Lands' End, Inc.: Form 10-Q for the period ended Aug 2, 2024

You should read the following discussion in conjunction with the Condensed Consolidated 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 risks, 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 Statement concerning Forward-Looking Statements” below, “Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the year ended February 2, 2024 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q, for a discussion of the uncertainties, risks and assumptions associated with these statements.

As used in this Quarterly Report on Form 10-Q, references to the “Company”, “Lands’ End”, “we”, “us”, “our” and similar terms refer to Lands’ End, Inc. and its subsidiaries. Our fiscal year ends on the Friday preceding the Saturday closest to January 31. Other terms that are commonly used in this Quarterly Report on Form 10-Q are defined as follows:

• ABL Facility – Asset-based senior secured credit agreement, providing for a revolving facility, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders, as amended to date
• Adjusted EBITDA – Net income (loss) appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit), Interest expense, Depreciation and amortization and other significant items
• Adjusted net income (loss) – Net income (loss) appearing on the Condensed Consolidated Statements of Operations excluding significant non-recurring or non-operational items. Adjusted net income (loss) is also presented on a diluted per share basis
• Company Operated stores – Lands’ End retail stores in the Retail distribution channel
• Current Term Loan Facility – Term loan credit agreement, dated as of December 29, 2023, among the Company, Blue Torch Capital, as Administrative Agent and Collateral Agent, and the lenders party thereto
• Debt Facilities – Collectively, the Current Term Loan Facility and ABL Facility
• First Quarter 2024 – The 13 weeks ended May 3, 2024
• First Quarter 2023 – The 13 weeks ended April 28, 2023
• Fiscal 2024 – The 52 weeks ending January 31, 2025
• Fiscal 2023 – The 53 weeks ended February 2, 2024
• Fiscal 2022 – The 52 weeks ended January 27, 2023
• Former Term Loan Facility – Term loan credit agreement, dated as of September 9, 2020, among the Company, Fortress Credit Corp., as Administrative Agent and Collateral Agent, and the lenders party thereto
• GAAP – Accounting principles generally accepted in the United States
• GMV – Gross merchandise value equals total order value of all merchandise sold to customers through business-to-consumer and business-to-business channels, as well as the retail value of the merchandise sold through third party distribution channels.
• LIBOR – London inter-bank offered rate
• Second Quarter 2024 – The 13 weeks ended August 2, 2024
• Second Quarter 2023 – The 13 weeks ended July 28, 2023
• SOFR – Secured Overnight Funding Rate
• Term Loan Adjusted SOFR – SOFR plus adjustments of either (a) 0.11448% for a one-month interest period, (b) 0.26161% for a three-month interest period, or (c) 0.42826% for a six-month interest period
• Year-to-Date 2024 – The 26 weeks ended August 2, 2024
• Year-to-Date 2023 – The 26 weeks ended July 28, 2023

Executive Overview

Description of the Company

Lands’ End is a leading digital retailer of solution-based apparel, swimwear, outerwear, accessories, footwear, home products and uniforms. We offer products online at www.landsend.com (http://www.landsend.com), through third-party distribution channels, our own Company Operated stores and third-party license agreements. We also offer products to businesses and schools, for their employees and students, through the Outfitters distribution channel. We are a classic American lifestyle brand that creates solutions for life’s every journey.

Lands’ End was founded in 1963 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.”

We have one external reportable segment and identify our operating segments according to how our business activities are managed and evaluated. Our operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Retail.

We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore, the results of our operating segments are aggregated into one external reportable segment.

Distribution Channels

We identify five separate distribution channels for revenue reporting purposes:

• U.S. eCommerce offers products through our eCommerce website.
• International offers products primarily to consumers located in Europe and through our eCommerce international websites and third-party affiliates.
• Outfitters sells uniform and logo apparel to businesses and their employees, as well as to student households through school relationships, located primarily in the U.S.
• Third Party sells the same products as U.S. eCommerce but direct to consumers through third-party marketplace websites and through domestic wholesale relationships. In addition, Third Party generates revenue from licensing agreements.
• Retail sells products through our Company Operated stores.

