LANDS' END, INC. 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 Statements Concerning Forward-Looking Statements" below and "Item 1A. Risk Factors" in our Annual Report filed on Form 10-K for the year endedJanuary 31, 2020 , the risk factors contained in our Current Report on Form 8-K datedJune 2, 2020 , 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
• ABL Facility -Asset-based senior secured credit agreements, dated as of
• CARES Act - The Coronavirus Aid, Relief and Economic Security Act signed
into law on
• Company Operated stores -
• Debt Facilities - Collectively, the ABL Facility and the Term Loan Facility
• EOM - Enterprise order management software solutions
• ESL -
Edward S. Lampert • First Quarter 2020 - The 13 weeks endedMay 1, 2020 • First Quarter 2019 - The 13 weeks endedMay 3, 2019 • Fiscal 2020 - The 52 weeks endingJanuary 29, 2021 • Fiscal 2019 - The 52 weeks endedJanuary 31, 2020 • Fiscal 2018 - The 52 weeks endedFebruary 1, 2019 • GAAP - Accounting principles generally accepted inthe United States
•
• LIBOR -London inter-bank offered rate • Sears Holdings or Sears Holdings Corporation - Sears Holdings
Corporation, a
•SEC -United States Securities and Exchange Commission • Second Quarter 2020 - the 13 weeks endedJuly 31, 2020 • Second Quarter 2019 - the 13 weeks endedAugust 2, 2019
• Separation - OnApril 4, 2014 Sears Holdings distributed 100% of the outstanding common stock ofLands' End to its shareholders
• Term Loan Facility - Term loan credit agreements, dated as of
2014, with Bank of America, N.A . and certain other lenders
• Third Quarter 2020 - the 13 weeks ending October 30, 2020
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• Transform Holdco -
go-forward retail footprint, and other assets and component businesses of
Sears Holdings as a going concern
• Year-to-Date 2020 - The 26 weeks ended July 31, 2020
• Year-to-Date 2019 - The 26 weeks ended August 2, 2019
Executive Overview
Description of the Company
Lands' End is a leading uni-channel retailer of casual clothing, accessories,
footwear and home products. Operating out of America's heartland, we believe our
vision and values make a strong connection with our core customers. We offer
products online at www.landsend.com, on third party online marketplaces and
through retail locations. We are a classic American lifestyle brand with a
passion for quality, legendary service and real value, and seek to deliver
timeless style for women, men, kids and the home.
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."
Lands' End seeks to provide a common customer experience regardless of whether
our customers are interacting with us on our company websites, third party
marketplaces, at Company Operated stores or other distribution outlets. We have
one external reportable segment and identify our operating segments according to
how our business activities are managed and evaluated. Our operating segments
consist of U.S. eCommerce, Retail, Lands' End Outfitters ("Outfitters"), Europe
eCommerce and Japan eCommerce. 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.
Lands' End 's product channels are eCommerce, Retail and Outfitters. eCommerce
offers products through the Company's eCommerce websites, third party online
marketplaces and direct mail catalogs. Retail sells products and services
through Company Operated stores. Outfitters sells products to end consumers,
located primarily in the United States , through negotiated arrangements with
client organizations to make specific styles or embroidered products available
to members of client organizations, as well as through the Company's eCommerce
websites and direct mail catalogs.
Impact of the COVID-19 Pandemic
Over the past few months, we have seen the profound impact that COVID-19 pandemic is having on human health, the global economy and society at large.Lands' End has been actively addressing the COVID-19 pandemic and its impact globally, working to mitigate the potential impacts to our employees, customers and business. The impact of the COVID-19 pandemic and measures to prevent its spread are affecting our business in a number of ways. We continue to believe that we will emerge from these events well positioned for long-term growth, though we cannot reasonably estimate the duration and severity of this global pandemic or its ultimate impact on the global economy and our business and results.
