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Background and Basis of Presentation | 9 Months Ended
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Oct. 27, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Background and Basis of Presentation | NOTE 1. BACKGROUND AND BASIS OF PRESENTATION Description of Business Lands’ End, Inc. (“Lands’ End” or the “Company”) is a leading digital retailer of casual clothing, swimwear, outerwear, accessories, footwear, home products and uniform solutions. Lands’ End offers products online at www.landsend.com, through Company Operated stores and through third-party distribution channels. Lands’ End is a classic American lifestyle brand with a passion for quality, legendary service and real value and seeks to deliver timeless style for women, men, kids and the home. Lands’ End also offers products to businesses and schools, for their employees and students, through the Outfitters distribution channel. References to www.landsend.com do not constitute incorporation by reference of the information at www.landsend.com, and such information is not part of this Quarterly Report on Form 10-Q or any other filings with the SEC, unless otherwise explicitly stated. Terms that are commonly used in the Company’s Notes to Condensed Consolidated Financial Statements 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 certain significant items • ASC – Financial Accounting Standards Board Accounting Standards Codification, which serves as the source for authoritative GAAP, as supplemented by rules and interpretive releases by the SEC which are also sources of authoritative GAAP for SEC registrants • Company Operated stores – Lands’ End retail stores in the Retail distribution channel • Debt Facilities – Collectively, the Term Loan Facility and ABL Facility • Deferred Awards – Time vesting stock awards • EPS – Earnings per share • FASB – Financial Accounting Standards Board • Fiscal 2023 – The 53 weeks ending February 2, 2024 • Fiscal 2022 – The 52 weeks ended January 27, 2023 • GAAP – Accounting principles generally accepted in the United States • LIBOR – London inter-bank offered rate • Option Awards – Stock option awards • Performance Awards – Performance-based stock awards • SEC – United States Securities and Exchange Commission • Second Quarter 2023 – The 13 weeks ended July 28, 2023 • Second Quarter 2022 – The 13 weeks ended July 29, 2022 • SOFR – Secured Overnight Funding Rate • Target Shares – Number of restricted stock units awarded to a recipient which reflects the number of shares to be delivered based on achievement of target performance goals • 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, as amended to date • Third Quarter 2023 – The 13 weeks ended October 27, 2023 • Third Quarter 2022 – The 13 weeks ended October 28, 2022 Basis of Presentation The Condensed Consolidated Financial Statements include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands’ End Annual Report on Form 10-K filed with the SEC on April 10, 2023. Macroeconomic Challenges Macroeconomic issues, such as recent inflationary pressures and rising interest rates, have continued to have an impact on the Company’s business. Since apparel purchases are discretionary expenditures that historically have been influenced by domestic and global economic conditions, higher prices of consumer goods due to inflation may result in less discretionary spending for consumers which may negatively impact customer demand and require higher levels of promotion in order to attract and retain customers. Additionally, interest expense could be negatively affected by any continued rate increases due to the variable interest rates associated with the Company’s Debt Facilities. These macroeconomic challenges have led to increased cost of raw materials, packaging materials, labor, energy, fuel, debt and other inputs necessary for the production and distribution of the Company’s products. Corporate Restructuring The Company reduced corporate positions, primarily in the Company’s Hong Kong sourcing office, during Third Quarter 2023. The Company incurred total severance costs of approximately $2.3 million related to the reduction in corporate positions which was recorded in Other operating expense, net in the Consolidated Statements of Operations. As of October 27, 2023, approximately $0.4 million of the severance costs had yet to be paid and is included in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. Lands’ End Japan Closure During Second Quarter 2022, the Board of Directors approved a plan to wind down and cease operations of Lands’ End Japan KK. Lands’ End Japan KK represents the Japan eCommerce operating segment. For a discussion on this operating segment, see Note 13, Segment Reporting. The Company incurred closing costs of approximately $0.1 million and $3.0 million during the 13 weeks ended October 27, 2023 and October 28, 2022, respectively. For the 39 weeks ended October 27, 2023 and October 28, 2022 the Company incurred closing costs of approximately $0.2 million and $3.0 million, respectively, recorded in Other operating expense, net in the Consolidated Statements of Operations. See Note 9, Lands’ End Japan Closure. Goodwill and Indefinite-Lived Intangible Asset Impairment Analysis Goodwill and the indefinite-lived trade name intangible asset are tested separately