed Consolidated and Combined Balance Sheets are as follows:
 
 
October 31, 2014
(in thousands)
 
Carrying
Amount
 
Fair
Value
Long-term debt, including short-term portion
 
$
512,425

 
$
500,895

Long-term debt was valued utilizing level 2 valuation techniques based on the closing inactive market bid price on October 31, 2014. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of October 31, 2014, November 1, 2013 and January 31, 2014.


    
11



NOTE 8. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for under the purchase accounting method. The net carrying amounts of goodwill, trade names and customer lists are included within the Company's Direct segment. Total amortization expense relating to intangible assets was $0.7 million and $2.0 million for the 13 and 39 weeks ended October 31, 2014 and November 1, 2013, respectively. There were no impairments of goodwill or intangible assets during these periods.
The following summarizes goodwill and intangible assets:
 
 
 
 
 
October 31, 2014
 
November 1, 2013
 
January 31, 2014
(in thousands)
 
Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Amortizing intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists
 
10
 
$
26,300

 
$
25,231

 
$
26,300

 
$
22,601

 
$
26,300

 
$
23,258

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
 
 
528,300

 

 
528,300

 

 
528,300

 

Gross intangible assets
 
 
 
$
554,600

 
$
25,231

 
$
554,600

 
$
22,601

 
$
554,600

 
$
23,258

Total intangible assets, net
 
 
 
$
529,369

 
 
 
$
531,999

 
 
 
$
531,342

 
 
Goodwill
 
 
 
$
110,000

 
 
 
$
110,000

 
 
 
$
110,000

 
 
Estimated Future Amortization Expense
 
2014 (13 weeks)
$
657

2015
412

NOTE 9. RELATED PARTY AGREEMENTS AND TRANSACTIONS
According to statements on form Schedule 13D filed with the SEC by ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert (collectively, “ESL”), ESL beneficially owned significant portions of both the Company's and Sears Holdings Corporation's outstanding shares of common stock. Therefore Sears Holdings Corporation, the Company's former parent company, is considered a related party both prior to and subsequent to the Separation.
Prior to the Separation, Sears Holdings Corporation (including certain of its non-Lands’ End subsidiaries) and the Company entered into various agreements to, among other things: (i) support the Lands’ End Shops at Sears; (ii) provide various general corporate services; (iii) the Company's participation in the Shop Your Way program; and (iv) allow for the use of intellectual property or services. The amounts charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. Management believes that such costs are reasonable; however, the Condensed Consolidated and Combined Financial Statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future, or what they would have been if it had been a stand-alone company during all periods presented. Unless indicated otherwise, the fees and expense charged are included in Selling and administrative expense in the Condensed Consolidated and Combined Statements of Comprehensive Operations.
In connection with the Separation, we entered into various agreements with Sears Holdings which, among other things, (i) govern specified aspects of our relationship following the Separation, especially with regards to the Lands’ End Shops at Sears, and (ii) establish terms pursuant to which subsidiaries of Sears Holdings Corporation are providing services to us.

    
12



References to and descriptions of the agreements below represent the agreements entered into as part of the Separation.  For descriptions of the agreements and the related allocation methodologies prior to the Separation, refer to Note 11 - Related Party in our 2013 Annual Report on Form 10-K.
The components of the transactions between the Company and Sears Holdings, which exclude passthrough payments to third parties, are as follows:
Lands’ End Shops at Sears
Related party costs charged by Sears Holdings to the Company related to Lands’ End Shops at Sears are as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 31, 2014
 
November 1, 2013
 
October 31, 2014
 
November 1, 2013
Rent, CAM and occupancy costs
 
$
6,485

 
$
7,007

 
$
20,078

 
$
21,017

Retail services, store labor
 
7,899

 
8,515

 
23,208

 
25,225

Supply chain costs
 
246

 
502

 
751

 
1,963

Financial services and payment processing
 
713

 
825

 
2,144

 
2,220

Total expenses
 
$
15,343

 
$
16,849

 
$
46,181

 
$
50,425

Number of Lands’ End Shops at Sears at period end (1)
 
242

 
275

 
242

 
275

(1)    During the 13 and 39 weeks ended October 31, 2014, five and 32 Lands’ End Shops at Sears were closed, respectively.
Rent, CAM and Occupancy Costs
The Company rents space in store locations owned or leased by Sears, Roebuck and Co. (“Sears Roebuck”), a subsidiary of Sears Holdings Corporation. The agreements include a cost per square foot for rent, common area maintenance (“CAM”) and occupancy costs. The lease terms for the individual store locations generally terminate effective January 31, 2018, 2019, or 2020.
Retail Services, Store Labor
The Company contracts with Sears Roebuck to provide hourly labor and required systems and tools to service customers in the Lands’ End Shops at Sears. This includes dedicated staff to directly engage with customers and allocated overhead. The dedicated staff undergoes specific Lands’ End brand training. Required tools include point-of-sale, price lookup and labor scheduling systems.
Supply Chain Costs
The Company contracts with Sears Roebuck to provide logistics, handling, transportation and other services, primarily based upon inventory units processed, to assist in the flow of merchandise from vendors to the Lands’ End Shops at Sears locations.
Financial Services and Payment Processing
The Company contracts with Sears Holdings Management Corporation (“SHMC”), a subsidiary of Sears Holdings Corporation, to provide retail financing and payment solutions, primarily based upon customer credit card activity, including third-party payment acceptance, credit cards and gift cards.

    
13



General Corporate Services
Related party costs charged by Sears Holdings to the Company for general corporate services are as follows:
 
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 31, 2014
 
November 1, 2013
 
October 31, 2014
 
November 1, 2013
Sourcing
 
$
3,203

 
$
3,672

 
$
6,939

 
$
7,725

Shop Your Way
 
992

 
2,138

 
3,040

 
5,127

Shared services
 
150

 
119

 
409

 
294

Co-location and services
 
2

 
6

 
15

 
19

Total expenses
 
$
4,347

 
$
5,935

 
$
10,403

 
$
13,165

Sourcing
The Company contracts with Sears Holdings Global Sourcing, Ltd., a subsidiary of Sears Holdings Corporation, to provide agreed upon buying agency services in foreign territories from where the Company purchases merchandise. These services, primarily based upon inventory levels, include quality-control functions, regulatory compliance, product claims management and new vendor selection and setup assistance. These amounts are included in Cost of sales in the Condensed Consolidated and Combined Statements of Comprehensive Operations.
Shop Your Way
The Company contracts with SHMC to participate in Sears Holdings’ Shop Your Way (“SYW”) member loyalty program. Customers earn points issued by SHMC on purchases which may be redeemed to pay for future purchases. The Company pays SHMC an agreed-upon fee for points issued in connection with purchases from the Company. Depending on the ratio of points redeemed in Lands’ End formats to points issued in Lands’ End formats in the previous 12 months, the Company generally either pays additional fees or is reimbursed fees by SHMC. For the 13 and 39 weeks ended October 31, 2014, the Company recorded an expense for additional fees payable to SHMC based on the formula above. All SYW member loyalty program expenses are recorded in Cost of sales in the Condensed Consolidated and Combined Statements of Comprehensive Operations. In 2013, under the prior arrangements that governed the Company’s participation in the SYW program, as customers redeemed points on purchases, Sears Holdings reimbursed the Company through a redemption credit. The redemption credit was $2.7 million and $6.7 million for the 13 and 39 weeks ended November 1, 2013, respectively and was included in Merchandise sales and services, net in the Condensed Consolidated and Combined Statements of Comprehensive Operations.
Shared Services
The Company contracts with SHMC to provide certain shared corporate services. These shared services include financing services, treasury services (including tax), shipping costs and compliance.
Co-Location and Services
The Company had contracted with SHMC to host and support certain redundant information technology hardware, software and operations at the Sears Data Center in Troy, Michigan for disaster mitigation and recovery efforts. In July 2014 the Company exited the Sears Data Center and completed the installation of the disaster mitigation and recovery systems at its Dodgeville location. The related contract with SHMC terminated on August 25, 2014.

