LE - Land's End

[CorpRaider]

If they're selling many of those non-iron dress shirts, they must have some moat.  I can get brooks brothers for those prices (on sale).  No BB hate please, the non-irons are legit.

[PatientCheetah]

I like the brand but I have two main concerns - 1) capex back in 2000-2002 was around $40 mil years vs $5-15 mil currently under Sears, what is a good estimate for normalized free cash flow? LE is more asset lite compare to its peers. EV/FCF is probably the best metrics for comparison purpose. 2) LE's revenue was around $1.5 bil back in early 2000s, after 10+ years, LE's revenue is still at $1.5 bil, is there any growth prospect left? LE looks fairly valued if its growth prospect is limited. 

[Chalk bag]

The current market is pricing in 5% sales growth and 8.5% EBIT margin for the next 5 years. Unless you think the mgmt team will be studs, good luck holding those long guys. To think that they can trade in-line w/ VFC, PVH, COLM, etc is ludicrous to me. It should be a show-me story and not be priced as such now.

[yadayada]

what is it about retailers that gets everyone off so much. Their net tang assets is like 100 million and revenue is in decline. It is trading at a multiple of 10x. For a 800 million market cap? If anything it looks expensive . Should be more like 7-8x multiple. is there some wastefull cost here that is huge and will be cut that makes this cheap?

[ni-co]

Well, we'll see. In my mind, sentiment is quite the opposite. Retail is hated right now. Earnings are depressed. In 2009, in the midst of the financial crisis, LE made $4 a share. And I just can't see why they shouldn't be able to repeat that.

[yadayada]

yeah so in a best case scenario you get 50% upside. And then they have to keep doing something for 10 years what they haven't been able to do  in the last 5. Lot's of things need to go right for not too much upside.

[PatientCheetah]

Well, we'll see. In my mind, sentiment is quite the opposite. Retail is hated right now. Earnings are depressed. In 2009, in the midst of the financial crisis, LE made $4 a share. And I just can't see why they shouldn't be able to repeat that.

 

where did you find the $4 figure?

[ni-co]

Well, we'll see. In my mind, sentiment is quite the opposite. Retail is hated right now. Earnings are depressed. In 2009, in the midst of the financial crisis, LE made $4 a share. And I just can't see why they shouldn't be able to repeat that.

 

where did you find the $4 figure?

 

It's in the 10-K, page 36.

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

 

You have to adjust for the interest on the 500m, though. It is (was) only roughly their earnings power.

[PatientCheetah]

Well, we'll see. In my mind, sentiment is quite the opposite. Retail is hated right now. Earnings are depressed. In 2009, in the midst of the financial crisis, LE made $4 a share. And I just can't see why they shouldn't be able to repeat that.

 

where did you find the $4 figure?

 

It's in the 10-K, page 36.

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

 

You have to adjust for the interest on the 500m, though. It is (was) only roughly their earnings power.

 

Thanks, didn't realize how large LE's earnings are sensitive to minor margin variations 

[Morgan]

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.

 

I've been buying LE clothes for a number of years now and the quality has gone down since I first started buying, but it's always very cheap. $12-$15 for a button up shirt and $20 for chinos when on sale. At the full price, 2-3x that, their products are not worth the money.

[Spekulatius]

I've been buying LE clothes for a number of years now and the quality has gone down since I first started buying, but it's always very cheap. $12-$15 for a button up shirt and $20 for chinos when on sale. At the full price, 2-3x that, their products are not worth the money.

 

Almost nobody buys LE cloth at full price, since there is always a sale around. I agree that quality for some items has gone down (Squal jackets), for others it has stayed the same. I think their. Peruian Polo's are a good value (I bought quite a few) and some kids cloth are good. I have been buying LE cloth for 12+ years, but in the last few years, I have been buying more LLbeans (more expensive, but consistent and better quality). I think LE is an OK brand that has seen better days and under good management could do very well.

 

I don't own it as the valuation is not compelling.

[ni-co]

yeah so in a best case scenario you get 50% upside. And then they have to keep doing something for 10 years what they haven't been able to do  in the last 5. Lot's of things need to go right for not too much upside.