Macroeconomic Challenges

Macroeconomic issues which impact consumer discretionary spending, such as realized inflation-based price increases and high interest rates, have continued to have an impact on our business. Apparel purchases historically have been influenced by domestic and global economic conditions, which may negatively impact customer demand and may require higher levels of promotion in order to attract and retain customers. Additionally, the variable interest rates associated with our Debt Facilities are negatively affected by higher interest rate environments. Macroeconomic challenges may lead to increased cost of raw materials, packaging materials, labor, energy, fuel, debt and other inputs necessary for the production and distribution of our products.

Restructuring

During Fiscal 2023, we reduced approximately 10% of our corporate office and Hong Kong sourcing office positions and incurred restructuring charges, primarily severance and benefit and other related costs. The reductions in the Hong Kong sourcing office were organizational changes to move positions to our corporate headquarters to centralize product development to better align with our speed-to-market initiatives. The reductions in the corporate office positions were made to better align with the evolving needs of our business and to invest in key growth areas. For the 26 weeks ended August 2, 2024, we incurred restructuring charges, primarily severance and benefit costs, related to cost optimization of business operations and strategic initiatives.

We incurred $2.3 million and $0.4 million of restructuring costs during the Second Quarter 2024 and Second Quarter 2023, respectively. Restructuring costs of $2.7 million and $0.4 million were incurred Year-to-Date 2024 and Year-to-Date 2023, respectively, and were recorded in Other operating expense, net in the Condensed Consolidated Statements of Operations. As of August 2, 2024, approximately $2.9 million of the restructuring costs had yet to be paid and are included in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

Basis of Presentation

The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.

Seasonality

We experience seasonal fluctuations in our Net revenue and operating results and historically have realized a significant portion of our net revenue and earnings for the year during our fourth fiscal quarter. We generated approximately 34.0% of our net revenue in the fourth quarters of Fiscal 2023 and Fiscal 2022.

Working capital requirements typically increase during the second and third quarters of the fiscal year as inventory builds to support peak selling periods and, accordingly, working capital requirements typically decrease during the fourth quarter of the fiscal year as inventory is 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.

Results of Operations

The following tables set forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue:

(in thousands)

21

(in thousands)

Depreciation and amortization are 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.

Definitions, Reconciliations and Uses of Non-GAAP Financial Measures

In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we report the following non-GAAP measures: Adjusted net income (loss) and Adjusted EBITDA. Adjusted net income (loss) is also expressed on a diluted per share basis.

We believe presenting non-GAAP financial measures provides useful information to investors, allowing them to assess how the business performed excluding the effects of significant non-recurring or non-operational amounts. We believe the use of the non-GAAP financial measures facilitates comparing the results being reported against past and future results by eliminating amounts that we believe are not comparable between periods and assists investors in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s own methods for evaluating business performance.

Our management uses Adjusted net income (loss) and Adjusted EBITDA to evaluate the operating performance of our business for comparable periods and to discuss our business with our Board of Directors, institutional investors and other market participants. Adjusted EBITDA is also used as the basis for a performance measure used in executive incentive compensation.

The methods we use to calculate our non-GAAP financial measures may differ significantly from methods other companies use to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted net income (loss) and Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as these measures may exclude a number of important cash and non-cash recurring items.

Adjusted net income (loss) is defined as net income (loss) excluding significant non-recurring or non-operational items as set forth below. Adjusted net income (loss) is also presented on a diluted per share basis. While Adjusted net income (loss) is a non-GAAP measurement, management believes that it is an important indicator of operating performance and useful to investors.

• Other significant non-recurring or non-operational items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results and are described below:
• Long-lived asset impairment – charges associated with the non-cash write down of certain long-lived assets for the 13 and 26 weeks ended August 2, 2024.
• Exit costs – charges associated to exit the kids and footwear lines of business including excess and obsolescence reserves, inventory discounts and operational charges recorded in the 13 and 26 weeks ended August 2, 2024 in conjunction with our licensing arrangements which commenced in Fiscal 2024.
• Restructuring – primarily severance and benefit costs for the 13 and 26 weeks ended August 2, 2024 and July 28, 2023.
• Lands’ End Japan closure – net operating income (loss) from liquidation and closing costs recorded for the 13 and 26 weeks ended July 28, 2023.