    
14



Use of Intellectual Property or Services
Related party revenue and costs charged by the Company to and from Sears Holdings for the use of intellectual property or services is as follows:
(in thousands)
 
13 Weeks Ended
 
39 Weeks Ended
 
 
October 31, 2014
 
November 1, 2013
 
October 31, 2014
 
November 1, 2013
Royalty income
 
$
20

 
$
33

 
$
67

 
$
77

Call center services
 
605

 
313

 
1,462

 
890

Gift card revenue
 
(72
)
 
237

 
254

 
772

Credit card revenue
 
353

 
297

 
1,025

 
863

Other revenue
 
(255
)
 
70

 
368

 
800

Total income
 
$
651

 
$
950

 
$
3,176


$
3,402

Royalty Income
The Company entered into a licensing agreement with SHMC whereby royalties are paid in consideration for sharing or use of intellectual property. Royalties received under this agreement are included in Merchandise sales and services, net in the Condensed Consolidated and Combined Statements of Comprehensive Operations.
Call Center Services
The Company has entered into a contract with SHMC to provide call center services in support of Sears Holdings’ SYW member loyalty program. This income is net of agreed upon costs directly attributable for the Company providing these services. The income is included in Merchandise sales and services, net and costs are included in Selling and administrative expenses in the Condensed Consolidated and Combined Statements of Comprehensive Operations.
Gift Card Revenue
The Company has entered into a contract with SHC Promotions LLC (“SHCP”), a subsidiary of Sears Holdings Corporation, to provide gift certificates, gift cards and store credits (“Credits”) for use by the Company. The Company offers Credits for sale on behalf of SHCP and redeems such items on the Company’s internet websites, retail stores and other retail outlets for merchandise. The Company receives a commission fee on the face value for each Credit it sells, and a payment from Sears Holdings for certain Lands' End-branded Credits that are redeemed by Sears Holdings for non-Lands' End merchandise. The Company pays a transaction/redemption fee to SHCP for each Credit the Company redeems. The income net of associated expenses is included in Merchandise sales and services, net in the Condensed Consolidated and Combined Statements of Comprehensive Operations.
Credit Card Revenue
The Company has entered into a contract with SHMC to provide credit cards for customer sales transactions. The Company earns revenue based on the dollar volume of merchandise sales and receives a fee based on the generation of new credit card accounts. This income is included in Merchandise sales and services, net in the Condensed Consolidated and Combined Statements of Comprehensive Operations.
Other Revenue
The Company has entered into a contract with Sears Roebuck to sell all prior season inventory that has been marked out of stock. Sears Roebuck pays the Company a contracted rate for all out of stock inventory and liquidates the inventory on the Company's behalf. This income is included in Merchandise sales and services, net in the Condensed Consolidated and Combined Statements of Comprehensive Operations.
Additional Balance Sheet Information
At October 31, 2014, the Company included $5.8 million and $11.0 million in Accounts receivable, net and Accounts payable, respectively, in the Condensed Consolidated and Combined Balance Sheets to reflect amounts

    
15



due from and owed to Sears Holdings. At October 31, 2014, a $14.1 million receivable was recorded by the Company in Other assets in the Condensed Consolidated and Combined Balance Sheets to reflect the indemnification by Sears Holdings Corporation of the pre-Separation uncertain tax positions (including penalties and interest) for which Sears Holdings Corporation is responsible. 
NOTE 10. SEGMENT REPORTING
The Company is a leading multi-channel retailer of casual clothing, accessories and footwear, as well as home products, and has two reportable segments: Direct and Retail. Both segments sell similar products—apparel, which includes accessories and footwear, and products for the home. Apparel and home revenues constituted over 99% of total revenues during each of the 13 and 39 weeks ended October 31, 2014 and November 1, 2013. The Company identifies reportable segments according to how business activities are managed and evaluated. Each of the Company’s operating segments are reportable segments and are strategic business units that offer similar products and services but are sold either directly from our warehouses (Direct) or through our retail stores (Retail). Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) is the primary measure used to make decisions on allocating resources and assessing performance of each operating segment. Adjusted EBITDA is computed as Income before taxes appearing on the Condensed Consolidated and Combined Statements of Comprehensive Operations net of interest expense, depreciation and amortization and other significant items which, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, which may affect comparability of results. Reportable segment assets are those directly used in or clearly allocable to an operating segment’s operations. Depreciation, amortization, and property and equipment expenditures are recognized in each respective segment. There were no material transactions between reporting segments for the 13 and 39 weeks ended October 31, 2014 and November 1, 2013.
The Direct segment sells products through the Company’s e-commerce websites and direct mail catalogs. Operating costs consist primarily of direct marketing costs (catalog and e-commerce advertising costs); order processing and shipping costs; direct labor and benefits costs and facility costs. Assets primarily include goodwill and trade name intangible assets, inventory, accounts receivable, prepaid expenses (deferred catalog costs), technology infrastructure, and property and equipment.
The Retail segment sells products and services through dedicated Lands’ End Shops at Sears across the United States, the Company’s stand-alone Lands’ End Inlet stores and international shop-in-shops. Operating costs consist primarily of labor and benefits costs; rent, CAM and occupancy costs; distribution costs; and in-store marketing costs. Assets primarily include inventory in the retail stores, fixtures and leasehold improvements.
Corporate overhead and other expenses include unallocated shared-service costs, which primarily consist of employee services and financial services, legal and corporate expenses. These expenses include labor and benefits costs, corporate headquarters occupancy costs and other administrative expenses. Assets include corporate headquarters and facilities, corporate cash and deferred income taxes.

    
16



Financial information by segment is presented in the following tables for the 13 and 39 weeks ended October 31, 2014 and November 1, 2013, respectively.
SUMMARY OF SEGMENT DATA
(in thousands)
 
Direct
 
Retail
 
Corporate/ Other
 
Total
13 Weeks Ended October 31, 2014
 
 
 
 
 
 
 
 
Merchandise sales and services, net
 
$
320,286

 
$
52,776

 
$
20

 
$
373,082

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization)
 
160,807

 
28,980

 

 
189,787

Selling and administrative
 
111,712

 
22,980

 
8,678

 
143,370

Depreciation and amortization
 
3,822

 
643

 
337

 
4,802

Other operating expense, net
 

 

 
25

 
25

Total costs and expenses
 
276,341

 
52,603

 
9,040

 
337,984

Operating income (loss)
 
43,945

 
173

 
(9,020
)
 
35,098

Interest expense
 

 

 
6,194

 
6,194

Other income, net
 

 

 
507

 
507

Income (loss) before income taxes
 
43,945

 
173

 
(14,707
)
 
29,411

Interest expense
 

 

 
6,194

 
6,194

Other income, net
 

 

 
507

 
507

Depreciation and amortization
 
3,822

 
643

 
337

 
4,802

Loss on property and equipment
 

 

 
25

 
25

Adjusted EBITDA
 
$
47,767

 
$
816

 
$
(8,658
)
 
$
39,925

 
 
 
 
 
 
 
 
 
Total assets
 
$
1,127,221

 
$
80,406

 
$
146,386

 
$
1,354,013

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
4,962

 
$
310

 
$
153

 
$
5,425


    
17



(in thousands)
 
Direct
 
Retail
 
Corporate/ Other
 
Total
13 Weeks Ended November 1, 2013
 
 
 
 
 
 
 
 
Merchandise sales and services, net
 
$
324,179

 
$
59,639

 
$
33

 
$
383,851

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization)
 
171,226

 
38,175

 

 
209,401

Selling and administrative
 
114,111

 
25,636

 
6,170

 
145,917

Depreciation and amortization
 
4,035

 
882

 
338

 
5,255

Other operating expense, net
 

 

 
7

 
7

Total costs and expenses
 
289,372

 
64,693

 
6,515

 
360,580

Operating income (loss)
 
34,807

 
(5,054
)
 
(6,482
)
 