Health and Safety of our People and Consumers
From the beginning of the COVID-19 pandemic, our priority has been the safety of our employees and customers. OnMarch 16, 2020 , we temporarily closed our 26U.S. stores. These stores reopened during Second Quarter 2020. Additionally, the Company opened four new stores in Second Quarter 2020. Due to the COVID-19 pandemic we have implemented extra precautions in our offices and distribution centers. These precautions were developed in line with guidance from global, federal and state health authorities, including work-from-home policies, social distancing, thermal scanning and partitions in our facilities. Customer Demand In the Second Quarter 2020, customer demand in the eCommerce channel rebounded from the decline experienced in First Quarter 2020. The eCommerce channel delivered a double-digit revenue increase and consequently Year-to-Date 2020 eCommerce revenue has increased compared to prior year. Year-to-Date 2020 revenue in the Outfitters and Retail channels is lower than Year-to-Date 2019 due to the reduction in customer demand caused by the COVID-19 pandemic. Retail revenue also declined due to lengthy store closures. The ultimate timing and impact of customer demand levels will depend on the duration and scope of the COVID-19 pandemic, overall economic conditions and consumer preferences. 19
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Table of Contents Supply Chain We have not experienced significant supply chain disruptions related to the COVID-19 pandemic. We continue to place a priority on business continuity and contingency planning. We may experience disruptions in our supply chain as the pandemic continues, though we cannot reasonably estimate the potential impact or timing of those events, and we may not be able to mitigate such impact. Expense Reduction
Beginning in First Quarter 2020, we took the following actions to reduce overall expense as a response to decreased customer demand due to the COVID-19 pandemic:
• Temporarily reduced base salaries, including a reduction of 50% in the
base salary of our Chief Executive Officer and President, 20% reduction
in the base salaries of our other senior management members and scaled
salary reductions throughout the Company.
• Furlough of approximately 70% of corporate employees and nearly 100% of
retail employees from March 28, 2020 to April 13, 2020 , with
approximately 49% of the workforce remaining furloughed at the end of
First Quarter 2020.
• Permanent reduction of approximately 10% of corporate staff during Second
Quarter 2020, with all remaining furloughed personnel returning to work
by mid-Second Quarter 2020. The Company incurred total severance costs of
approximately $3.0 million related to the reduction of corporate staff
which was recorded in Other operating expense (income), net in the
Condensed Consolidated Statements of Operations. As of July 31, 2020
approximately $1.2 million of the severance costs had yet to be paid.
• Fiscal 2020 merit increases were eliminated.
• The Board of Directors compensation was temporarily reduced.
• The Company's 401(k) match was temporarily suspended.
• Other discretionary operating expenses were significantly reduced.
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. The COVID-19
pandemic has had an impact on our Year-to-Date 2020 results and we expect it to
continue to have an impact on our results. As such, this interim period, as well
as upcoming periods, may not be comparable to past performance or indicative of
future performance
Related party
Following the Separation, we began operating as a separate, publicly traded
company, independent from Sears Holdings. According to statements on Schedule
13D filed with the SEC by 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. On February 11, 2019 , Transform Holdco acquired from Sears Holdings
substantially all of the go-forward retail footprint, and other assets and
component businesses of Sears Holdings as a going concern. We believe that ESL
holds a significant portion of the membership interests of Transform Holdco and
therefore consider that entity to be a related party as well.
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 37.9% and 34.6% of
our net revenue in the fourth fiscal quarter of Fiscal 2019 and Fiscal 2018
respectively. Thus, lower than expected fourth quarter net revenue 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.