 

I think you are right that lots of things have to go right but I think you're wrong about the upside. This is a high ROCE business and I see ample market opportunities for its products. If they succeed in growing the top line and improve their operating margin to 2009 levels the stock is an easy double, at least. Chances are not that bad imo. If they invest their 100m in FCF per year wisely, they can grow for a long time. I don't care what they have done for the last 10 years because before the spin-off they didn't control the cash flows. I don't think that Sears has let them keep their cash for their own use, simply because they needed to put it into SHLD's retail operations. I admit that it all depends on the management though and, yes, things have to go right.

[ni-co]

Good write-up in Barron's:

 

Fans of Lands' End say the company will be able to sharpen its focus on operations now that it is independent, making it more likely that operating profit margins, currently 8%, could approach 12% in the future. After all, the company reduced selling, general, and administrative costs by 6.4% last year and 3.6% the prior year. Lower expenses helped produce a 58% jump in earnings in fiscal 2014, to $2.47 a share.

 

Yet, costs seem set to rise as a result of independence. Lands' End will incur $21 million to $23 million of annual interest expense on the $515 million it borrowed to pay Sears a $500 million dividend prior to the spinoff, says Matt McGinley, an analyst at ISI Group. In addition it will have incremental headquarters expenses of $8 million to $10 million, and $11 million to $13 million in expenses related to Sears' Shop Your Way customer-loyalty program, he figures. If earnings in the latest fiscal year were adjusted for these expenses, Lands' End would have earned $1.63 a share, McGinley calculates.

 

Sounds about right to me.

 

http://online.barrons.com/news/articles/SB50001424053111904223604579487600039323662

[ni-co]

LE significantly lowered their SG&E from $621m in 2011 to $560m in 2013. I find it remarkable that about 40% of these savings stem from lower advertising costs. They went from $223.7m in 2011 to $198.6m in 2013. In 2014 this trend seems to continue. At least they account for lower prepaid advertising costs ($15.6m in January 2014 vs. $18.6 in January 2013).

 

Is this a result from the SYW participation? (Costs for SYW went up from $4,2m in 2011 to $8,8m in 2013.) If SYW is really the driver behind the savings it would be good news.

 

What do you think, guys?

 

At least they make it sound that way in their 10-K (p. 40):

Net annual costs associated with the Shop Your Way program are estimated to increase by approximately $11.0 to $13.0 million in 2014. The additional investment in the Shop Your Way program is anticipated to be offset by increased profits from incremental revenue and reductions in promotions and advertising expense, as we expect to reduce our dependency on other marketing efforts as member engagement through the program continues to grow.

 

There seems to be an error in the wording, though. I think it should be "increase to approximately $11.0 to $13.0 million", because they already spent $8.8m in 2013. It's unlikely that they are going to spend $20-23m in 2014 alone while only planning to spend between $33-39m in total within the next three years.

[ni-co]

https://blog.searsholdings.com/eddie-lampert/spinoffs-and-lands-end/

 

However, in 2011 and 2012 the company stumbled for a variety of reasons that were described in its public filings. Just one example: in 2011, cotton prices hit heights unseen since supply and distribution were disrupted during the Civil War (impacting most other apparel retailers as well). Lands’ End’s performance improved significantly in 2013, but it was clear to us that bigger changes needed to be made to really unlock the potential of the business.

 

He seems to be referring to this:

 

Gross Margin

Total gross margin for 2011 was $766.0 million compared to $822.0 million in the prior year. As a percentage of total revenues, gross margin declined to 44.4% of total revenues in 2011 compared to 49.6% in 2010.

 

Direct segment gross margin was $645.6 million, or 45.2% of total Direct segment revenues, compared to $704.3 million, or 51.1% of total Direct segment revenues, for 2011 and 2010, respectively. The Direct segment gross margin rate decreased 590 basis points in 2011, mainly due to higher commodity costs and increased markdowns primarily in our U.S. consumer and International businesses.

 

Retail segment gross margin was $120.1 million, or 40.4% of total Retail segment revenues, compared to $117.1 million or 42.5% of total Retail segment revenues for 2011 and 2010, respectively. The Retail segment gross margin rate decreased 210 basis points in 2011 primarily due to higher commodity costs and increased markdowns.