The following tables set forth, for the periods indicated, a reconciliation of Net loss to Adjusted net loss and Adjusted diluted net loss per share:

Unaudited

(in thousands, except per share amounts)

(1) The tax impact of adjustments is calculated at the applicable U.S. and non-U.S. Federal and State statutory rates.

Unaudited

(in thousands, except per share amounts)

(1) The tax impact of adjustments is calculated at the applicable U.S. and non-U.S. Federal and State statutory rates.

While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance, and is useful to investors, because EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax.

• Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results and are described below:
• Long-lived asset impairment – charges associated with the non-cash write down of certain long-lived assets for the 13 and 26 weeks ended August 2, 2024.
• Exit costs – charges associated to exit the kids and footwear lines of business including excess and obsolescence reserves, inventory discounts and operational charges recorded in the 13 and 26 weeks ended August 2, 2024 in conjunction with our licensing arrangements which commenced in Fiscal 2024.
• Restructuring – primarily severance and benefit costs for the 13 and 26 weeks ended August 2, 2024 and July 28, 2023.
• Lands’ End Japan closure – net operating income (loss) from liquidation and closing costs recorded for the 13 and 26 weeks ended July 28, 2023.
• Net gain or loss on disposal of property and equipment – disposal of property and equipment for the 13 and 26 weeks ended August 2, 2024 and July 28, 2023.
• Other – amortization of transaction related costs associated with our Third Party distribution channel expenses for the 13 and 26 weeks July 28, 2023.

The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue and a reconciliation of Net loss to Adjusted EBITDA:

Unaudited

(in thousands)

Unaudited

(in thousands)

In assessing the operational performance of our business, we consider a variety of financial measures. We operate in five separate distribution channels for revenue reporting purposes: U.S. eCommerce, International, Outfitters, Third Party and Retail. A key measure in the evaluation of our business is revenue performance by distribution channel. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.

We use Net revenue to evaluate revenue performance for the U.S. eCommerce, International, Outfitters and Third Party distribution channels. We use GMV, which equals total order value of all merchandise sold to customers through business-to-consumer and business-to-business channels, as well as the retail value of the merchandise sold through third party distribution channels, as an important indicator of the performance of the comparable growth of the total brand. For our Retail distribution channel, we use Same Store Sales as a key measure in evaluating performance. A Company Operated store is included in U.S. Same Store Sales calculations when it has been open for at least 14 months. Online sales and sales generated through our in-store web portal are considered revenue in our U.S. eCommerce and are excluded from U.S. Same Store Sales.

Discussion and Analysis

Second Quarter 2024 compared with Second Quarter 2023

Gross Merchandise Value

Gross Merchandise Value (“GMV”) increased mid-single digits compared to Second Quarter 2023.

Net Revenue

Net revenue was $317.2 million for Second Quarter 2024, a decrease of $6.1 million or 1.9%, from $323.3 million during Second Quarter 2023.

U.S. eCommerce Net revenue was $188.3 million for Second Quarter 2024, a decrease of $7.6 million or 3.9%, from $195.9 million during Second Quarter 2023. The decrease in U.S. eCommerce was primarily driven by the transition of kids and footwear products from a direct to a license model, lower promotional activity and improved inventory management resulting in increased gross profit from higher gross margins. Excluding the impact of transitioning the kids and footwear products to licensing arrangements, U.S. eCommerce revenue increased by mid-single digits year-over-year.

International eCommerce Net revenue was $23.0 million for Second Quarter 2024, an increase of $0.2 million or 0.9%, from $22.8 million during Second Quarter 2023. The increase in International eCommerce was primarily driven by an increase in full price sales, lower promotional activity and improved inventory management resulting in increased gross profit from higher gross margins.

Outfitters Net revenue was $63.2 million for Second Quarter 2024, a decrease of $4.8 million or 7.1%, from $68.0 million during Second Quarter 2023. The school uniform channel delivered a strong start to back to school season with a mid-single digit revenue increase over last year. The business uniform channel decreased year-over-year primarily due to the timing changes with certain national accounts and some pricing resistance from smaller accounts as a result of macroeconomic challenges.