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Results of Operations
The following table sets forth, for the periods indicated, selected income
statement data:
13 Week Period Ended
July 31, 2020 August 2, 2019
% of % of
(in thousands) $'s Net revenue $'s Net revenue
Net revenue $ 312,083 100.0 % $ 298,267 100.0 %
Cost of sales (excluding depreciation
and amortization) 176,661 56.6 % 169,182 56.7 %
Gross profit 135,422 43.4 % 129,085 43.3 %
Selling and administrative 111,478 35.7 % 122,260 41.0 %
Depreciation and amortization 9,378 3.0 % 7,408 2.5 %
Other operating expense (income), net 3,373 1.1 % (22 ) (0.0 )%
Operating income (loss) 11,193 3.6 % (561 ) (0.2 )%
Interest expense 4,916 1.6 % 6,235 2.1 %
Other expense (income), net 1,333 0.4 % (608 ) (0.2 )%
Income (loss) before income taxes 4,944 1.6 % (6,188 ) (2.1 )%
Income tax expense (benefit) 568 0.2 % (3,174 ) (1.1 )%
NET INCOME (LOSS) $ 4,376 1.4 % $ (3,014 ) (1.0 )%
26 Week Period Ended
July 31, 2020 August 2, 2019
% of % of
(in thousands) $'s Net revenue $'s Net revenue
Net revenue $ 529,091 100.0 % $ 560,700 100.0 %
Cost of sales (excluding depreciation
and amortization) 299,514 56.6 % 311,741 55.6 %
Gross profit 229,577 43.4 % 248,959 44.4 %
Selling and administrative 217,276 41.1 % 239,104 42.6 %
Depreciation and amortization 18,164 3.4 % 15,026 2.7 %
Other operating expense, net 7,656 1.4 % 126 0.0 %
Operating loss (13,519 ) (2.6 )% (5,297 ) (0.9 )%
Interest expense 10,227 1.9 % 14,069 2.5 %
Other expense (income), net 1,160 0.2 % (1,475 ) (0.3 )%
Loss before income taxes (24,906 ) (4.7 )% (17,891 ) (3.2 )%
Income tax benefit (8,639 ) (1.6 )% (8,059 ) (1.4 )%
NET LOSS $ (16,267 ) (3.1 )% $ (9,832 ) (1.8 )%
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.
Net Income (Loss) and Adjusted EBITDA
We recorded Net income of$4.4 million in Second Quarter 2020 compared to Net loss of$3.0 million in the Second Quarter 2019. In addition to our Net income and Net loss determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income or Net loss appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, 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 for comparable periods, and as an executive compensation metric. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies 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 EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes several important cash and non-cash recurring items. 21
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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. 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.
• Corporate restructuring - corporate restructuring actions and
activities including severance for the reduction in corporate staff,
in the 13 weeks ended July 31, 2020 and the 26 weeks ended July 31,
2020 and August 2, 2019 .
• Long-lived asset impairment - charge associated with the non-cash
write-down of certain long-lived assets in the 13 weeks ended July
31, 2020 .
• Goodwill and long-lived asset impairment - chargeassociated with
the non-cash write-down of certain long-lived assets and goodwill in
the 26 weeks ended July 31, 2020 .
• Loss or gain on property and equipment - management considers the
losses or gains on asset valuation to result from investing
decisions rather than ongoing operations for the 13 weeks and 26
weeks ended July 31, 2020 and August 2, 2019.
13 Weeks Ended
July 31, 2020 August 2, 2019
% of % of
(in thousands) $'s Net revenue $'s Net revenue
Net income (loss) $ 4,376 1.4 % $ (3,014 ) (1.0 )%
Income tax expense (benefit) 568 0.2 % (3,174 ) (1.1 )%
Other expense (income), net 1,333 0.4 % (608 ) (0.2 )%
Interest expense 4,916 1.6 % 6,235 2.1 %
Operating income (loss) 11,193 3.6 % (561 ) (0.2 )%
Depreciation and amortization 9,378 3.0 % 7,408 2.5 %
Corporate restructuring 2,925 0.9 % - 0.0 %
Long-lived asset impairment 400 0.1 % - 0.0 %
Loss (gain) on property and equipment 48 0.0 % (22 ) (0.0 )%
Adjusted EBITDA $ 23,944 7.7 % $ 6,825 2.3 %
26 Week Period Ended
July 31, 2020 August 2, 2019
% of % of
(in thousands) $'s Net revenue $'s Net revenue
Net loss $ (16,267 ) (3.1 )% $ (9,832 ) (1.8 )%
Income tax benefit (8,639 ) (1.6 )% (8,059 ) (1.4 )%
Other income (loss), net 1,160 0.2 % (1,475 ) (0.3 )%
Interest expense 10,227 1.9 % 14,069 2.5 %
Operating loss (13,519 ) (2.6 )% (5,297 ) (0.9 )%
Depreciation and amortization 18,164 3.4 % 15,026 2.7 %
Corporate restructuring 2,925 0.6 % 207 0.0 %
Goodwill and long-lived asset impairment 3,844 0.7 % - 0.0 %
Loss (gain) on property and equipment 887 0.2 % (81 ) (0.0 )%
Adjusted EBITDA $ 12,301 2.3 % $ 9,855 1.8 %
In assessing the operational performance of our business, we consider a variety
of financial measures. We operate in three channels: eCommerce, Outfitters, and
Retail. A key measure in the evaluation of our business is revenue performance
by channel. We also consider gross margin and Selling and administrative
expenses in evaluating the performance of our business.
