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 agreement, dated as of
as amended to date
• CARES Act - The Coronavirus Aid, Relief and Economic Security Act signed
into law on
• Company Operated stores -
• Debt Facilities - Collectively, the ABL Facility, Term Loan Facility and
Term Loan Credit Agreement
• 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 • Separation - OnApril 4, 2014 Sears Holdings distributed 100% of the outstanding common stock ofLands' End to its shareholders • Term Loan Credit Agreement - Term loan credit agreement, dated as ofSeptember 9, 2020 , among the Company,Fortress Credit Corp. , as Administrative Agent and Collateral Agent, and the lenders party thereto
• Term Loan Facility - Term loan credit agreements, dated as of
2014, with
by the Term Loan Credit Agreement on September 9, 2020
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Table of Contents • Third Quarter 2020 - the 13 weeks endedOctober 30, 2020 • Third Quarter 2019 - the 13 weeks endedNovember 1, 2019
•
go-forward retail footprint, and other assets and component businesses of
Sears Holdings as a going concern
• Year-to-Date 2020 - The 39 weeks ended October 30, 2020
• Year-to-Date 2019 - The 39 weeks ended November 1, 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
We have seen the profound impact that the COVID-19 pandemic is having on human health, the global economy and society at large. The recent spike in the pandemic leads to continued uncertainty in our business and the overall economy.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 and one new store in Third 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 The eCommerce channel experienced a decline in customer demand in First Quarter 2020, which rebounded in Second Quarter 2020 and continued to be strong in Third Quarter 2020. Consequently, Year-to-Date 2020 eCommerce revenue has increased 18
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compared to prior year. The Outfitters and Retail channels Year-to-Date 2020 revenue is lower than Year-to-Date 2019 due to the COVID-19 pandemic, which resulted in lower customer demand in both channels. The Outfitters channel is heavily weighted to the travel industry and the Retail channel experienced lengthy store closures. The Outfitters and Retail channels continued to be negatively impacted by the COVID-19 pandemic in Third Quarter 2020, however these channels have shown better results each quarter in Year-to-Date 2020. 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. 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. All salaries were restored
during Third Quarter 2020.
• 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 October 30, 2020 ,
approximately $0.3 million of the severance costs had yet to be paid.
• Fiscal 2020 merit increases were eliminated.
• The Board of Directors compensation was temporarily reduced. This
compensation was restored in Third Quarter 2020.
• The Company's 401(k) match has been 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 owns a significant portion of
the Company's outstanding shares of common stock and while it was publicly
traded, owned a significant portion of the common stock of Sears Holdings
Corporation. 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.
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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.
Results of Operations
The following table sets forth, for the periods indicated, selected income
statement data:
13 Weeks Ended
October 30, 2020 November 1, 2019
% of % of
(in thousands) $'s Net revenue $'s Net revenue
Net revenue $ 359,982 100.0 % $ 340,023 100.0 %
Cost of sales (excluding depreciation
and amortization) 196,527 54.6 % 185,848 54.7 %
Gross profit 163,455 45.4 % 154,175 45.3 %
Selling and administrative 134,890 37.5 % 135,417 39.8 %
Depreciation and amortization 9,627 2.7 % 8,076 2.4 %
Other operating expense (income), net 255 0.1 % (225 ) (0.1 )%
Operating income 18,683 5.2 % 10,907 3.2 %
Interest expense 9,005 2.5 % 6,121 1.8 %
Other income, net (250 ) (0.1 )% (166 ) (0.0 )%
Income before income taxes 9,928 2.8 % 4,952 1.5 %
Income tax expense 2,752 0.8 % 1,346 0.4 %
NET INCOME $ 7,176 2.0 % $ 3,606 1.1 %
39 Weeks Ended
October 30, 2020 November 1, 2019
% of % of
(in thousands) $'s Net revenue $'s Net revenue
Net revenue $ 889,073 100.0 % $ 900,723 100.0 %
Cost of sales (excluding depreciation
and amortization) 496,041 55.8 % 497,589 55.2 %
Gross profit 393,032 44.2 % 403,134 44.8 %
Selling and administrative 352,164 39.6 % 374,521 41.6 %
Depreciation and amortization 27,791 3.1 % 23,101 2.6 %
Other operating expense (income), net 7,913 0.9 % (99 ) (0.0 )%
Operating income 5,164 0.6 % 5,611 0.6 %
Interest expense 19,232 2.2 % 20,190 2.2 %
Other expense (income), net 910 0.1 % (1,640 ) (0.2 )%
Loss before income taxes (14,978 ) (1.7 )% (12,939 ) (1.4 )%
Income tax benefit (5,887 ) (0.7 )% (6,713 ) (0.7 )%
NET LOSS $ (9,091 ) (1.0 )% $ (6,226 ) (0.7 )%
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 and Adjusted EBITDA
We recorded Net income of$7.2 million in Third Quarter 2020 compared to$3.6 million in the Third Quarter 2019. In addition to our Net income determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income appearing on the Condensed Consolidated 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 20
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investors or other third parties as the sole basis for formulating investment decisions as it excludes several important cash and non-cash recurring items.