23,271

Other income, net
 

 

 
10

 
10

Income (loss) before income taxes
 
34,807

 
(5,054
)
 
(6,472
)
 
23,281

Other income, net
 

 

 
10

 
10

Depreciation and amortization
 
4,035

 
882

 
338

 
5,255

Loss on property and equipment
 

 

 
7

 
7

Adjusted EBITDA
 
$
38,842

 
$
(4,172
)
 
$
(6,137
)
 
$
28,533

 
 
 
 
 
 
 
 
 
Total assets
 
$
1,176,621

 
$
90,149

 
$
34,846

 
$
1,301,616

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
1,618

 
$

 
$
249

 
$
1,867


    
18



(in thousands)
 
Direct
 
Retail
 
Corporate/ Other
 
Total
39 Weeks Ended October 31, 2014
 
 
 
 
 
 
 
 
Merchandise sales and services, net
 
$
888,889

 
$
161,831

 
$
67

 
$
1,050,787

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization)
 
448,519

 
88,545

 

 
537,064

Selling and administrative
 
324,820

 
69,184

 
25,855

 
419,859

Depreciation and amortization
 
11,682

 
1,938

 
1,009

 
14,629

Other operating expense, net
 

 

 
45

 
45

Total costs and expenses
 
785,021

 
159,667

 
26,909

 
971,597

Operating income (loss)
 
103,868

 
2,164

 
(26,842
)
 
79,190

Interest expense
 

 

 
14,324

 
14,324

Other income, net
 

 

 
847

 
847

Income (loss) before income taxes
 
103,868

 
2,164

 
(40,319
)
 
65,713

Interest expense
 

 

 
14,324

 
14,324

Other income, net
 

 

 
847

 
847

Depreciation and amortization
 
11,682

 
1,938

 
1,009

 
14,629

Loss on disposal of property and equipment
 

 

 
45

 
45

Adjusted EBITDA
 
$
115,550

 
$
4,102

 
$
(25,788
)
 
$
93,864

 
 
 
 
 
 
 
 
 
Total assets
 
$
1,127,221

 
$
80,406

 
$
146,386

 
$
1,354,013

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
10,393

 
$
452

 
$
296

 
$
11,141


    
19



(in thousands)
 
Direct
 
Retail
 
Corporate/ Other
 
Total
39 Weeks Ended November 1, 2013
 
 
 
 
 
 
 
 
Merchandise sales and services, net
 
$
860,774

 
$
171,596

 
$
77

 
$
1,032,447

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization)
 
455,794

 
97,941

 

 
553,735

Selling and administrative
 
316,882

 
75,476

 
16,424

 
408,782

Depreciation and amortization
 
12,590

 
2,655

 
1,008

 
16,253

Other operating expense, net
 

 

 
59

 
59

Total costs and expenses
 
785,266

 
176,072

 
17,491

 
978,829

Operating income (loss)
 
75,508

 
(4,476
)
 
(17,414
)
 
53,618

Other income, net
 

 

 
33

 
33

Income (loss) before income taxes
 
75,508

 
(4,476
)
 
(17,381
)
 
53,651

Other income, net
 

 

 
33

 
33

Depreciation and amortization
 
12,590

 
2,655

 
1,008

 
16,253

Loss on sale of property and equipment
 

 

 
59

 
59

Adjusted EBITDA
 
$
88,098

 
$
(1,821
)
 
$
(16,347
)
 
$
69,930

 
 
 
 
 
 
 
 
 
Total assets
 
$
1,176,621

 
$
90,149

 
$
34,846

 
$
1,301,616

 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
3,355

 
$
1

 
$
273

 
$
3,629

NOTE 11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is party to various legal proceedings arising in the ordinary course of business. These actions include commercial, intellectual property, employment, regulatory and consumer fraud claims. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. The Company does not believe that the outcome of any current legal proceeding would have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
Beginning in 2005, the Company initiated the first of several claims in Iowa County Circuit Court against the City of Dodgeville to recover overpaid taxes resulting from the city’s excessive assessment of the Company’s headquarters campus. As of December 9, 2014, the courts reviewing these claims have ordered the city to return, and the city has refunded, over $3.9 million in excessive taxes and interest to the Company. The Company received approximately $1.6 million for the case involving the 2005 and 2006 tax years that was recognized in 2009. The Company also received a partial recovery of approximately $1.6 million for the consolidated cases, involving the 2007, 2009 and 2010 tax years, recognized in 2013 within Selling and administrative costs in the Condensed Consolidated and Combined Statement of Operations and for which the Company appealed seeking the remainder of our claim of $1.2 million and additional interest. Additionally, in September 2013, the Wisconsin Court of Appeals awarded the Company $0.7 million in tax reimbursement and an as-yet uncalculated amount of interest on the Company’s claim relating to the 2008 tax year, which the City of Dodgeville paid in June 2014. Of the reimbursement received, $0.6 million was recognized as a decrease to Selling and administrative expense and $0.1 million of interest was recognized as an increase to Other income in the Condensed Consolidated and Combined Statements Comprehensive Operations for the 39 weeks ended October 31, 2014. In May 2014, the Court of Appeals granted, in part, the Company's appeal of the 2007, 2009 and 2010 tax assessment cases, concluding that the Company was entitled to a further reduction in its 2007 and 2009 assessments. The Company estimates that this ruling will entitle the Company to an additional refund of approximately $0.6 million, plus an as-yet uncalculated amount of interest. The Company filed an appeal with the Wisconsin Supreme Court seeking a reduction in its 2010

    
20



tax assessment that is the same as the reduction in the 2007 and 2009 assessments awarded by the Court of Appeals in its May 2014 decision. The Wisconsin Supreme Court denied the Company's appeal. Excluding the claim relating to the 2005 and 2006 tax years for which all appeals have been exhausted, the Company believes that its outstanding claims pending in circuit court covering the still-disputed tax years from 2007 through 2013 may yield a potential aggregate recovery from the City of Dodgeville of $3.2 million or more. In addition, the Company has submitted an administrative claim for the 2014 tax year, which has not yet been filed in the circuit court, which the Company believes may yield a potential aggregate recovery from the City of Dodgeville of $0.7 million or more. None of these amounts for outstanding claims have been recorded in the Condensed Consolidated and Combined Financial Statements.
NOTE 12. SUPPLEMENTAL FINANCIAL INFORMATION
Non-cash Transactions
Certain non-cash transactions resulted at the time of the Separation.  Such transactions were accounted for as an adjustment to Net parent company investment and did not result in cash flows as follows:  (i) a $1.5 million liability related to postretirement benefits was transferred to Sears Holdings Corporation as it assumed administration and funding of the plan after the Separation, and (ii) as described in Note 2 - Income Taxes, upon Separation, certain tax attributes previously included within Net parent company investment were reclassified. 
NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for Lands' End in the first quarter of its fiscal year ending February 2, 2018. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's Consolidated and Combined Financial Statements.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which modifies the requirements for disposals to qualify as discontinued operations and expands related disclosure requirements. This guidance will be effective for Lands' End in its fiscal year ending January 29, 2016. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated and Combined Financial Statements.