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To evaluate revenue performance for the eCommerce and Outfitters channels we use Net revenue. For our Retail channel, we use Company Operated stores Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations when it has been open for at least 14 months and selling square footage has not changed by 15% or more within the past year. Online sales and sales generated through our in-store web portal are considered revenue in our eCommerce channel and are excluded from Same Store Sales. Discussion and Analysis
Second Quarter 2020 compared with Second Quarter 2019
Net Revenue
Net revenue for Second Quarter 2020 was
eCommerce Net revenue was$270.2 million for Second Quarter 2020 an increase of$51.6 million or 23.6%, from the comparable period of the prior year. The increase was primarily driven by customer demand for key items and strong new customer acquisition both of which benefitted from the more prevalent work from home lifestyle.
Outfitters Net revenue was
Retail Net revenue was$4.5 million in Second Quarter 2020, a decrease of$9.7 million or 68.5%, from the comparable period of the prior year. This decrease was driven by the closure of allLands' End Shops at Sears locations and, due to the COVID-19 pandemic, the temporary closure ofU.S. retail stores onMarch 16, 2020 . As ofJuly 31, 2020 all 26 U.S retail stores had reopened. OnJuly 31, 2020 we had 30 U.S. Company Operated stores, which includes four new stores opened within the Second Quarter 2020, compared with 21 U.S. Company Operated stores onAugust 2, 2019 . Gross Profit Gross profit was$135.4 million in Second Quarter 2020, an increase of$6.3 million from the comparable period of the prior year. Gross margin increased approximately 10 basis points to 43.4%, in Second Quarter 2020, compared with 43.3%, in Second Quarter 2019, primarily driven by improved promotional strategies and continued use of analytics, partially offset by the liquidation of seasonal inventory as retail stores reopened.
Selling and Administrative Expenses
Selling and administrative expenses decreased$10.8 million to$111.5 million or 35.7% of total Net revenue, in Second Quarter 2020, compared with$122.3 million or 41.0% of Net revenue, in Second Quarter 2019. This 530 basis point decrease was primarily due to strong controls to manage non-essential operating expenses and structural costs in response to the COVID-19 pandemic.
Depreciation and Amortization
Depreciation and amortization expense was$9.4 million in Second Quarter 2020, an increase of$2.0 million compared with$7.4 million in Second Quarter 2019. This increase was primarily attributable to depreciation associated with our EOM system implementation, continued investment in our digital infrastructure and an increased number ofU.S. Company Operated stores. Other Operating Expense Other operating expense, net was$3.4 million in Second Quarter 2020 compared to an insignificant amount in Second Quarter 2019 due to the impact of corporate restructuring which includes severance for the reduction in corporate staff in Second Quarter 2020. Operating Income/Loss
As a result of the above factors, Operating income was
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Table of Contents Interest Expense
Interest expense was
Other Expense/ Income
Other expense was
Income Tax Benefit We recorded tax expense at an overall effective tax rate of 11.5% for Second Quarter 2020. This rate reflects the tax expense generated from changes in estimates related to improvement in Company performance and revised outlook for Fiscal 2020 as a result of the COVID-19 pandemic. We recorded an income tax benefit of 51.3% for Second Quarter 2019. This rate reflects the tax benefits resulting from the change in status of various foreign jurisdictions. Net Income/Loss
As a result of the above factors, Net income was
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased
Year-to-Date 2020 compared with Year-to-Date 2019
Net Revenue
Net revenue for Year-to-Date 2020 was
eCommerce Net revenue was$451.7 million for Year-to-Date 2020, an increase of$24.2 million or 5.7%, from the comparable period of the prior year. The increase was primarily driven by customer demand for key items and strong new customer acquisition both of which benefitted from the more prevalent work from home lifestyle.