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 October 30, 2020 and the 39 weeks ended
October 30, 2020 .
• Goodwill and long-lived asset impairment - chargeassociated with
the non-cash write-down of certain long-lived assets and goodwill in
the 39 weeks ended October 30, 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 39
weeks ended October 30, 2020 and November 1, 2019.
13 Weeks Ended
October 30, 2020 November 1, 2019
% of % of
(in thousands) $'s Net revenue $'s Net revenue
Net income $ 7,176 2.0 % $ 3,606 1.1 %
Income tax expense 2,752 0.8 % 1,346 0.4 %
Other income, net (250 ) (0.1 )% (166 ) (0.0 )%
Interest expense 9,005 2.5 % 6,121 1.8 %
Operating income 18,683 5.2 % 10,907 3.2 %
Depreciation and amortization 9,627 2.7 % 8,076 2.4 %
Other operating expense (income) 132 0.0 % (206 ) (0.1 )%
Corporate restructuring 16 0.0 % - -
Loss (gain) on property and equipment 107 0.0 % (19 ) (0.0 )%
Adjusted EBITDA $ 28,565 7.9 % $ 18,758 5.5 %
39 Weeks Ended
October 30, 2020 November 1, 2019
% of % of
(in thousands) $'s Net revenue $'s Net revenue
Net loss $ (9,091 ) (1.0 )% $ (6,226 ) (0.7 )%
Income tax benefit (5,887 ) (0.7 )% (6,713 ) (0.7 )%
Other expense (income), net 910 0.1 % (1,640 ) (0.2 )%
Interest expense 19,232 2.2 % 20,190 2.2 %
Operating income 5,164 0.6 % 5,611 0.6 %
Depreciation and amortization 27,791 3.1 % 23,101 2.6 %
Other operating expense 132 0.0 % - -
Corporate restructuring 2,941 0.3 % - -
Goodwill and long-lived asset impairment 3,844 0.4 % - -
Loss (gain) on property and equipment 994 0.1 % (99 ) (0.0 )%
Adjusted EBITDA $ 40,866 4.6 % $ 28,613 3.2 %
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.
To evaluate revenue performance for the eCommerce and Outfitters channels we use
Net revenue. For our Retail channel, we have historically used Company Operated
stores Same Store Sales as a key measure in evaluating performance. However, due
to the
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COVID-19 pandemic, we are no longer using Same Store Sales as a key measure in evaluating performance. The Retail channel is now evaluated on sales productivity which is a metric measuring sales traffic and customer conversion.
Discussion and Analysis
Third Quarter 2020 compared with Third Quarter 2019
Net Revenue
Net revenue for Third Quarter 2020 was
eCommerce Net revenue was$289.8 million for Third Quarter 2020, an increase of$47.5 million or 19.6%, 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$8.2 million in Third Quarter 2020, a decrease of$6.2 million or 43.0%, from the comparable period of the prior year. This decrease was driven by reduced traffic due to the COVID-19 pandemic, partially offset by improved conversion in our Company Operated stores. OnOctober 30, 2020 the Company had 31 U.S. Company Operated stores, which includes one new store opened in Third Quarter 2020, compared with 22 U.S. Company Operated stores onNovember 1, 2019 . Gross Profit Gross profit was$163.5 million in Third Quarter 2020, an increase of$9.3 million from the comparable period of the prior year. Gross margin increased approximately 10 basis points to 45.4%, in Third Quarter 2020, compared with 45.3%, in Third Quarter 2019. Gross margin benefited from improved promotional strategies and continued use of analytics, offset by increased shipping costs and surcharges as well as sales mix from third party business.
Selling and Administrative Expenses
Selling and administrative expenses decreased$0.5 million to$134.9 million or 37.5% of total Net revenue, in Third Quarter 2020, compared with$135.4 million or 39.8% of Net revenue, in Third Quarter 2019. This 230 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$9.6 million in Third Quarter 2020, an increase of$1.5 million compared with$8.1 million in Third 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/Income
Other operating expense, net was
Operating Income/Loss As a result of the above factors, Operating income was$18.7 million in Third Quarter 2020, an increase of$7.8 million , compared to$10.9 million in Third Quarter 2019. Interest Expense
Interest expense was
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Other income was
Income Tax Expense
The Company recorded tax expense at an overall effective tax rate of 27.7% for Third Quarter 2020 and 27.2% for Third Quarter 2019.