    
21




ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the Condensed Consolidated and Combined Financial Statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. See “Cautionary Statements Concerning Forward-Looking Statements” below and “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2014 and for a discussion of the uncertainties, risks and assumptions associated with these statements.
Executive Overview
Description of the Company
Lands’ End, Inc. (“Lands’ End,” “we,” “us,” “our” or the “Company”) is a leading multi-channel retailer of casual clothing, accessories and footwear, as well as home products. We offer products through catalogs, online at www.landsend.com and affiliated specialty and international websites, and through retail locations, primarily at Lands’ End Shops at Sears, stand-alone Lands’ End Inlet stores and international shop-in-shops that sell merchandise in various retail department stores. We are a classic American lifestyle brand with a passion for quality, legendary service and real value, and we seek to deliver timeless style for men, women, kids and the home. Lands’ End was founded in 1963 in Chicago by Gary Comer and his partners to sell sailboat hardware and equipment by catalog. While our product focus has shifted significantly over the years, we have continued to adhere to our founder’s motto as one of our guiding principles: “Take care of the customer, take care of the employee and the rest will take care of itself.”
On March 14, 2014, the board of directors of Sears Holdings Corporation (inclusive of all of its subsidiaries, “Sears Holdings”) approved the distribution of the issued and outstanding shares of Lands’ End common stock on the basis of 0.300795 shares of Lands’ End common stock for each share of Sears Holdings Corporation common stock held on March 24, 2014, the record date. Sears Holdings Corporation distributed 100 percent of the outstanding common stock of Lands’ End to its shareholders on April 4, 2014 (the “Separation”).
Basis of Presentation
The financial statements presented herein represent (i) periods prior to April 4, 2014 when we were a wholly owned subsidiary of Sears Holdings Corporation (referred to as “Condensed Combined Financial Statements”) and (ii) the period as of and subsequent to April 4, 2014 when we became a separate publicly-traded company (referred to as “Condensed Consolidated Financial Statements”).
Our historical Condensed Combined Financial Statements have been prepared on a stand-alone basis and have been derived from the consolidated financial statements of Sears Holdings and accounting records of Sears Holdings. The Condensed Combined Financial Statements include Lands’ End, Inc. and subsidiaries and certain other items related to the Lands’ End business which were held by Sears Holdings prior to the Separation, primarily the Lands’ End Shops at Sears. These items were contributed by Sears Holdings to Lands’ End, Inc. prior to the Separation. These historical Condensed Combined Financial Statements reflect our financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).
The Condensed Combined Balance Sheets prior to April 4, 2014, include the allocation of certain assets and liabilities that have historically been held by Sears Holdings but which are specifically identifiable or allocable to Lands’ End. All intracompany transactions and accounts have been eliminated. Prior to the Separation, all intercompany transactions between Sears Holdings and Lands’ End were considered to be effectively settled in the Condensed Combined Financial Statements at the time the transactions were recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Condensed Combined Statements of Cash Flows as a financing activity and in the Condensed Combined Balance Sheets as Net parent company investment.
Through April 4, 2014, Sears Holdings Corporation’s investment in Lands’ End is shown as Net parent company investment in the Condensed Combined Balance Sheet. Upon completion of the Separation, the Company had 31,956,521

    
22



shares of common stock outstanding at a par value of $0.01 per share. After Separation adjustments were recorded, the remaining Net parent company investment, which includes all earnings prior to the Separation, was transferred to Additional paid-in capital.
Impacts from the Separation from Sears Holdings
Following the Separation, we began operating as a separate, publicly traded company, independent from Sears Holdings, which has a range of impacts on our operations:
General administrative and separation costs. Historically, we have used the corporate functions of Sears Holdings for a variety of shared services. We will continue to pay Sears Holdings a fee for a variety of shared services. We believe that the assumptions and methodologies underlying these expenses from Sears Holdings are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been or will be incurred by us as we operate as a publicly traded company independent from Sears Holdings. We entered into agreements with Sears Holdings or its subsidiaries for the continuation of certain of these services on a transitional basis. We believe that the arrangements before the Separation, as reflected in the historical Condensed Combined Financial Statements contained herein, are not materially different from the arrangements that were entered into as part of the Separation.
Stand-alone costs. We are also incurring increased costs as a result of becoming a publicly traded company independent from Sears Holdings. As a stand-alone company, we expect to incur incremental annual operating costs estimated to be approximately $8.0 million to $10.0 million to support our businesses, including management personnel, legal, finance, and human resources as well as certain costs associated with being a public company. We believe cash flows from operations will be sufficient to fund these additional operating charges, the majority of which will be recognized as selling and administrative expenses.
In addition, we estimate one-time information technology costs related to the Separation to be approximately $2.0 million to $3.0 million. These one-time costs include costs to support our business and certain costs required to operate as a stand-alone company and do not include future investments in technology. A portion of these expenditures may be capitalized and amortized over their useful lives and others will be expensed as incurred, depending on their nature.
     Sears Holdings Agreements. Following the Separation, Lands’ End and Sears Holdings operate separately, each as an independent company. We entered into certain agreements with Sears Holdings Corporation or its subsidiaries that effected the Separation, provided a framework for our relationship with Sears Holdings after the Separation and provided for the allocation between us and Sears Holdings of Sears Holdings’ assets, employees, liabilities and obligations (including its investments, property and tax-related assets and liabilities) attributable to periods prior to, at and after the Separation.
The prior arrangements, as reflected in the historical Condensed Combined Financial Statements contained herein, are not materially different from the arrangements that were entered into with Sears Holdings in connection with the Separation, with the exception of the Shop Your Way member loyalty program. Net annual costs associated with the Shop Your Way member loyalty program are estimated to increase by approximately $6.0 to $8.0 million in 2014. The additional investment in the Shop Your Way member loyalty program is anticipated to be offset by increased profits from incremental revenue and reductions in promotions and advertising expense, as we expect to reduce our dependency on other marketing efforts as member engagement through the program continues to grow.
We do not believe that it will be necessary to employ a significant number of new employees to perform additional stand-alone or transition services. With respect to our retail operations, prior to the Separation, Sears Holdings provided retail staff for the Lands’ End Shops at Sears. Pursuant to a retail operations agreement, we contracted with Sears Holdings to continue to provide such staff following the Separation. We continue to rely on our existing field management working in conjunction with retail staff contracted from Sears Holdings to manage our Lands’ End Shops at Sears.
The success of our Retail segment depends on the performance of the Lands’ End Shops at Sears. Under the terms of the master lease agreement and master sublease agreement pursuant to which Sears Roebuck leases or subleases to us the premises for the Lands’ End Shops at Sears, Sears Roebuck has certain rights to (1) relocate our leased premises within the building in which such premises are located, subject to certain limitations, including our right to terminate the applicable lease if we are not satisfied with the new premises, and (2) terminate without liability the lease with respect to a particular Lands’ End Shop if the overall Sears store in which such Lands’ End Shop is located is closed or sold. Sears Holdings recently announced that it intends to continue to right-size, redeploy and highlight the value of its assets, including its real estate portfolio, in its transition from an asset-intensive, store-focused retailer. Sears Holdings also recently announced that it has entered into lease agreements with a third party fashion retailer for seven stand-alone stores. If Sears Roebuck continues to dispose of retail stores that contain Lands’ End Shops, and/or offer us relocation

    
23



alternatives for Lands’ End Shops that are less attractive than the current premises, our business and results of operations could be adversely affected.
Debt Service Costs. We are also incurring increased costs related to an asset-based senior secured credit facility which provides for maximum borrowings of $175.0 million (the “ABL Facility”) and on a senior secured term loan facility with an initial balance of $515.0 million (the “Term Loan Facility” and, together with the ABL Facility, the “Facilities”). On October 31, 2014 the Term Loan Facility had a balance of $512.4 million. We anticipate interest costs related to the Facilities to be approximately $20.5 million for the ten months the Facilities are in place in 2014. The interest costs include approximately $1.6 million of amortization of debt issuance costs. Annual payments under the Facilities are expected to be the cash interest charges plus the Term Loan Facility seven year amortization of principal at a rate equal to 1% per annum. See “Liquidity and Capital Resources - Description of Material Indebtedness” below.
The aggregate amount of our stand-alone operating costs, the costs associated with our agreements with Sears Holdings, and the debt service costs that we expect to incur in connection with the Separation are not expected to significantly impact our liquidity. We expect that our existing cash balance, cash flows from operations and the available borrowing capacity of $175.0 million under the ABL Facility will provide adequate resources to meet our capital requirements and operational needs for the remainder of the fiscal year. Beyond this fiscal year, we believe that our existing cash balance, cash flows from operations, along with the ABL Facility will be adequate to meet our capital requirements and operational needs.
Due to these and other changes related to the Separation, the historical financial information included in this Quarterly Report on Form 10-Q may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods prior to the Separation that are presented.
Seasonality
We experience seasonal fluctuations in our net sales and operating results and historically have realized a significant portion of our net sales and earnings for the year during our fourth fiscal quarter. We generated approximately 34% of our net sales in the fourth fiscal quarter of the past three years. Thus, lower than expected fourth quarter net sales could have an adverse impact on our annual operating results.
Working capital requirements typically increase during the second and third quarters of the fiscal year as inventory builds to support peak shipping/selling periods and, accordingly, typically decrease during the fourth quarter of the fiscal year as inventory is shipped/sold. Cash provided by operating activities is typically higher in the fourth quarter of the fiscal year due to reduced working capital requirements during that period.