Outfitters Net revenue was
Retail Net revenue was$8.1 million in Year-to-Date 2020, a decrease of$16.5 million or 67.0%, from the comparable period of the prior year. This decrease was driven by the closure of allLands' End Shops at Sears locations and, due to the COVID-19 pandemic, the temporary closure ofU.S. retail stores onMarch 16, 2020 . As ofJuly 31, 2020 all 26 U.S. retail stores had reopened. OnJuly 31, 2020 , the Company had 30 U.S. Company Operated stores, which includes four new stores opened within the Second Quarter 2020, compared with 21U.S. Company Operated stores onAugust 2, 2019 . Gross Profit
Gross profit decreased
Selling and Administrative Expenses
Selling and administrative expenses decreased$21.8 million to$217.3 million , or 41.1% of total Net revenue, in Year-to-Date 2020, compared with$239.1 million , or 42.6% of Net revenue, in Year-to-Date 2019. This 150 basis point decrease was primarily due to strong controls to manage non-essential operating expenses and structural costs in response to the COVID-19 pandemic. 24
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Depreciation and Amortization
Depreciation and amortization expense was$18.2 million in Year-to-Date 2020, an increase of$3.1 million , compared with$15.0 million in Year-to-Date 2019. The increase was primarily attributable to depreciation associated with our EOM system implementation, continued investment in our digital infrastructure and an increased number ofU.S. Company Operated stores. Other Operating Expense Other operating expense was$7.7 million in Year-to-Date 2020 compared to$0.1 million in Year-to-Date 2019. This increase was due to impairment of goodwill and long-lived assets as well as the impacts of corporate restructuring which include severance for the reduction in corporate staff in Second Quarter 2020. Operating Loss
As a result of the above factors, Operating loss was
Interest Expense
Interest expense was
Other Expense/Income, Net
Other expense, net was
Income Tax Benefit We recorded tax benefit of 34.7% for Year-to-Date 2020. This rate reflects the estimated tax benefits as a result of the CARES Act. We recorded an income tax benefit of 45.0% for Year-to-Date 2019. This rate reflects the tax benefits resulting from the change in status of various foreign jurisdictions. Net Loss
As a result of the above factors, Net loss was
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased
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. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. As ofJuly 31, 2020 we had zero borrowings on the ABL Facility. Cash generated from our net revenue and profitability, and somewhat 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. The following information relates to the Term Loan Facility and ABL Facility as each was in effect atJuly 31, 2020 . 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, and material judgments and change of control. The Term Loan Facility was scheduled to mature onApril 4, 2021 , and onSeptember 9, 2020 was replaced by the new Term Loan Credit Agreement. The ABL Facility was amended onAugust 12, 2020 and matures onNovember 16, 2022 . See Note 13, Subsequent Events in Notes to Condensed Consolidated Financial Statements for additional information. As a result of this refinancing, we believe we have sufficient liquidity to satisfy our obligations for the foreseeable future. 25
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Description of Material Indebtedness
Debt Arrangements OnNovember 16, 2017 , the Company entered into the ABL Facility, which provides for maximum borrowings of$175.0 million for the Company, subject to a borrowing base. During First Quarter 2020, the Company increased capacity under the ABL Facility by$25.0 million , so that maximum borrowings were$200.0 million at the end of First Quarter 2020. The ABL Facility has a letter of credit sub-limit of$70.0 million . The ABL Facility is available for working capital and other general corporate purposes. As ofJuly 31, 2020 , the Company had zero borrowings, outstanding letters of credit of$12.0 million and$188.0 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company incurred$1.5 million in debt origination fees. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Debt Facilities. OnApril 4, 2014 ,Lands' End entered into 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 Debt Facilities at that time of approximately$11.4 million , with the remaining proceeds used for general corporate purposes. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the Debt Facilities. In First Quarter 2019,Lands' End made a$100.0 million voluntary prepayment on the Term Loan from excess cash on hand.