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$741.5 million for Year-to-Date 2020, an increase of$71.7 million or 10.7%, 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 partially offset by the impact of the COVID-19 pandemic in First Quarter 2020.
Outfitters Net revenue was
Retail Net revenue was$16.3 million in Year-to-Date 2020, a decrease of$22.6 million or 58.1%, 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. Company Operated stores onMarch 16, 2020 , as well as reduced traffic in those stores, partially offset by improved conversion. As ofOctober 30, 2020 , allU.S. retail stores had reopened. OnOctober 30, 2020 , the Company had 31 U.S. Company Operated stores, which includes one new store opened in Third Quarter 2020, compared with 22 U.S. Company Operated stores onNovember 1, 2019 . Gross Profit Gross profit decreased$10.1 million to$393.0 million partially due to reduced consumer demand related to the COVID-19 pandemic. Gross margin decreased approximately 60 basis points to 44.2%, for Year-to-Date 2020, compared with 44.8%, for Year-to-Date 2019, primarily driven by promotional activity throughout the industry and increased shipping costs and surcharges, partially offset by improved promotional strategies as well as continued use of data analytics.
Selling and Administrative Expenses
Selling and administrative expenses decreased$22.4 million to$352.2 million , or 39.6% of total Net revenue, in Year-to-Date 2020, compared with$374.5 million , or 41.6% of Net revenue, in Year-to-Date 2019. This 200 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$27.8 million in Year-to-Date 2020, an increase of$4.7 million , compared with$23.1 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. 23
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Other Operating Expense/Income
Other operating expense was$7.9 million in Year-to-Date 2020 compared to income Other operating income of$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 Income
As a result of the above factors, Operating income was
Interest Expense
Interest expense was
Other Expense/Income, Net
Other expense, net was
Income Tax Benefit The Company recorded a tax benefit of 39.3% for Year-to-Date 2020 reflecting the estimated tax benefits of the CARES Act. The Company recorded a tax benefit of 51.9% for Year-to-Date 2019 reflecting the tax benefits from the change in status of various foreign jurisdictions. Net Loss As a result of the above factors, Net loss was$9.1 million and diluted loss per share was$0.28 in Year-to-Date 2020 compared with a Net loss of$6.2 million and diluted loss per share of$0.19 in Year-to-Date 2019. Adjusted EBITDA As a result of the above factors, Adjusted EBITDA increased$12.3 million to$40.9 million in Year-to-Date 2020 as compared to$28.6 million in Year-to-Date 2019.
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 working capital needs and general corporate purposes. We expect that our cash on hand and cash flows from operations, along with our borrowing availability under our ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. 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.
Description of Material Indebtedness
Debt Arrangements 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 Term Loan Facility at that time of approximately$11.4 million , with the remaining proceeds used for general corporate purposes. The Term Loan Facility had a maturity date ofApril 4, 2021 . OnSeptember 9, 2020 , the Company entered into the Term Loan Credit Agreement, receiving a loan of$275.0 million . The proceeds from the Term Loan Credit Agreement, along with$125.0 million of borrowings under the ABL Facility, were used to repay 24
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all of the indebtedness under the Term Loan Facility, as well as fees and expenses associated with the financing. Upon entering into the Term Loan Credit Agreement, the Company incurred$13.0 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 Term Loan Credit Agreement. OnNovember 16, 2017 , the Company entered into the ABL Facility and onSeptember 9, 2020 the Second Amendment to the ABL Facility became effective. As ofSeptember 9, 2020 , the Company had maximum borrowings under the ABL Facility of$275.0 million . The ABL Facility has a letter of credit sub-limit of$70.0 million and is available for working capital and other general corporate purposes. As ofOctober 30, 2020 , the Company had outstanding borrowings of$155.0 million , outstanding letters of credit of$15.3 million and$104.7 million in availability under the ABL Facility. Upon entering into the ABL Facility, the Company incurred$1.5 million in debt origination fees. An additional$0.4 million of debt origination fees were incurred when entering into the Second Amendment to the ABL Facility. The fees were capitalized as debt issuance costs and are being amortized as an adjustment to Interest expense over the remaining life of the ABL Facility.
Maturity; Amortization and Prepayments
The Term Loan Credit Agreement matures onSeptember 9, 2025 and amortizes at a rate equal to 1.25% per quarter. Additionally the Term Loan Credit Agreement is subject to mandatory prepayments in an amount equal to a percentage of the borrower's excess cash flows in each fiscal year, ranging from 0% to 75% depending on the Company's total leverage ratio, and with the proceeds of certain asset sales, casualty events and extraordinary receipts. The loan may not be voluntarily prepaid during the first two years of its term. A prepayment premium is applicable to voluntary prepayments and certain mandatory prepayments made prior to the fourth anniversary of the closing date of the Term Loan Credit Agreement.
