This morning, Lands’ End, Inc. (LE) posted its second set of quarterly results after being spun out from underneath the Sears Holdings Corp. (SHLD) umbrella.
As anyone who owns or has been watching LE stock could have expected, the echoes from the spinoff — both good and bad — are still ringing, so it may feel a little soon to make a final judgment on the company based solely on the Lands’ End earnings results for its Q3.
On the other hand, there are already some noticeable structural shifts in the numbers that aren’t apt to go away anytime soon. As such, it’s not too soon to at least start a constructive discussion of whether or not Lands’ End is better off in the long run by not being part of the Sears Holdings family.
Lands’ End Earnings
Just as a quick reminder, Sears finally completed the divestiture of Lands’ End in April. However, there are still 242 Lands’ End shops located within Sears stores, which puts at least a piece of Lands’ End’s fate in struggling Sears’ hands. The bulk of Lands’ End’s sales are still made directly to consumers, though. In fact, 85% of its revenue last quarter was driven by direct-to-consumer sales. Point being, the relationship with Sears isn’t game-changing …. fortunately.
In any case, the Lands’ End earnings report for the most recently reported quarter indicated a 2.8% decline in total sales. Direct sales (directly from the company to the consumer) fell 1.2% to $320.3 million. Retail sales (sales made through its Sears shops and its fourteen stand-alone stores) saw an 11.5% decline in revenue, falling to $52.8 million.
That’s not a small drop, but bear in mind at this time a year ago Lands’ End shops could be found in 275 Sears stores. That’s 12% fewer shops, right in line with the 11% dip in retail sales.
What’s more than a little interesting is profits were up, despite the drop in revenue. Operating income grew 50.8% to $35.1 million. Net income improved 26.0%, reaching $18 million. Earnings per share of LE stock improved from 45 cents in the third quarter of 2013 to 56 cents per share for the third quarter of 2014.
Making more money with less revenue? Lands’ End CEO Edgar Huber has to be wondering why Sears Holdings CEO Eddie Lampert didn’t think to spin off this company a long time ago.
But wait — it gets better.
Reality Check
One of the more contentious points of the Lands’ End split from Sears was the requirement that the subsidiary pay the parent company a one-time cash dividend of $500 million for the privilege of being spun off. Lands’ End didn’t have $500 million to fork over, so Eddie Lampert generously orchestrated $500 million worth of debt for Lands’ End in order to facilitate the deal.
Future owners of LE stock were understandably worried that such a debt burden could crush an otherwise profitable Lands’ End, adding an extra $6.2 million worth of expense each and every quarter. As it turns out, it han’t been a problem. That net income figure of $18 million factored in the $6.2 million interest payment. Though a bottom line of $24.2 million would have obviously been nicer, net profit margins of 4.8% are actually pretty solid for retailing.
Said another way, Lands’ End is handling the unfair debt in stride, as its margins are already much stronger than most would have expected before it was out from underneath the money-sucking shadow of Sears.
Bottom Line for LE Stock
The market’s initial response to Lands’ End earnings report was a bearish one … LE stock was down 14% shortly after the market opened, as investors saw no net sales growth even after dismissing its Sears-related results. As of this writing, it had climbed back to a 7.5% decline, which is still no small dip. This hit just shows that a company with a forward-looking P/E of more than 20 (before the selloff anyway) can’t afford to disappoint the market in any way, shape, or form.
Throw in the fact that roughly 15% of Lands’ End sales come from a deteriorating Sears that may not be around much longer, and it would be surprising if Lands’ End shareholders weren’t nervous.
Make no mistake, though. The only real problem Lands’ End has is a valuation problem with LE stock. The company is doing fine on its own — arguably even thriving. The modest overall revenue dip outside of the Sears-related lull is can mostly be chalked up to Lands’ End still finding itself out from underneath the Sears Holdings shadow.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
