LE - Land's End

[deadspace]

There is likely going to be a lot of volatility in Lands End over the next year.  This company however could thrive as a stand alone entity.  I suspect some significant price drops as this is sold off from accounts of SHLD holders.  The valuation metrics today may look pricey but the present revenue may be a trough for this entity

 

 

http://finance.yahoo.com/blogs/michael-santoli/as-sears-cuts-lands--end-loose--investors-should-hold-fast-154340372.html

 

[merkhet]

I have to say that I'm more than a little surprised at the level of selling in Land's End -- the short sale restriction was just extended to tomorrow.

[ni-co]

I have to say that I'm more than a little surprised at the level of selling in Land's End -- the short sale restriction was just extended to tomorrow.

 

Indiscriminate selling is one of the key characteristics of spin-offs. On top of that, for an online retailer yesterday wasn't the best day to start trading. I kept my LE shares and if they go down further, I might buy some more.

 

Then there is also a general misunderstanding of LE as a "normal" retailer. This sums up the discussion so far, I think:

 

I am pretty bullish on Lands End. I pretty much said if it traded at Peridot's valuation 700-800M EV I'd be buying it aggressively (even in addition to the many shares I would've owned through the SHLD spinoff).  I expected that it would easily fetch $1.2B +  EV from a VF Corp or some other company interested in retail.

 

Lands End is a classic brand that is not impacted much by current short term fashion trends, it has likely been mismanaged (underinvested in), and it has a very loyal following.  (Even if young value investors don't buy their clothes or think a brand like Eddie Bauer is more valuable)  Lands End barely has a bricks and mortar footprint and under the right management focused on the success of the brand it could do very very well.

 

That being said I sold SHLD aggressively to buy SHLDV today. At a $1.5B EV it's not the no brainer that it would've been at $700-800M EV.

 

I'm shocked at the $1.5B E/V and will be surprised if it stays there in the intermediate term. The idea that LE should trade at a large premium to the price JCrew sold for, and above practically every other apparel retailer out there makes no sense to me. I can buy EXPR or ANN (two of my favorite apparel stocks right now) at 4-5x cash flow, most of the peers fetch 6x, but LE trades at 10x? It's baffling (and will make for a nice paired trade potentially if it trades over 30 regular way).

 

I wouldn't be surprised at all if it stayed there (or moved higher). You can't compare an asset-light company like LE with J Crew, EXPR or ANN that operate hundreds of stores with thousands of employees. This is a completely different animal. 1$ of LE revenue is much more valuable than 1$ of revenue of a retailer heavily depending on offline sales, especially when you think about LE's loyal customer base and international appeal. I'm not going to sell a single share for at least a year or two when I will be able to see whether capitalism does its wonders at LE.

 

Lands End does not have hundreds of stores and thousands of employees? That's news to me. In fact, Lands End has 5,800 employees and still needs to pay Sears to staff its 275 shops within Sears stores post-spin, which is pretty amazing to me. Express, by contrast, has 17,000 employees, but more than 14,000 of them work in the retail stores. Counting the Sears staff that LE will be paying for, it is entirely possible that LE has more employees on a per-store basis than Express does.

 

Furthermore, have you looked at the numbers or are you just assuming LE is "asset-light" vs a company like Express? Express has fewer total assets and lower working capital vs Lands End, despite having more than double the number of stores and 35% more in annual revenue.

 

Yes. I have looked at the numbers. However, in this case it's pretty obvious without even looking at them. LE derives 85% of its business from catalogue and online sales. It's pretty clear that these businesses don't bind as much capital as a retail chain does.

 

What I meant is employees in retail stores. How many do you need to staff 275 sales points in Sears stores vs. 14,000 employees in stores at Express? If LE decided to leave the brick and mortar retail business, they'd only lose 15% of their revenues. Could EXPR even do that? Have you taken the EXPR lease obligations into account when counting their assets/liabilities and the fact that LE has 600m of goodwill on their balance sheets (which I don't count as assets)?

 

As I said, LE is a completely different animal. You cannot compare retail chains with nearly pure play online retailers just because they sell similar products.

[ni-co]

What I don't get is that SHLD and LE are down together. There have to be technical reasons for this. It doens't make any sense to me that the market seems to say that both companies are worth more together than as standalone businesses. Then again, who am I to second-guess Mr Market?

[LC]

Is there any more sales data than the 3 years presented in the 10-k? I sold my small stake today with LE trading around 10x my estimate of owner's earnings. The status of the business didn't look terrible: a reasonable amount of debt such that I wasn't concerned, obviously asset-light and profit-generating. My concern is how much sales can/will fluctuate. I wish LL Bean was publicly traded :)

[ni-co]

Is there any more sales data than the 3 years presented in the 10-k? I sold my small stake today with LE trading around 10x my estimate of owner's earnings. The status of the business didn't look terrible: a reasonable amount of debt such that I wasn't concerned, obviously asset-light and profit-generating. My concern is how much sales can/will fluctuate. I wish LL Bean was publicly traded :)

 

http://investors.landsend.com/secfiling.cfm?filingID=1193125-14-114621&CIK=799288

Some data in the 10-K (page 36 and page 37) go back to 2009. I haven't found older sales numbers yet.