    
24



Results of Operations
The following tables set forth our consolidated results of operations for the 13 and 39 weeks ended October 31, 2014 and November 1, 2013:
 
13 Weeks Ended
 
October 31, 2014
 
November 1, 2013
(in thousands)
$’s
 
% of
Net Sales
 
$’s
 
% of
Net Sales
Merchandise sales and services, net
$
373,082

 
100.0
%
 
$
383,851

 
100.0
%
Cost of sales (excluding depreciation and amortization)
189,787

 
50.9
%
 
209,401

 
54.6
%
Gross margin
183,295

 
49.1
%
 
174,450

 
45.4
%
Selling and administrative
143,370

 
38.4
%
 
145,917

 
38.0
%
Depreciation and amortization
4,802

 
1.3
%
 
5,255

 
1.4
%
Other operating expense, net
25

 
%
 
7

 
%
Operating income
35,098

 
9.4
%
 
23,271

 
6.1
%
Interest expense
6,194

 
1.7
%
 

 
%
Other income, net
507

 
0.1
%
 
10

 
%
Income before income taxes
29,411

 
7.9
%
 
23,281

 
6.1
%
Income tax expense
11,420

 
3.1
%
 
9,002

 
2.3
%
Net income
$
17,991

 
4.8
%
 
$
14,279

 
3.7
%
 
39 Weeks Ended
 
October 31, 2014
 
November 1, 2013
(in thousands)
$’s
 
% of
Net Sales
 
$’s
 
% of
Net Sales
Merchandise sales and services, net
$
1,050,787

 
100.0
%
 
$
1,032,447

 
100.0
%
Cost of sales (excluding depreciation and amortization)
537,064

 
51.1
%
 
553,735

 
53.6
%
Gross margin
513,723

 
48.9
%
 
478,712

 
46.4
%
Selling and administrative
419,859

 
40.0
%
 
408,782

 
39.6
%
Depreciation and amortization
14,629

 
1.4
%
 
16,253

 
1.6
%
Other operating expense, net
45

 
%
 
59

 
%
Operating income
79,190

 
7.5
%
 
53,618

 
5.2
%
Interest expense
14,324

 
1.4
%
 

 
%
Other income, net
847

 
0.1
%
 
33

 
%
Income before income taxes
65,713

 
6.3
%
 
53,651

 
5.2
%
Income tax expense
25,009

 
2.4
%
 
20,747

 
2.0
%
Net income
$
40,704

 
3.9
%
 
$
32,904

 
3.2
%
Depreciation and amortization is not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.
Net Income and Adjusted EBITDA
We recorded Net income of $18.0 million and $14.3 million for the 13 weeks ended October 31, 2014 and November 1, 2013, respectively. We recorded Net income of $40.7 million and $32.9 million for the 39 weeks ended October 31, 2014 and November 1, 2013, respectively. In addition to our Net income determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income appearing on the Condensed Consolidated and Combined Statements of Comprehensive

    
25



Operations net of Income tax expense, Interest expense, Depreciation and amortization, and certain significant items set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses, as well as executive compensation metrics, for comparable periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.
While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of ongoing operating performance, and useful to investors, because:
EBITDA excludes the effects of financings and investing activities by eliminating the effects of interest and depreciation costs.
Other significant items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, which may affect comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations. For the 13 and 39 weeks ended October 31, 2014 and November 1, 2013, we excluded the loss on disposal of property and equipment as management considers the gains or losses on disposal of assets to result from investing decisions rather than ongoing operations.
 
 
13 Weeks Ended
 
October 31, 2014
 
November 1, 2013
(in thousands)
$’s
 
% of
Net Sales
 
$’s
 
% of
Net Sales
Net income
$
17,991

 
4.8
 %
 
$
14,279

 
3.7
 %
Income tax expense
11,420

 
3.1
 %
 
9,002

 
2.3
 %
Other income, net
(507
)
 
(0.1
)%
 
(10
)
 
 %
Interest expense
6,194

 
1.7
 %
 

 
 %
Operating income
35,098

 
9.4
 %
 
23,271

 
6.1
 %
Depreciation and amortization
4,802

 
1.3
 %
 
5,255

 
1.4
 %
Loss on disposal of property and equipment
25

 
 %
 
7

 
 %
Adjusted EBITDA
$
39,925

 
10.7
 %
 
$
28,533

 
7.4
 %
 
39 Weeks Ended
 
October 31, 2014
 
November 1, 2013
(in thousands)
$’s
 
% of
Net Sales
 
$’s
 
% of
Net Sales
Net income
$
40,704

 
3.9
 %
 
$
32,904

 
3.2
 %
Income tax expense
25,009

 
2.4
 %
 
20,747

 
2.0
 %
Other income, net
(847
)
 
(0.1
)%
 
(33
)
 
 %
Interest expense
14,324

 
1.4
 %
 

 
 %
Operating income
79,190

 
7.5
 %
 
53,618

 
5.2
 %
Depreciation and amortization
14,629

 
1.4
 %
 
16,253

 
1.6
 %
Loss on disposal of property and equipment
45

 
 %
 
59

 
 %
Adjusted EBITDA
$
93,864

 
8.9
 %
 
$
69,930

 
6.8
 %
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments, Direct (sold through e-commerce websites and direct mail catalogs) and Retail (sold through stores). A key measure in the evaluation of our business is revenue performance by segment. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.
To evaluate revenue performance for the Direct segment we use Merchandise sales and services, net. For our Retail segment, we use same store sales as a key measure in evaluating performance. Same store sales amounts within the following discussion include sales for all stores operating for a period of at least 12 full months where selling square footage has not changed by 15% or more within the past year. A store is included in same store sales calculations on the