The ABL Facility matures on
Guarantees; Security Pursuant to a Term Loan Guaranty and Security Agreement, datedSeptember 9, 2020 , all obligations under the Term Loan Credit Agreement are unconditionally guaranteed byLands' End , Inc. and subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The Term Loan Credit Agreement is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets such as real estate, stock of the subsidiaries and intellectual property, in each case, subject to certain exceptions. The Term Loan Credit Agreement is also secured by a second priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory, with certain exceptions. 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. Interest; Fees The interest rates per annum applicable to the loans under the Term Loan Credit Agreement are based on a fluctuating rate of interest measured by reference to, at the borrower's election, either (1) an adjusted LIBOR (with a minimum rate of 1%) plus 9.75%, or (2) an alternative base rate (which is the greater of (i) the prime rate published in theWall Street Journal , (ii) the federal funds rate, which shall be no lower than 0%, plus ½ of 1%, and (iii) the one month LIBOR rate plus 1% per annum) plus 8.75%. An upfront fee equal to 3.00% of the principal amount of the Term Loan Credit Agreement was paid upon funding of the Term Loan Credit Agreement. Customary agency fees are payable annually. The borrowing margin under the ABL Facility is subject to adjustment based on the average daily total loans outstanding under the ABL Facility for the preceding fiscal quarter. For LIBOR loans, the interest rate is LIBOR (subject to an interest rate floor of 0.75%) plus a borrowing margin which is where the average daily total loans outstanding for the previous quarter are (i) less than$50.0 million , 1.75%, (ii) equal to or greater than$50.0 million but less than$100.0 million , 2.00%, (iii) equal to or greater than$100.0 million but less than$200.0 million , 2.25%, and (iv) greater than$200.0 million , 3.50%. For Base Rate loans, the borrowing margin is, where the average daily total loans outstanding for the previous quarter are (i) less than$50.0 million for the previous quarter, 1.00%, (ii) equal to or greater than$50.0 million but less than$100.0 million , 1.25%, (iii) equal to or greater than$100.0 million but less than$200.0 million , 1.50%, and (iv) greater than$200.0 million , 2.75%. Additionally, if average daily total loans outstanding for the previous quarter are (i) less than 50% of the lesser of (a) the aggregate commitments and (b) the borrowing base (the "Loan Cap"), the commitment fee percentage will equal 0.375% and (ii) equal to or greater than 50% of the Loan Cap, the commitment fee percentage will equal 0.25%. The commitment fee is computed as 25
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the applicable percentage multiplied by the actual daily amount by which the aggregate commitments exceed the total outstanding loans and letter of credit obligations in the preceding quarter.
Representations and Warranties; Covenants
The Term Loan Credit Agreement contains various representations and warranties, and restrictive covenants that, among other things, and subject to specified exceptions, restricts 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.
The Term Loan Credit Agreement is subject to certain financial covenants, including a quarterly maximum total leverage ratio test, a weekly minimum liquidity test and an annual maximum capital expenditure amount.
The Term Loan Credit Agreement contains 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. Additionally, the ABL Facility has a cash maintenance provision, which applies a limit of$75.0 million on the amount of cash and cash equivalents (subject to certain exceptions) that the Company may hold when outstanding loans under the ABL Facility are equal to or exceed$125.0 million . Events of Default
The Term Loan Credit Agreement and ABL Facility include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults 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 used in operating activities decreased to$26.1 million in Year-to-Date 2020 from$125.0 million in Year-to-Date 2019 driven by inventory efficiencies, higher deferred revenue and the timing of expense accruals.
Cash Flows from Investing Activities
Net cash used in investing activities was$25.6 million and$28.5 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 provided by financing activities was$30.8 million for Year-to-Date 2020 and net cash used in financing activities was$24.6 million for Year-to-Date 2019. The 2020 activity consists of new debt of$275.0 million in the Term Loan Credit Agreement and borrowings of$125.0 million on the ABL Facility to replace the Term Loan Facility and pay deferred financing fees for the new debt. The 2019 activity consisted primarily of a$100.0 million voluntary prepayment of our Term Loan Facility in First Quarter 2019 offset by borrowings under the ABL Facility.
Contractual Obligations and Off-Balance-Sheet Arrangements
OnSeptember 9, 2020 , (i) the Company entered into a new Term Loan Credit Agreement, which replaced the Term Loan Facility, and (ii) the Second Amendment to the ABL Facility, entered into onAugust 12, 2020 , became effective. There have been no other 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 endedJanuary 31, 2020 . See Note 5, Debt in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Financial Instruments with Off-Balance-Sheet Risk
On
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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 or Third Quarter 2020.
The Company concluded that recent events has not resulted in a triggering event
for the trade name in the nine months ended
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 Notes to Condensed Consolidated Financial Statements of 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. 27
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