Maturity; Amortization and Prepayments
The Term Loan Facility amortizes 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 (as defined in the Term Loan Facility) in each fiscal year, ranging from 0% to 50% depending onLands' End 's secured leverage ratio, and the proceeds from certain asset sales and casualty events.
The Term Loan Facility matures on
Guarantees; Security All obligations under the Debt Facilities are unconditionally guaranteed byLands' End , Inc. and subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic 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 Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions. The Term Loan Facility is also 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 also secured by a second priority security interest in the same collateral. Interest; Fees The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers' election, either (i) an adjusted LIBOR rate 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. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% for the ABL Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facility. Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees also include (i) commitment fees in an amount equal to 0.25% of the daily unused portions of the ABL Facility and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability ofLands' 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 26
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coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain
financial maintenance covenants. The Company was in compliance with all
financial covenants related to the Debt Facilities as of
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. 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, and material judgments and change of control.
Cash Flows from Operating Activities
Net cash provided by operating activities decreased to
Cash Flows from Investing Activities
Net cash used in investing activities was$19.8 million and$24.8 million for Year-to-Date 2020 and Year-to-Date 2019, respectively. Cash used in investing activities for both periods was primarily used for investments to update our information technology infrastructure and property and equipment.
Cash Flows from Financing Activities
Net cash used in financing activities was$3.0 million for Year-to-Date 2020 and$103.3 million for Year-to-Date 2019 consisting primarily of a$100.0 million voluntary prepayment of our Term Loan Facility in First Quarter 2019.
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
Financial Instruments with Off-Balance-Sheet Risk
OnNovember 16, 2017 , the Company entered into the ABL Facility, which provides for maximum borrowings of$175.0 million for the Company, subject to a borrowing base. During First Quarter 2020, the Company increased capacity under the ABL Facility by$25.0 million . The ABL Facility has a letter of credit sub-limit of$70.0 million and matures onNovember 16, 2022 . The ABL Facility is available for working capital and other general corporate purposes. As ofJuly 31, 2020 , the Company had zero outstanding borrowings, outstanding letters of credit of$12.0 million and$188.0 million in availability under the ABL Facility. The ABL Facility was amended onAugust 12, 2020 . See Note 13, Subsequent Events in Notes to Condensed Consolidated Financial Statements for additional information.
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.
The duration and severity of the COVID-19 pandemic could result in additional future impairment charges for goodwill and the trade name indefinite-lived intangible asset. We considered the COVID-19 pandemic to be a triggering event for goodwill in First Quarter 2020 for the Outfitters andJapan eCommerce reporting units, resulting in full impairment of the$3.3 million of goodwill allocated toJapan eCommerce reporting unit, recorded during First Quarter 2020. There was not a triggering event or impairment charges for any reporting unit in Second Quarter 2020.
The Company concluded that recent events did not result in a triggering event for trade name in First Quarter 2020 or Second Quarter 2020.
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For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year endedJanuary 31, 2020 , and Note 2, Recent Accounting Pronouncements. There have been no significant changes in our critical accounting policies or their application sinceJanuary 31, 2020 .
Recent Accounting Pronouncements
See Part I, Item 1, Note 2, Recent Accounting Pronouncements, 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 net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, financing activities, liquidity, the impact of the COVID-19 pandemic, 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," "could 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 endedJanuary 31, 2020 , as supplemented by the risk factors contained in the Current Report on Form 8-K datedJune 2, 2020 and as modified by "Part II, Item 1A Risk Factors" of this Quarterly Report on From 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. 28
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