Third Party Net revenue was $30.1 million for Second Quarter 2024, an increase of $5.7 million or 23.4%, from $24.4 million during Second Quarter 2023. The increase was primarily due to revenue generated from licensing and wholesale arrangements.

Retail Net revenue was $12.6 million for Second Quarter 2024, an increase of $0.4 million or 3.3%, from $12.2 million during Second Quarter 2023. Our U.S. Company Operated stores experienced an increase of 11.7% in Same Store Sales as compared to Second Quarter 2023. On August 2, 2024 there were 24 U.S. Company Operated stores, compared to 27 U.S. Company Operated stores on July 28, 2023.

Gross Profit

Gross profit was $151.9 million for Second Quarter 2024, an increase of $12.3 million or 8.8% from $139.6 million during Second Quarter of 2023. Gross margin increased approximately 470 basis points to 47.9% in Second Quarter 2024, compared with 43.2% in Second Quarter 2023. The gross margin improvement was primarily driven by leveraging the strength in product solutions and newness across the channels, lower promotional activity, reduction in clearance inventory and improved supply chain costs.

Selling and Administrative Expenses

Selling and administrative expenses increased $11.6 million to $135.5 million or 42.7% of total Net revenue in Second Quarter 2024 compared with $123.9 million or 38.3% of Net revenue in Second Quarter 2023. The approximately 440 basis points increase was driven by higher digital marketing spend focused on new customer acquisition, third party professional services and higher incentive related personnel costs.

Depreciation and Amortization

Depreciation and amortization expense decreased $0.8 million to $8.7 million in Second Quarter 2024 compared with $9.5 million in Second Quarter 2023.

Other Operating Expense

Other operating expense, net was $5.2 million in Second Quarter 2024 compared to $0.4 million in Second Quarter 2023. The increase was primarily attributed to a $2.8 million non-cash charge related to long-lived asset impairment and $2.3 million of restructuring costs.

Operating Income (Loss)

As a result of above factors, Operating income was $2.5 million in Second Quarter 2024 compared to $5.8 million of Operating income in Second Quarter 2023.

Interest Expense

Interest expense was $10.4 million in Second Quarter 2024 compared to $12.0 million in Second Quarter 2023. The $1.6 million decrease was driven by lower ABL Facility interest related to lower average outstanding balances.

Other Expense (Income)

Other income was $0.1 million in Second Quarter 2024 compared to $0.2 million in Second Quarter 2023.

Income Tax (Benefit) Expense

We recorded an income tax benefit at an overall effective rate of 33.4% for the Second Quarter 2024 and an income tax expense at an overall effective rate of (32.4)% for the Second Quarter 2023. The overall effective tax rate for the Second Quarter 2024 varies from the U.S. federal statutory rate of 21% as a result of state taxes, non-deductible expenses, and the impact of stock-based compensation adjustments. The overall effective tax rate for the Second Quarter 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation.

Net Income (Loss)

As a result of the above factors, Net loss was $5.3 million and diluted net loss per share was $0.17 in Second Quarter 2024 compared with Net loss of $8.0 million and diluted net loss per share was $0.25 in Second Quarter 2023.

Adjusted Net Income (Loss)

Adjusted net loss was $0.7 million and Adjusted diluted net loss per share was $0.02 in Second Quarter 2024, driven by a non-cash charge related to long-lived asset impairment and restructuring costs, compared to Adjusted net loss of $7.6 million and Adjusted diluted net loss per share of $0.24 in Second Quarter 2023.

Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $17.1 million in Second Quarter 2024 and $15.8 million in Second Quarter 2023, respectively.

Year-to-Date 2024 compared with Year-to-Date 2023

Gross Merchandise Value

Gross Merchandise Value (“GMV”) increased low single digits compared to Year-to-Date 2023.

Net Revenue

Net revenue was $602.6 million for Year-to-Date 2024 a decrease of $30.3 million or 4.8% from $632.9 million during Year-to-Date 2023. Excluding the $29.6 million in revenue from inventory sales to Delta Air Lines at the conclusion of their five-year contract in the First Quarter 2023, Net revenue Year-to-Date 2024 decreased 0.1%.