for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment assessments contain multiple uncertainties because the calculation requires management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting cash flows under different scenarios. Goodwill impairment assessments In connection with the preparation of the financial statements included in this Form 10-Q, the Company considered the decline in the Company’s stock price and market capitalization, as well as current market and macroeconomic conditions, to be a triggering event for the U.S. eCommerce and Outfitters reporting units and therefore completed an interim test for impairment of goodwill for these reporting units as of October 27, 2023. The Company tested goodwill for impairment using a one-step quantitative test. The quantitative test compares the reporting unit’s fair value to its carrying value. An impairment is recorded for any excess carrying value above the reporting unit’s fair value, not to exceed the amount of goodwill. The Company estimates fair value of its reporting units using a discounted cash flow model, commonly referred to as the income approach. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions appropriate to the Company’s reporting unit. The discounted cash flow model uses management’s best estimates of economic and market conditions over the projected period using the best information available, including growth rates in revenues, costs and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, weighted average cost of capital and changes in future working capital requirements. The testing resulted in full impairment of $70.4 million and $36.3 million of goodwill allocated to the Company’s U.S. eCommerce and Outfitters reporting units, respectively. Indefinite-lived intangible asset impairment assessments The Company’s indefinite-lived intangible asset is the Lands’ End trade name. The Company reviews the trade name for impairment on an annual basis during the fourth fiscal quarter, or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The fair value of the trade name indefinite-lived intangible asset is estimated using the relief from royalty method. The relief from royalty method is based on the assumption that, in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class. The relief from royalty method involves two steps: (1) estimation of reasonable royalty rates for the assets and (2) the application of these royalty rates to a forecasted net revenue stream and discounting the resulting cash flows to determine a present value. The Company multiplies the selected royalty rate by the forecasted net revenue stream to calculate the cost savings (relief from royalty payment) associated with the asset. The cash flows are then discounted to present value using the selected discount rate and compared to the carrying value of the asset. In connection with the preparation of the financial statements included in this Form 10-Q, the Company considered the decline in the Company’s stock price and market capitalization, as well as current market and macroeconomic conditions, to be a triggering event for the Lands’ End trade name. The fair value of the trade name indefinite-lived intangible asset was estimated using the relief from royalty method and the testing resulted in no impairment to the Lands’ End trade name. The Company’s impairment testing indicates the fair value of the trade name exceeds the carrying value by 6.1%. Long-lived Asset Impairment Analysis Property and equipment are subject to a review for impairment if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”) the Company reviewed the long-lived asset groups for impairment as of October 27, 2023. The Company Operated store long-lived asset group, including Operating right-of-use assets, are regularly reviewed for impairment indicators. Impairment is assessed at the individual store level which is the lowest level of identifiable cash flows and considers the estimated undiscounted cash flows over the asset’s remaining life. If estimated undiscounted cash flows are insufficient to recover the investment, an impairment loss is recognized equal to the difference between the estimated fair value of the asset and its carrying value, net of salvage, and any costs of disposition. The fair value estimate is generally the discounted amount of estimated store-specific cash flows. The Company recognized long-lived asset impairment for Operating lease right-of-use assets and property and equipment, net for individual identified Company Operated stores in the amount of no impairment and $0.1 million as of October 27, 2023 and October 28, 2022, respectively, recorded in Other operating expense, net in the Condensed Consolidated Statement of Operations. The Company reviewed the remaining long-lived asset groups for impairment as of October 27, 2023. The Company assessed the recoverability of our long-lived asset groups by comparing their projected undiscounted cash flows associated over remaining estimated useful lives of the primary asset in the long-lived asset group against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. As a result of the testing the undiscounted cash flows of the remaining asset groups exceeded their respective carrying amount resulting in no impairment.

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