    
26



first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15% or more as a result of a remodel, expansion or reduction are excluded from same store calculations until the first day they have comparable prior year sales. Online sales and sales generated through our in-store computer kiosks are considered revenue in our Direct segment and are excluded from same store sales.
13-Week Period Ended October 31, 2014 compared with the 13-Week Period Ended November 1, 2013
Merchandise Sales and Services, Net
Merchandise sales and services, net for the 13 weeks ended October 31, 2014 were $373.1 million, compared with $383.9 million in the same period of the prior year, a decrease of $10.8 million, or 3%. The decrease was comprised of a decrease in our Direct segment of $3.9 million and a decrease in our Retail segment of $6.9 million.
Merchandise sales and services, net in our Direct segment were $320.3 million for the 13 weeks ended October 31, 2014, a decrease of $3.9 million, or 1% from the same period of the prior year. The decrease was primarily attributable to decreases in our International business, partially offset by an increase in U.S. business and school uniforms sales.
Merchandise sales and services, net in our Retail segment were $52.8 million for the 13 weeks ended October 31, 2014, a decrease of $6.9 million, or 12% from the same period of the prior year, driven by a decrease in the number of Lands’ End Shops at Sears, a decrease in Shop Your Way redemption credits resulting from the commercial agreements entered into with Sears Holdings Corporation and its subsidiaries as part of the Separation and a decrease in same store sales. Same store sales in the Retail segment decreased 3.1%, driven by lower sales in the Company’s Lands’ End Shops at Sears. On October 31, 2014, the Company operated 242 Lands’ End Shops at Sears, 14 global Lands’ End Inlet stores and five newly opened international shop-in-shops compared to 275 Lands’ End Shops at Sears and 16 global Lands’ End Inlets on November 1, 2013.
Gross Profit and Gross Margin
Total gross profit increased 5% to $183.3 million and gross margin increased approximately 370 basis points to 49.1% of total Merchandise sales and services, net, compared with $174.5 million, or 45.4% of total Merchandise sales and services, net, for the 13 weeks ended October 31, 2014 and November 1, 2013, respectively. The increase in gross profit and gross margin was primarily attributable to increases in both the Direct and Retail segments.
Gross profit in the Direct segment was $159.5 million compared with $153.0 million for the 13 weeks ended October 31, 2014 and November 1, 2013, respectively. Gross margin in the Direct segment increased 260 basis points to 49.8% in the 13 weeks ended October 31, 2014 versus 47.2% in the comparable prior year period, primarily attributable to improved merchandise assortment architecture and a more targeted promotional strategy; and to a lesser extent refunds on duties paid for imported products that were subsequently exported.
Retail segment gross profit increased to $23.8 million in the 13 weeks ended October 31, 2014 from $21.5 million in the 13 weeks ended November 1, 2013. Retail segment gross margin increased 910 basis points to 45.1% compared with 36.0% for the 13 weeks ended October 31, 2014 and November 1, 2013, respectively, driven by improved merchandise assortment architecture and a more targeted promotional strategy. The Retail segment also benefited from a favorable comparison to the 13 weeks ended November 1, 2013; which contained an inventory adjustment related to the transition of inventory from Sears’ distribution facilities to Lands’ End distribution facilities that negatively impacted gross margin.
Selling and Administrative Expenses
Selling and administrative expenses decreased 2% to $143.4 million for the 13 weeks ended October 31, 2014 compared with $145.9 million for the comparable period in the prior year. The 13 weeks ended October 31, 2014 included approximately $3.2 million of incentive compensation expenses and $2.0 million of stand-alone public company related expenses. There were no incentive compensation expenses or stand-alone public company costs in the 13 weeks ended November 1, 2013. As a percentage of Merchandise sales and services, net, Selling and administrative expenses increased approximately 40 basis points to 38.4% during the third quarter of 2014 from 38.0% during the third quarter last year. The deleveraging of Selling and administrative expenses was primarily attributable to increased incentive compensation expenses and stand-alone costs, partially offset by a reduction in marketing investments, personnel costs and other expenses.

    
27



 Operating Income
Operating income was $35.1 million in the 13 weeks ended October 31, 2014, compared with Operating income of $23.3 million in the 13 weeks ended November 1, 2013. The increase in Operating income of $11.8 million, or 51%, was primarily driven by the increased gross profit described above.
Interest Expense
Interest expense was $6.2 million in the 13 weeks ended October 31, 2014, and was attributable to higher debt levels and costs related to borrowings on the Term Loan Facility, which was used to pay a $500.0 million dividend to a subsidiary of Sears Holdings Corporation immediately prior to the Separation. We did not incur Interest expense in the 13 weeks ended November 1, 2013.
Income Tax Expense
Income tax expense was $11.4 million for the 13 weeks ended October 31, 2014 compared with $9.0 million in the 13 weeks ended November 1, 2013. Our effective tax rate was 38.8% and 38.7% for the 13 weeks ended October 31, 2014 and November 1, 2013, respectively.
Net Income
Net income increased 26% to $18.0 million and diluted earnings per share increased 24% to $0.56 per diluted share in the 13 weeks ended October 31, 2014 compared with $14.3 million and diluted earnings per share of $0.45 per diluted share in the 13 weeks ended November 1, 2013.
Adjusted EBITDA
Adjusted EBITDA increased 40% to $39.9 million in the 13 weeks ended October 31, 2014, compared with Adjusted EBITDA of $28.5 million in the 13 weeks ended November 1, 2013, primarily driven by the increase in Operating income described above.
39-Week Period Ended October 31, 2014 compared with the 39-Week Period Ended November 1, 2013
Merchandise Sales and Services, Net
Total Merchandise sales and services, net for the 39 weeks ended October 31, 2014 were $1,050.8 million, compared with $1,032.4 million in the same period of the prior year, an increase of $18.3 million, or 2%. The increase was attributable to an increase in our Direct segment of $28.1 million, partially offset by a decrease in our Retail segment of $9.8 million.
Direct segment Merchandise sale and services, net were $888.9 million for the 39 weeks ended October 31, 2014, an increase of $28.1 million, or 3% from the same period of the prior year. The increase was driven by an increase in our U.S. businesses driven by our women's product offerings, business and school uniforms, partially offset by decreases in our International business.
Merchandise sales and services, net in the Retail segment were $161.8 million for the 39 weeks ended October 31, 2014, a decrease of $9.8 million, or 6% from the same period of the prior year. The decrease was driven by a decrease in the number of Lands’ End Shops at Sears and a decrease in Shop Your Way member loyalty program redemption credits resulting from the commercial agreements entered into with Sears Holdings as part of the Separation, partially offset by an increase in same store sales. Same store sales in the Retail segment increased 1%, driven by higher sales in the Company’s Lands’ End Shops at Sears. On October 31, 2014 the Company operated 242 Lands’ End Shops at Sears, 14 global Lands’ End Inlet stores and five newly opened international shop-in-shops compared to 275 Lands’ End Shops at Sears and 16 global Lands’ End Inlets on November 1, 2013.
Gross Profit and Gross Margin
Total gross profit increased 7% to $513.7 million and gross margin increased approximately 250 basis points to 48.9% of total Merchandise sales and services, net, compared with $478.7 million, or 46.4% of total Merchandise sales and services, net, for the 39 weeks ended October 31, 2014 and November 1, 2013, respectively.
The increase in gross profit was driven by an increase in Direct segment gross profit to $440.4 million compared with $405.0 million for the 39 weeks ended October 31, 2014 and November 1, 2013, respectively. The Direct segment

    
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gross margin increased 250 basis points to 49.5% in the 39 weeks ended October 31, 2014 from 47.0% in the 39 weeks ended November 1, 2013, driven by higher gross margin in the U.S. businesses primarily attributable to improved merchandise assortment architecture and a more targeted promotional strategy.
Retail segment gross profit decreased slightly to $73.3 million in the 39 weeks ended October 31, 2014 compared with $73.7 million in the 39 weeks ended November 1, 2013. Retail segment gross margin increased 240 basis points to 45.3% of Retail Merchandise sales and services, net in the 39 weeks ended October 31, 2014, from 42.9% in the 39 weeks ended November 1, 2013, driven by improved merchandise assortment architecture and a more targeted promotional strategy, partially offset by increased net costs associated with the Shop Your Way member loyalty program. The Retail segment also benefited from a favorable comparison to the 39 weeks ended November 1, 2013; which contained an inventory adjustment related to the transition of inventory from Sears’ distribution facilities to Lands’ End distribution facilities that negatively impacted gross margin.
Selling and Administrative Expenses
Selling and administrative expenses were $419.9 million, or 40.0% of total Merchandise sales and services, net for the 39 weeks ended October 31, 2014 compared with $408.8 million, or 39.6% of total Merchandise sales and services, net for the comparable period in the prior year. The increase of $11.1 million in Selling and administrative expense was primarily attributable to a $9.4 million increase in incentive compensation, $6.0 million in costs associated with being a stand-alone public company and increased investment in marketing, partially offset by lower personnel costs. In the 39 weeks ended November 1, 2013 the Company had no stand-alone public company related expenses.
Operating Income
Operating income was $79.2 million in the 39 weeks ended October 31, 2014, compared with Operating income of $53.6 million in the 39 weeks ended November 1, 2013. The increase in Operating income of $25.6 million, or 48%, was primarily driven by increased gross profit, partially offset by increased Selling and administrative expenses.
Interest Expense
Interest expense was $14.3 million in the 39 weeks ended October 31, 2014, and was attributable to higher debt levels and costs related to the issuance of the Term Loan Facility, which was used to pay a $500.0 million dividend to a subsidiary of Sears Holdings Corporation immediately prior to the Separation. We did not incur Interest expense in the 39 weeks ended November 1, 2013.
Income Tax Expense
Our effective tax rate was 38.1% and 38.7% for the 39 weeks ended October 31, 2014 and November 1, 2013, respectively. The decreased rate was primarily due to one-time Separation related items and lower effective state tax rates.
Net Income
Net income increased 24% to $40.7 million, or $1.27 per diluted share, in the 39 weeks ended October 31, 2014 compared with $32.9 million, or $1.03 per diluted share, in the 39 weeks ended November 1, 2013.
Adjusted EBITDA
Adjusted EBITDA was $93.9 million in the 39 weeks ended October 31, 2014, compared with Adjusted EBITDA of $69.9 million in the 39 weeks ended November 1, 2013. The 34% increase was primarily driven by the increase in Operating income of $25.6 million described above.
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. The ABL Facility serves as a source of liquidity for short-term working capital needs and general corporate purposes. We expect that our cash on hand, cash flows from operations and the available borrowing capacity of $175.0 million under the ABL Facility will provide adequate resources to meet our capital requirements and operational needs for the remainder of the fiscal year. Beyond this fiscal year, we believe that our cash on hand and cash flows from operations, along with our ABL Facility will be adequate to meet our capital requirements and operational needs. Cash generated from our net sales and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionate amount of net merchandise sales and operating cash flows generally occurring in the fourth fiscal quarter of each year.
Our working capital needs have been met primarily through funds generated from operations, with additional funding from Sears Holdings prior to the Separation to meet short-term working capital needs, mainly for our