U.S. eCommerce Net revenue was $358.9 million for Year-to-Date 2024, a decrease of $14.7 million or 3.9%, from $373.6 million during the Year-to-Date 2023. The decrease in U.S. eCommerce was primarily driven by the transition of kids and footwear products from a direct to a license model, continued promotional productivity within swim, outerwear and newness in adjacent product categories and improved inventory management resulting in higher margins with lower clearance inventory sales. Excluding the impact of transitioning the kids and footwear products to licensing arrangements, U.S. eCommerce Year-to-Date 2024 revenue increased by mid-single digits year-over-year.

International eCommerce Net revenue was $47.9 million for Year-to-Date 2024, a decrease of $0.3 million or 0.6%, from $48.2 million during the Year-to-Date 2023. The decrease in International eCommerce was due to an increase in full price sales, lower promotional activity and improved inventory management resulting in increased gross profit from higher gross margins.

Outfitters Net revenue was $105.8 million for Year-to-Date 2024, a decrease of $36.2 million or 25.5%, from $142.0 million during the Year-to-Date 2023. Compared to the Year-to-Date 2023, the decrease was primarily driven by inventory sales to Delta Air Lines at the conclusion of their five-year contract in the First Quarter 2023. Excluding the $29.6 million revenue from the Delta Air Lines business, Net revenue for the Outfitters business decreased by 5.9%.

Third Party Net revenue was $67.6 million for Year-to-Date 2024, an increase of $20.2 million or 42.6% from $47.4 million during the Year-to-Date 2023. The increase was primarily due to revenue generated from licensing arrangements including $10.5 million of Lands’ End produced inventory sold to a licensee in First Quarter 2024 in connection with the transition of kids products from a direct to a license model. Online marketplaces saw increased gross profit from improved gross margins primarily driven by the expansion of the Company’s strategy to focus on higher quality sales.

Retail Net revenue was $22.4 million for Year-to-Date 2024, an increase of $0.6 million or 2.8%, from $21.8 million during the Year-to-Date 2023. Our U.S. Company Operated stores experienced an increase of 11.8% in Same Store Sales as compared to Year-to-Date 2023. On August 2, 2024 there were 24 U.S. Company Operated stores compared to 27 U.S. Company Operated stores on July 28, 2023.

Gross Profit

Gross profit was $290.9 million for Year-to-Date 2024, an increase of $13.4 million or 4.8% from $277.5 million during Year-to-Date 2023. Gross margin increased to 48.3% in Year-to-Date 2024, compared with 43.8% in Year-to-Date 2023. The 450 basis point improvement in gross margin was primarily driven by leveraging the strength in the swimwear, outerwear and newness in adjacent product categories across the channels, reduction in clearance inventory and improvements in supply chain costs for Year-to-Date 2024 compared to the prior year.

Selling and Administrative Expenses

Selling and administrative expenses increased $20.5 million to $262.9 million or 43.6% of total Net revenue in Year-to-Date 2024 compared with $242.4 million or 38.3% of Net revenue in Year-to-Date 2023. The approximately 530 basis point increase was driven by deleveraging from lower revenues, higher digital marketing spend focused on new customer acquisition, third party professional services and higher incentive related personnel costs.

Depreciation and Amortization

Depreciation and amortization expense was $17.7 million in Year-to-Date 2024, a decrease of $1.1 million or 5.9%, compared with $18.8 million in Year-to-Date 2023.

Other Operating Expense

Other operating expense, net was $5.5 million in Year-to-Date 2024, an increase of $4.9 million, compared with $0.6 million in Year-to-Date 2023. The increase was primarily attributed to a $2.8 million non-cash charge related to long-lived asset impairment and $2.7 million of restructuring costs.

Operating Income (Loss)

As a result of the above factors, Operating income was $4.7 million in Year-to-Date 2024 compared to Operating income of $15.7 million in Year-to-Date 2023.

