Lands’ End Soars Without SHLD

Lands’ End (LE) announced solid first-quarter earnings June 12, its first as a public company. Since being spun off April 7 from its parent company, Sears Holdings (SHLD), LE stock has traded in a six-dollar range between $26 and $32. But the Q1 results were good enough to send the stock up more than 20% in the days since.

lands' end shldBack in March, Lands’ End made my list of 3 Stock Spinoffs That Will Outperform Their Parents. I still have the utmost confidence that, this time next year, the performance comparison between itself and SHLD won’t even be close. The recent surge in LE stock is only a glimpse at what is to come.

Here’s why the future is so bright for Lands’ End.

Lands’ End Loses Dysfunctional Parent

Getting hived off by SHLD is the best thing to happen to Lands’ End since it was bought by SHLD’s predecessor in 2002. Eddie Lampert is busy selling off everything of value while showing almost no ability to operate a department store of any size, let alone one of the country’s largest.

Being set free from the incompetence that permeates the executive suite at Sears can only help Lands’ End regain its footing as a respected national brand.

Lands’ End’s Financial Picture

Lands’ End’s overall financial picture has trended downward in the past five years with revenues declining by 6% to $1.56 billion. Meanwhile, its adjusted EBITDA saw a 33% decline to $150 million. Given these numbers, it’s understandable that investors weren’t exactly lapping up Lands’ End stock when it became an independent company.

However, the financial picture from a balance sheet perspective isn’t all that bad. Sure, Lands’ End undertook a $515 million term loan (most payable more than five years out) to pay a $500 million dividend to SHLD as part of its spinoff, but it still finished the first quarter with long-term debt just 3.3 times adjusted EBITDA. It’s not perfect, but I’m sure CEO Edgar Huber, who has led some pretty impressive businesses, will whittle that down in no time.

As for its Q1 report there are a few numbers that stand out.

  • Although its retail segment saw a 2% decrease in sales due to 25 fewer Lands’ End Shops open, it still managed to deliver same-store sales growth of 3.4%.
  • Its e-commerce business, which represents 84% of Lands’ End’s overall revenue, managed to increase sales by 5% year-over-year to $276 million.
  • Operating income for its e-commerce business in the quarter increased by 49% to $25.2 million. That’s a margin of 9.1%, 270 basis points higher than last year. More importantly, this powered Lands’ End to a 57% increase in overall operating income and a 200 basis-point increase in operating margins.
  • Gross margin inched up 50 basis points in the quarter to 49.0%. When you consider that brands like Kate Spade (KATE) and Michael Kors (KORS) have gross margins in the high 50s, a move into the 50s by Lands’ End would be impressive, not to mention profitable.

Its first quarterly report as a public company portends better things to come. Lands’ End is solidly profitable and should become even more so with time. There’s nothing shaky about its business — and that’s saying something, considering where it’s come from.

Lands’ End Future

I think the future is very favorable for Lands’ End because online is where retail is headed and the company is already there. With more people webrooming than showrooming these days, it stands to reason that those retailers providing convenient brick-and-mortar stores so that customers can click-and-collect are likely to be the most successful. This means that as Lands’ End becomes less reliant on the Shops at Sears (251 in Q1 2014 vs. 276 in Q1 2013), it must increase the number of standalone stores, which currently sits at 14.

Huber has a five-point plan whose goal is to transform Lands’ End into a $5 billion company. One of the biggest goals is international growth. Presently, there are no stores outside the U.S., although it does sell online in 170 countries around the globe. While it hasn’t stated publicly how much international business it generates, its vice president in charge of international business development, Carl Atwell, suggested that it aims to triple or quadruple the amount of business it does outside the U.S. I don’t see any reason why it can’t achieve this goal within 2-3 years.

Lands’ End — Bottom Line

If you believe the saying, “Every cloud has a silver lining” than you should definitely feel this way about Sears if you’re a shareholder. I wouldn’t have touched SHLD over the past 2-3 years because of all the uncertainty created by Lampert’s elaborate game of checkers, but it did result in Lands’ End being spun off into its own independent company for which every SHLD shareholder got one-third of a share in the new company.

As I suggested in March, SHLD shareholders should sell some or all of their stock, buying Lands’ End shares with the proceeds. Two months later I’m even more convinced this is the right move. There’s no question Lands’ End has what it takes to be successful as an independent retail operation.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

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