    
29



seasonal inventory builds. Sears Holdings used a centralized approach to its U.S. domestic cash management and financing of its operations. The majority of our cash was transferred to Sears Holdings on a daily basis. Sears Holdings was also our only source of funding for our operating and investing activities prior to the Separation. The principal methods by which Sears Holdings funded Lands’ End were to cover corporate and other expenses and to fund our seasonal inventory builds.
Description of Material Indebtedness
Debt Arrangements
Lands’ End entered into an asset-based senior secured credit agreement, dated as of April 4, 2014, with Bank of America, N.A., which provides for maximum borrowings of $175.0 million under the ABL Facility for Lands’ End, subject to a borrowing base, with a $30.0 million sub facility for a United Kingdom subsidiary borrower of Lands’ End (the “UK Borrower”). The ABL Facility has a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The ABL Facility is available for working capital and other general corporate purposes, and was undrawn at the Separation and at October 31, 2014, other than for letters of credit. The Company had borrowing availability under the ABL Facility of $161.5 million as of October 31, 2014, net of outstanding letters of credit of $13.5 million.
Also on April 4, 2014, Lands’ End entered into a term loan credit agreement with Bank of America, N.A., with respect to the Term Loan Facility of $515.0 million, the proceeds of which were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and expenses associated with the Facilities of approximately $11.4 million, with the remaining proceeds to be used for general corporate purposes.
Maturity; Amortization and Prepayments
The ABL Facility will mature on April 4, 2019. The Term Loan Facility will mature on April 4, 2021 and will amortize at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events.
Guarantees; Security
All domestic obligations under the Facilities are unconditionally guaranteed by Lands’ End and, subject to certain exceptions, each of its existing and future direct and indirect domestic subsidiaries. In addition, the obligations of the UK Borrower under the ABL Facility are guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The ABL Facility is secured by a second priority security interest in the same collateral.
Interest; Fees
The interest rates per annum applicable to the loans under the Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted London inter-bank offered rate (“LIBOR”) plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL Facility is subject to adjustment based on the average excess availability under the ABL Facility for the preceding fiscal quarter, and will range from 1.50% to 2.00% in the case of LIBOR borrowings and will range from 0.50% to 1.00% in the case of base rate borrowings.
Customary agency fees are payable in respect of both facilities. The ABL Facility fees also include (i) commitment fees, based on a percentage ranging from approximately 0.25% to 0.375% of the daily unused portions of the facility, and (ii) customary letter of credit fees.

    
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Representations and Warranties; Covenants
The Facilities contain various representations and warranties and restrictive covenants that, among other things and subject to specified exceptions, restrict the ability of Lands’ End and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business. In addition, if excess availability under the ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Facilities as of October 31, 2014.
The Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance, and providing additional guarantees and collateral in certain circumstances.
Events of Default
The Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, and material judgments and change of control.
Cash Flows from Operating Activities
Operating activities generated net cash of $85.6 million 39 weeks ended October 31, 2014 compared to a net use of $10.9 million for the 39 weeks ended November 1, 2013. Our primary source of operating cash flows is the sale of merchandise goods and services to customers, while the primary use of cash in operations is the purchase of merchandise inventories.
Net cash provided by operating activities increased $96.5 million for the 39 weeks ended October 31, 2014 compared with the 39 weeks ended November 1, 2013 primarily due to improved inventory management, the net effect of changes in the settlement methods with our former parent company and certain suppliers resulting from the Separation, and increased Operating income, partially offset by interest payments on debt. The net effect of changes in settlement methods with our former parent company and certain suppliers included approximately $24 million in Accounts payable and Accrued expenses of $5 million less $6 million in Accounts receivable as of October 31, 2014. These items would have been included in equity as part of Net parent company investment prior to the Separation on April 4, 2014 from Sears Holdings Corporation.
Cash Flows from Investing Activities
Net cash used in investing activities was $11.1 million and $3.6 million for the 39 weeks ended October 31, 2014 and November 1, 2013, respectively. Cash used in investing activities for both periods was primarily used for investment in information technology infrastructure and property and equipment.
For 2014, we plan to invest a total of approximately $20 - $25 million in capital expenditures for strategic investments and infrastructure, primarily in technology and general corporate needs.
Cash Flows from Financing Activities
Net cash provided by financing activities was $9.8 million and $2.7 million for the 39 weeks ended October 31, 2014 and November 1, 2013, respectively. Financing activities in the 39 weeks ended October 31, 2014 consisted of cash proceeds of $515.0 million from our Term Loan Facility and a $8.8 million contribution from Sears Holdings, offset by a $500.0 million dividend paid to a subsidiary of Sears Holdings Corporation prior to the Separation, $11.4 million of debt issuance costs related to the Facilities and $2.6 million of payments on the Term Loan Facility. Financing activities for the 39 weeks ended November 1, 2013 consisted of intercompany activity with Sears Holdings. Contributions from / (distributions to) parent company, net is the net effect of our former parent’s intercompany settlement for transactions that, as of the Separation, will be in cash flows from operating activities or investing activities.

    
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Contractual Obligations and Off-Balance-Sheet Arrangements
We have no material off-balance-sheet arrangements other than the guarantees and contractual obligations that are discussed below.
Information concerning our obligations and commitments to make future payments under contracts such as lease agreements, and under contingent commitments, as of October 31, 2014, is aggregated in the following table:
 
Payments Due by Period
(in thousands)
Total
 
Less than 1 year
 
2-3 Years
 
4-5 Years
 
After 5 years
 
 
 
 
 
 
 
 
 
 
Operating leases(1)
$
127,023

 
$
29,857

 
$
54,899

 
$
33,918

 
$
8,349

Principal payments on long-term debt
512,425

 
5,150

 
10,300

 
10,300

 
486,675

Interest on long-term debt and ABL Facility fees
143,139

 
23,496

 
45,101

 
43,958

 
30,584

Purchase obligations(2)
147,057

 
147,057

 

 

 

Total contractual obligations
$
929,644

 
$
205,560

 
$
110,300

 
$
88,176

 
$
525,608


(1)    Operating lease obligations consist primarily of future minimum lease commitments related to store operating leases.
(2)    Purchase obligations primarily represent open purchase orders to purchase inventory.