Interest Expense

Interest expense was $20.8 million in Year-to-Date 2024 compared to $24.3 million in Year-to-Date 2023. The $3.5 million decrease was driven by lower ABL Facility interest related to lower average outstanding balances.

Other Expense (Income)

Other income was $0.2 million in Year-to-Date 2024 compared to $0.4 million in Year-to-Date 2023.

Income Tax (Benefit) Expense

We recorded an income tax benefit at an overall effective rate of 26.4% for Year-to-Date 2024 and an income tax expense at an overall effective rate of (17.5)% for Year-to-Date 2023. The overall effective tax rate for Year-to-Date 2024 varies from the U.S. federal statutory rate of 21% as a result of state taxes, non-deductible expenses, and the impact of stock-based compensation adjustments. The overall effective tax rate for Year-to-Date 2023 reflects a one-time tax expense related to the write-off of deferred tax benefits for stock-based compensation.

Net Income (Loss)

As a result of the above factors, Net loss was $11.7 million and diluted loss per share was $0.37 in Year-to-Date 2024 compared with Net loss of $9.7 million and diluted loss per share of $0.30 in Year-to-Date 2023.

Adjusted Net Income (Loss)

As a result of the above factors, Adjusted net loss was $6.9 million and Adjusted diluted net loss per share was $0.22 in Year-to-Date 2024 compared with Adjusted net loss of $9.2 million and Adjusted diluted net loss per share of $0.29 in Year-to-Date 2023.

Adjusted EBITDA

As a result of the above factors, Adjusted EBITDA was $28.6 million in Year-to-Date 2024 compared to $35.3 million in Year-to-Date 2023. Excluding the $13.5 million from the conclusion of the Delta Air Lines business in Year-to-Date 2023, Adjusted EBITDA increased by 31.3%.

Liquidity and Capital Resources

Liquidity

Our primary need for liquidity is to fund working capital requirements of our business, which are inventory purchases, payments on debt, capital expenditures and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. The ABL Facility had a balance outstanding of $20.0 million on August 2, 2024, other than letters of credit. Cash generated from our net revenue and profitability, and to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a significant amount of net revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year. We expect that our cash on hand and cash flows from operations, along with revolving on the ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months.

ABL Facility

Our $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs and matures on July 29, 2026. The amount available to borrow is the lesser of (1) the Aggregate Commitments of $275.0 million (“ABL Facility Limit”) or (2) the Borrowing Base or Loan Cap which is calculated from Eligible Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility. The balance outstanding on August 2, 2024 and July 28, 2023 was $20.0 million and $70.0 million, respectively. The balance of outstanding letters of credit was $8.1 million and $8.6 million on August 2, 2024 and July 28, 2023, respectively. The borrowing availability under the ABL Facility was $117.5 million and $128.8 million as of August 2, 2024 and July 28, 2023, respectively.

Effective with the Fourth Amendment to the ABL Facility executed May 12, 2023, the benchmark interest rate was changed from LIBOR to SOFR plus an adjustment of 0.10% for all loans (“ABL Adjusted SOFR”). Loan interest rates are selected at the borrower’s election, is either (1) ABL Adjusted SOFR, or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month ABL Adjusted SOFR rate plus 1.00%, or (c) the Wells Fargo “prime rate”. The borrowing margin for ABL Adjusted SOFR loans is (i) less than $95.0 million, 1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For base rate loans, the borrowing margin is (i) less than $95.0 million, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00% (“Applicable Borrowing Margin”). The Applicable Borrowing Margin for all loans is based upon the average daily total loans outstanding for the previous quarter. The Fourth Amendment had no material interest rate impact.

The ABL Facility fees include (i) commitment fees of 0.25% based upon the average daily unused commitment (aggregate commitment less loans and letter of credit outstanding) under the ABL Facility for the preceding fiscal quarter, (ii) customary letter of credit fees and (iii) customary annual agent fees. As of August 2, 2024, we had $20.0 million borrowings outstanding under the ABL Facility.