[CorpRaider]

I would be pretty enthusiastic about this one if they were really able to sever ties with sears.  If I was running it, the first order of business would be to get my brand out of there.

[Aberhound]

Who thinks that the current management will make the hard choices to become the best clothes etc. supplier to the preppy high income college professor type crowd? Shut down the Sears stores and adopt a few Apple like stand-alone stores in select malls then have products with a story to tell. For instance they could source organic cotton and process it in a way so you are not poisoned by your clothes like the US speed skating team (the Swedes use only organic non-toxic clothes to boost performance of their Olympians). And get out of the points program that cheapen the brand. People want their privacy. The first thing Sobey's did when they bought Safeway Canada was to kill the irritating points program.

 

I don't think Lampert will do this and Sears needs cash so their 48% will act as an overhang. When the 48% gets down to 25% this stock could be very interesting.

[merkhet]

I have to say that I'm more than a little surprised at the level of selling in Land's End -- the short sale restriction was just extended to tomorrow.

 

Indiscriminate selling is one of the key characteristics of spin-offs. On top of that, for an online retailer yesterday wasn't the best day to start trading. I kept my LE shares and if they go down further, I might buy some more.

 

 

I expected that short covering might balance the spinoff sales dynamic. Why would anyone want to short Land's End? I understand some people deciding not to buy it -- but why have a short position in them?

[yadayada]

whats so good about this one. On a FCF basis it doesnt look v attractive. and they only  have 100  million in equity if you subtract intangibles. Is real estate worth that much more over book value?

[adesigar]

I sold all my Lands End yesterday. Just like SHLD its price is basically controlled by Eddie Lampert + Bruce Berkowitz + Short Sellers. And For at least a while it might have nothing to do with fundamentals.

 

1. ESL could use LE Shares for redemptions which would drive the price down.

2. Berkowitz might sell LE because its probably not as undervalued (I think he sold Sears Canada and SHOS) I

3. Short Sellers need to cover LE shares which might push shares up.

4. The new investors who want the Lands End brand will be countered by SHLD investors selling LE which does not have the hidden Real Estate value.

 

So I see 2 possible sellers and 1 Buyer. Its an ok price not great but Id rather buy more SHLD than own LE.

I hope SHLD will drop because im sure some Short sellers covered before the Spinoff and they should get back to shorting SHLD.

SHLD $30 here we come.

 

 

[Mephistopheles]

I have to say that I'm more than a little surprised at the level of selling in Land's End -- the short sale restriction was just extended to tomorrow.

 

I wonder how I was able to short then.

[ni-co]

I have to say that I'm more than a little surprised at the level of selling in Land's End -- the short sale restriction was just extended to tomorrow.

 

Indiscriminate selling is one of the key characteristics of spin-offs. On top of that, for an online retailer yesterday wasn't the best day to start trading. I kept my LE shares and if they go down further, I might buy some more.

 

 

I expected that short covering might balance the spinoff sales dynamic. Why would anyone want to short Land's End? I understand some people deciding not to buy it -- but why have a short position in them?

 

I'm only speculating but how about this hypothesis: Maybe the shorts covered their positions pre-spinoff and re-entered them after the spin-off? If most of the shorts did it this way it would explain the SHLD movement pre and post spin-off. LE selling would be "normal" post spin-off selling of SHLD long investors (like some of our fellow board members').

[merkhet]

I have to say that I'm more than a little surprised at the level of selling in Land's End -- the short sale restriction was just extended to tomorrow.

 

I wonder how I was able to short then.

 

It's not a ban, it's just a restriction on execution.

 

https://us.etrade.com/e/t/prospectestation/help?id=1301150000

[tiddman]

I am sure some people are selling just because they have no interest in owning Land's End and want to treat this as a cash distribution.  The valuation on the spun LE wasn't particularly cheap.

 

There are probably various spin-off trades such as those that think the relatively valuations of SHLD and LE are misaligned and so they short one and go long the other, this might explain some of the volume since the spin.  There are also trades between SHLD stock and bonds, such as going short the stock and long the bonds, or vice versa.

 

Land's End wasn't improved by its relationship with Sears and it's continuing connection with Sears is probably not a good thing either.  However Sears wants to maintain influence over them because losing Land's End completely would remove one of the few remaining reasons for shoppers to go to Sears stores.

 

I still don't see any kind of happy outcome for Sears... guess we will see.