At October 31, 2014, Lands’ End had gross unrecognized tax benefits of $9.0 million, which are not reflected in the table above. We are unable to reasonably estimate the timing of liability payments arising from uncertain tax positions in individual years due to uncertainties in the timing of effective settlement of tax positions.
Financial Instruments with Off-Balance-Sheet Risk
Lands’ End entered into the ABL Facility, which provides for maximum borrowings of $175.0 million for Lands’ End, subject to a borrowing base, with a $30.0 million sub facility for the UK Borrower. The ABL Facility has a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The ABL Facility is available for working capital and other general corporate purposes, and was undrawn at the Separation and at October 31, 2014, other than for letters of credit. The Company had borrowing availability under the ABL Facility of $161.5 million as of October 31, 2014, net of outstanding letters of credit of $13.5 million.

In addition, Lands’ End has a $2.3 million foreign subsidiary credit facility that is supported by a Lands’ End, Inc. guarantee. This credit facility guarantees and allows for deferred payment of custom duties. This credit facility was not utilized during the 39 weeks ended October 31, 2014 and November 1, 2013.
 
Application of Critical Accounting Policies and Estimates
We believe that the assumptions and estimates associated with inventory valuation, goodwill and intangible asset impairment assessments and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

There have been no material changes to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2014.
Recent Accounting Pronouncements
See Part I, Item I Note 13 – Recent Accounting Pronouncements, of the Condensed Consolidated and Combined Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements made in this Quarterly Report on Form 10-Q contain forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include without limitation information concerning our future financial performance, business strategy, plans, goals and objectives.
Statements preceded or followed by, or that otherwise include, the words “believes,” “expects,” “anticipates,” “intends,” “project,” “estimates,” “plans,” “forecast,” “is likely to” and similar expressions or future or conditional verbs such as “will,” “may,” “would,” “should” and “could” are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements.
The following factors, among others, could cause our actual results, performance, and achievements to differ from those described in the forward-looking statements: our ability to offer merchandise and services that customers want to purchase; changes in customer preference for our branded merchandise; customers’ use of our digital platform, including our e-commerce websites, and response to direct mail catalogs and digital marketing; the success of our overall marketing strategies, including our maintenance of a robust customer list; our dependence on information technology and a failure of information technology systems, including with respect to our e-commerce operations, or an inability to upgrade or adapt our systems; fluctuations and increases in the costs of raw materials; impairment of our relationships with our vendors; our failure to maintain the security of customer, employee or company information; our failure to compete effectively in the apparel industry; the performance of our “store within a store” business model; if Sears, Roebuck and Co. sells or disposes of its retail stores or if its retail business does not attract customers or does not adequately promote the Lands’ End Shops at Sears; legal, regulatory, economic and political risks associated with international trade and those markets in which we conduct business and source our merchandise; our failure to protect or preserve the image of our brands and our intellectual property rights; increases in postage, paper and printing costs; failure by third parties who provide us with services in

    
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connection with certain aspects of our business to perform their obligations; our failure to timely and effectively obtain shipments of products from our vendors and deliver merchandise to our customers; reliance on promotions and markdowns to encourage consumer purchases; our failure to efficiently manage inventory levels; unseasonal or severe weather conditions; the seasonal nature of our business; the adverse effect on our reputation if our independent vendors do not use ethical business practices or comply with applicable laws and regulations; assessments for additional state taxes; our exposure to periodic litigation and other regulatory proceedings, including with respect to product liability claims; incurrence of charges due to impairment of goodwill, other intangible assets and long-lived assets; our failure to retain our executive management team and to attract qualified new personnel; the impact on our business of adverse worldwide economic and market conditions, including economic factors that negatively impact consumer spending on discretionary items; the inability of our past performance generally, as reflected on our historical financial statements, to be indicative of our future performance; the impact of increased costs due to a decrease in our purchasing power following the Separation and other losses of benefits associated with being a subsidiary of Sears Holdings; the failure of Sears Holdings or its subsidiaries to perform under various transaction agreements that have been executed in connection with the Separation or our failure to have necessary systems and services in place when certain of the transaction agreements expire; our agreements related to the Separation and our continuing relationship with Sears Holdings were negotiated while we were a subsidiary of Sears Holdings and we may have received better terms from an unaffiliated third party; potential indemnification liabilities to Sears Holdings pursuant to the separation and distribution agreement; our inability to engage in certain corporate transactions after the Separation; the ability of our principal shareholders to exert substantial influence over us; our difficulty in operating as a separate entity following the Separation; our failure to achieve some or all of the expected benefits of the Separation, and adverse effects of the Separation on our business; potential liabilities under fraudulent conveyance and transfer laws and legal capital requirements; uncertainty relating to the development and continuation of an active trading market for our common stock; declines in our stock price due to the eligibility of a number of our shares of common stock for future sale; our inability to pay dividends; and increases in our expenses and administrative burden in relation to becoming a public company, in particular to bring us into compliance with certain provisions of the Sarbanes-Oxley Act of 2002.
The foregoing factors should not be understood as exhaustive and should be read in conjunction with the other cautionary statements, including the “Risk Factors,” that are included in our Annual Report filed on Form 10-K for the year ended January 31, 2014     and in our other filings with the SEC and our other public announcements. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by our forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to publicly update or review any forward-looking statement made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in currency rates. We have not been materially impacted by fluctuations in foreign currency exchange rates as a significant portion of our business is transacted in U.S. dollars, and is expected to continue to be transacted in U.S. dollars or U.S. dollar-based currencies. As of October 31, 2014 we had $15.4 million of cash denominated in foreign currencies, principally in Euros, Japanese Yen and British Pound Sterling. We do not enter into financial instruments for trading purposes or hedging and have not used, and currently do not anticipate using, any derivative financial instruments. We do not consider our foreign earnings to be permanently reinvested.
We are subject to interest rate risk with our Term Loan Facility and our ABL Facility, as both require us to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates associated with the Term Loan Facility would result in a $0.8 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn to a principal amount equal to $175.0 million, each one percentage point change in interest rates would result in a $1.8 million change in our annual cash interest expense.

    
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, Lands’ End’s President and Chief Executive Officer and Executive Vice President, Chief Operating Officer/Chief Financial Officer and Treasurer have concluded that, as of October 31, 2014, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the Company’s fiscal quarter ended October 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

    
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PART II
ITEM 1. LEGAL PROCEEDINGS
We are involved in various claims, legal proceedings and investigations, including those described below. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on our results of operations, cash flows or financial position, except where noted below.
Lands’ End’s legal proceedings include commercial, intellectual property, employment, regulatory, and consumer fraud claims. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. We do not believe that the outcome of any current legal proceeding would have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
See Part I, Item I "Financial Statements (Unaudited) - Notes to Condensed Consolidated and Combined Financial Statements," Note 11 "Commitments and Contingencies - Legal Proceedings" for additional information regarding legal proceedings (incorporated herein by reference).
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the 39 weeks ended October 31, 2014 and November 1, 2013, we did not issue or sell any shares of our common stock or other equity securities pursuant to unregistered transactions in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended.

ITEM 6. EXHIBITS
See Index of Exhibits, which is incorporated herein by reference as if it was part of this Form 10-Q.


    
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Lands’ End, Inc.

By:
/s/ Michael P. Rosera
 
Michael P. Rosera
 
Executive Vice President, Chief Operating Officer/Chief Financial Officer and Treasurer (Principal Financial Officer)



Dated: 12/10/2014

    
36



Index of Exhibits

3.1
 
Amended and Restated Certificate of Incorporation of Lands’ End, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Lands’ End, Inc. on March 20, 2014 (File No. 001-09769))
 
 
 
3.2
 
Amended and Restated Bylaws of Lands’ End, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on April 8, 2014 (File No. 001-09769))
 
 
 
*10.1
  
Director Compensation Policy of Lands' End, Inc., as amended.
 
 
*31.1
  
Certification of Chief Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
*31.2
  
Certification of Chief Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
*32.1
  
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document**
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document**
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document**
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Document**
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document**
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document**
 
 
 
*
Filed herewith
 
 
 
**
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”


    
37