Long-Term Debt

On December 29, 2023, we entered into the Current Term Loan Facility which provides borrowings of $260.0 million, the proceeds of which were used to repay all of the indebtedness under the Former Term Loan Facility and to pay fees and expenses in connection with the financing. Origination costs, including a 3% original issue discount of $7.8 million and debt origination fees of $3.8 million, were incurred in connection with entering into the Current Term Loan Facility.

The Current Term Loan Facility will mature on December 29, 2028, and will amortize at a rate equal to 1.25% per quarter. Depending upon the Company’s Total Leverage Ratio, as defined in the Current Term Loan Facility, mandatory prepayments in an amount equal to a percentage of the Company’s excess cash flows in each fiscal year, ranging from 0% to 75% are required. The Current Term Loan Facility also has typical prepayment requirements for the proceeds of certain asset sales, casualty events and extraordinary receipts. Voluntary prepayment and certain mandatory prepayments made (i) on or before December 29, 2024 would result in a prepayment premium equal to 3% of the principal amount of the loan prepaid plus a yield maintenance fee, (ii) between December 30, 2024 and December 29, 2025 would result in a prepayment premium equal to 2% of the principal amount of the loan prepaid, (iii) between December 30, 2025 and December 29, 2026, would result in a prepayment premium equal to 1% of the principal amount of the loan prepaid, (iv) between December 30, 2026 and December 29, 2027, would result in a prepayment premium equal to 0.5% of the principal amount of the loan prepaid and (v) thereafter no prepayment premium is due.

The interest rates per annum applicable to the loans under the Current Term Loan Facility are based on a fluctuating rate of interest equal to, at the Company’s election, either (1) Term Loan Adjusted SOFR loan (subject to a 2% floor) plus an applicable margin, or (2) an alternative base rate loan plus an applicable margin. The applicable margin is based on the Company’s net leverage and will be, (i) for Term Loan Adjusted SOFR loans, 8.25% per annum if the total leverage ratio is greater than or equal to 2.75:1.00, 8.00% per annum if the total leverage ratio is less than 2.75:1.00 but greater than or equal to 2.25:1.00, and 7.75% per annum if the total leverage ratio is less than 2.25:1.00 and (ii) for base rate loans, 7.25% per annum if the total leverage ratio is greater than or equal to 2.75:1.00, 7.00% per annum if the total leverage ratio is less than 2.75:1.00 but greater than or equal to 2.25:1.00, and 6.75% per annum if the total leverage ratio is less than 2.25:1.00. In each case, the net leverage is determined as of the last day of each applicable measurement period.

Effective with the First Amendment to the Former Term Loan Facility executed June 22, 2023, the interest rate benchmark changed from LIBOR to Term Loan Adjusted SOFR. The annual interest rate applicable to the loans under the Former Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Loan Adjusted SOFR rate plus 9.75% or (2) an alternative base rate (which is the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which was to be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month Term Loan Adjusted SOFR rate plus 1.00% per annum) plus 8.75%.

Both the Current and Former Term Loan Facilities contain customary agency fees.

Debt Facilities

Guarantees; Security

All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. 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 Current Term Loan Facility is also secured by a second priority security interest in the same collateral, with certain exceptions.

The Current Term Loan Facility is also secured by a first priority security interest in certain property and assets, including certain fixed assets such as real estate, stock of subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is also secured by a second priority interest in the same collateral, with certain exceptions.

Representations and Warranties; Covenants

Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability 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.

The Current Term Loan Facility contains financial covenants, including a quarterly maximum total leverage ratio test and a monthly minimum liquidity test.

Under the ABL Facility, if excess availability falls below the greater of 10% of the Loan Cap amount or $15.0 million, the Company will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0.

The Debt 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.

As of August 2, 2024, the Company was in compliance with its financial covenants in the Debt Facilities.

Events of Default

The Debt 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, material judgments and change of control.

Cash Flows and Capital Expenditures

Cash Flows from Operating Activities

Net cash provided by operating activities was $4.9 million during Year-to-Date 2024 compared to $54.8 million during Year-to-Date 2023. Through our concerted efforts to decrease inventory levels during 2023, we provided cash of $30.4 million through the end of Second Quarter 2023. We have maintained our lower inventory level realized at the end of Fiscal 2023 through efficient inventory management and therefore we used cash of $10.3 million through the end of Second Quarter 2024.