[TheEnterprisingInvestor]

It looks like that's the plan from the way the leases are rolling off.  I look at this as a pretty interesting situation.  LE is a pretty good brand with a capex light model.  They FCF nicely, they can probably run inventory a little tighter (their edgar filings show that pre-SHLD their inventory ran about 100m lighter on similar sales numbers).  In addition to some operational efficiencies to improve margins, any material increase to sales would flow real nicely through the IS.  Seems like there are a few levers they can pull to make that happen.  All the SHLD holders selling makes sense, they love their real estate story, but I'd expect to see more short covering, as this has little to do with the SHLD short thesis.  Float adjusted short interest is like 5.1m shaves vs. like 5m in float.  Odd, but the price insensitive selling here could create a nice long term opportunity. 

[LC]

Is there any more sales data than the 3 years presented in the 10-k? I sold my small stake today with LE trading around 10x my estimate of owner's earnings. The status of the business didn't look terrible: a reasonable amount of debt such that I wasn't concerned, obviously asset-light and profit-generating. My concern is how much sales can/will fluctuate. I wish LL Bean was publicly traded :)

 

http://investors.landsend.com/secfiling.cfm?filingID=1193125-14-114621&CIK=799288

Some data in the 10-K (page 36 and page 37) go back to 2009. I haven't found older sales numbers yet.

 

Thank you.

 

You know, it doesn't look like it's terribly overvalued. 10x FCF may be rich, but this is a company that did 200-225m in EBITDA* back in 2009/2010. As someone mentioned above if they can reach those numbers again (inventory mgmt may be the lever to pull here now that they are out of SHLD's tentacle grasp) then today's price may provide an attractive price for a very good business.

 

*I'm talking ebitda here just to make the point that their current operating results aren't due to massive leveraging (interest expense) or expansion (depreciation)

[merkhet]

Maybe I'm primed to think there's something weird going on since i just finished Michael Lewis' Flash Boys, but there's a significant amount of 100 share transactions going on right now.

[LC]

Who knows, I can't take listening to talk of HFT, 'pinging', sub-penny front running, etc. for more than 10 minutes without wanting to look at an income statement again and get back to reality.  ;D

 

Can I ask what broker/program you are using, merkhet? I really like that visualization. That is, if I am not mistaken, level 2 market access?

[merkhet]

Haha -- I thought the book was fascinating.

 

I'm using TD Ameritrade's Trade Architect -- I usually don't like using this view since there's just way too much data, but I was curious why I kept seeing B/A of only 100 shares despite such extreme movements so I went to the Level 2 view on Trade Architect.

[krazeenyc]

I am sure some people are selling just because they have no interest in owning Land's End and want to treat this as a cash distribution.  The valuation on the spun LE wasn't particularly cheap.

 

There are probably various spin-off trades such as those that think the relatively valuations of SHLD and LE are misaligned and so they short one and go long the other, this might explain some of the volume since the spin.  There are also trades between SHLD stock and bonds, such as going short the stock and long the bonds, or vice versa.

 

Land's End wasn't improved by its relationship with Sears and it's continuing connection with Sears is probably not a good thing either.  However Sears wants to maintain influence over them because losing Land's End completely would remove one of the few remaining reasons for shoppers to go to Sears stores.

 

I still don't see any kind of happy outcome for Sears... guess we will see.

 

I'm bullish on Lands End's business prospects. In the Sears thread I made it clear that if it was spun out at an $700-800M EV I'd be buying it aggressively. Instead the price I was able to sell it at was essentially appx $1.6B - $1.7B. I was fine with that.  For me I sold my LE because I got what I felt was a reasonable valuation (even if I think it has wonderful potential). If LE drops substantially, I'd gladly buy it back.

 

To say that Lands End is one of the reasons shoppers to go to Sears is insane. Lands End does $258M in B&M sales annually and Sears Domestic does $19B. The Lands End Sears combination makes no sense since their customer bases don't seem to overlap much. 

[ni-co]

What I like in LE: High ROCE, high operating leverage, loyal customer base, conservative non-fashionable clothing with potentially worldwide appeal and if you like the brand you can only get it there (or at Sears, which doesn't seem to be a great fit to me, neither).

 

Wild card: management. What are they going to do with all the FCF?

 

What's the downside? High operating leverage can work both ways. What else?

[bookie71]

Back in the past, Land's End was known for it's quality very similar to L.L. Bean.  Then they became a part of Sear's and lost that moat.

[krazeenyc]

Back in the past, Land's End was known for it's quality very similar to L.L. Bean.  Then they became a part of Sear's and lost that moat.

 

It is no longer known for quality? It has lost this moat? Do you have evidence of this or anything at all that would back this up? I'd be interested in reading about it.

[tiddman]

It's interesting to go back and read the press at the time Sears acquired Land's End to hear the justifications and hopes for the deal:

 

http://money.cnn.com/2002/05/13/news/deals/sears/

 

Both executives joined analysts in downplaying concerns that the lower-brow merchandise at Sears -- including tools and dishwashers -- would clash with the high-end offerings of Lands' End, which has its roots in the exclusive sailing culture.

...