Cash Flows from Investing Activities

Net cash used in investing activities was $11.5 million and $22.9 million during Year-to-Date 2024 and Year-to-Date 2023, respectively. Cash used in investing activities for both periods was primarily used for investments to update our digital information technology infrastructure. The decrease in Year-to-Date 2024 was a result of the timing of capitalized expenditures in the second half of Fiscal 2023 and First Quarter 2024.

For Fiscal 2024, we plan to invest approximately $35.0 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 $6.9 million during Year-to-Date 2024, compared with net cash used in financing activities of $44.9 million during Year-to-Date 2023. The increase in net cash provided by financing activities is primarily due to borrowings on the ABL Facility.

Contractual Obligations and Off-Balance-Sheet Arrangements

There have been no material changes to our contractual obligations and off-balance-sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2024.

Financial Instruments with Off-Balance-Sheet Risk

The ABL Facility is available for working capital and other general corporate liquidity needs. The balance outstanding on August 2, 2024 and July 28, 2023 was $20.0 million and $70.0 million, respectively. The balance of outstanding letters of credit was $8.1 million and $8.6 million on August 2, 2024 and July 28, 2023, respectively.

Application of Critical Accounting Policies and Estimates

We believe that the assumptions and estimates associated with revenue, 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.

For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended February 2, 2024. There have been no significant changes in our critical accounting policies or their application since February 2, 2024.

Recent Accounting Pronouncements

See Part I, Item 1, Note 2, Recently Issued Accounting Pronouncements Not Yet Adopted, of the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our GMV, net sales, gross margin, operating expenses, operating income, net income, adjusted net income, adjusted EBITDA, cash flow, financial condition, financings, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, market opportunities and general market and industry conditions. We generally identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely,” “targeting” or the negative version of these words or comparable words. Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those risks, uncertainties and factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2024 and “Part II, Item 1A Risk Factors” of this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations.

Foreign Currency Exchange Risk

The Company’s international subsidiaries operate with functional currencies other than the U.S. dollar. Since the Company’s Condensed Consolidated Financial Statements are presented in U.S. dollars, the Company must translate all components of these financial statements from the functional currencies into U.S. dollars at exchange rates in effect during or at the end of the reporting period. Net revenue generated from the International distribution channel represented approximately 8% of our total Net revenue during the Year-to-Date 2024. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of net revenue, expenses, assets and liabilities. Assuming a 10% change in foreign currency exchange rates, our Net revenue for Year-to-Date 2024 would have increased or decreased by approximately $4.8 million. Translation gains or losses, which are recorded in other comprehensive income or loss, result from translation of the assets and liabilities of our international subsidiaries into U.S. dollars. Foreign currency translation losses, net, for Year-to-Date 2024 totaled approximately $0.2. million related to our international subsidiaries in United Kingdom and Germany. Additionally, the Company has foreign currency denominated intercompany receivables and payables that when settled result in a transaction gain or loss. A 10% change in foreign currency exchanges rates would not result in a significant transaction gain or loss in earnings. The Company does not utilize financial instruments for trading purposes or hedging and have not used any derivative financial instruments to limit foreign currency exchange rate exposures. The Company does not consider our foreign earnings to be permanently reinvested.

As of August 2, 2024, the Company had $10.7 million of cash and cash equivalents denominated in foreign currency, principally in euro, British pound sterling and Hong Kong dollar.

Interest Rate Risk

The Company is subject to interest rate risk with the Current Term Loan Facility and the ABL Facility, as both require the Company to pay interest on outstanding borrowings at variable rates. Each one percentage point change in interest rates (above the 2.00% SOFR floor) associated with the Current Term Loan Facility would result in a $2.5 million change in our annual cash interest expenses. Assuming our ABL Facility was fully drawn to a principal amount equal to $275.0 million, each one percentage point change in interest rates would result in a $2.8 million change in our annual cash interest expense.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation for the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of August 2, 2024, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) are effective.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the most recently completed fiscal quarter ended August 2, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended February 2, 2024, filed with the SEC on April 3, 2024.