 

http://www.sec.gov/Archives/edgar/data/799288/000119312513464144/d632333dex991.htm (p. 46)

 

Which isn't really helpful. Why have they increased markdowns?

 

I wasn't aware of this cotton price spike in 2011...

[ni-co]

First write-up on LE:

http://seekingalpha.com/article/2147013-lands-end-spin-off-situation-with-60-percentminus-90-percent-upside

[Chalk bag]

First write-up on LE:

http://seekingalpha.com/article/2147013-lands-end-spin-off-situation-with-60-percentminus-90-percent-upside

 

Multiples he uses are too high (as he included capitalized leases but did not add back rent to EBITDA), glosses over debt burden, glosses over 20 mm of added cost, and did not run a DCF to back-ward imply what the current price means. The growth optionality is there and maybe the buyers today got comfortable w/ the management's game-plan, but they will have to execute for the stock to work.

[ni-co]

First write-up on LE:

http://seekingalpha.com/article/2147013-lands-end-spin-off-situation-with-60-percentminus-90-percent-upside

 

Multiples he uses are too high (as he included capitalized leases but did not add back rent to EBITDA), glosses over debt burden, glosses over 20 mm of added cost, and did not run a DCF to back-ward imply what the current price means. The growth optionality is there and maybe the buyers today got comfortable w/ the management's game-plan, but they will have to execute for the stock to work.

 

Yes. I also think he forgot to include the additional ~$10m costs for being a standalone company. With regard to the additional SYW costs, LE at least anticipates that they are going to be offset by increased profits from incremental revenue and reductions in promotions and advertising expense.

 

Debt seems to be a special case here as it's clear that LE didn't need the $500m in cash to fund its operations. You can make the argument that the $500m paid to SHLD are irrelevant for judging LE's ROCE. It's clear, however, that the additional debt worsens LE's financial position.

[ni-co]

http://seekingalpha.com/article/2154533-lands-end-a-contrary-view

Easily one of the worst write-ups I've come across lately. Of all the criteria I'd pick to value LE, book value would be the last, I guess.

Enjoy.

[PatientCheetah]

I think most of us agree that LE is an average business selling at a fair price while not being truly independent. If you go back and reread Greenblatt's "You can be a stock market genius," the ingredients for a good spinoff investment include great business, cheap valuation, and highly incentivized management.

[ni-co]

So here you have an online business which did $1.56 billion in revenues during 2013, trading for 0.55 times sales. And furthermore, since it did $150 million in EBITDA, if you consider $863 million in market capitalization plus $500 million in debt, it trades at just 9 times EV/EBITDA. Finally, LE trades at just 10.9 times its 2013 earnings, again, seemingly too low for what is essentially an online retailer.

…

Estimating Lands' End quarter from the figures divulged by Sears seems to indicate there are precious few surprises in what Lands' End is about to report.

 

http://seekingalpha.com/article/2233443-sears-earnings-offer-us-our-first-glimpse-of-lands-end-first-quarter

 

Finally somebody's waking up.

 

I think most of us agree that LE is an average business selling at a fair price while not being truly independent. If you go back and reread Greenblatt's "You can be a stock market genius," the ingredients for a good spinoff investment include great business, cheap valuation, and highly incentivized management.

 

My point is that LE actually is a great business with ROCE easily above 20% selling at a below average price. The ROCE should only grow over time as more customers go from catalogue to online. In essence, this is a business returning about 25% on its capital employed trading at 60% of its book value (adjusted for intangibles) (shame on me – I forgot to subtract the $500m dividend to SHLD  ::)).

 

There are two hurdles that usually keep online retailers from being great businesses:

[*]Customer acquisition costs;

[*]Price transparency and the following commoditization of branded products.

Both are significantly lower at LE because: 1. LE has such a loyal customer base and 2. has its own brand (it has a monopoly in selling LE!).

 

Add to this that

• the cloths are not fashionable, which is great for inventory and makes the business much more stable than the businesses of comparable retailers
  
• the brand/style obviously has worldwide appeal
  
• the usual spin-off dynamics (capitalism works…)
  

 

I think in the next two or three years we are in for more than one positive surprise with LE.

 

However, I seem to be the only one on this board who wants to own it.

[jeffmori7]

Land's End resultats are out:  http://www.marketwatch.com/story/lands-end-profit-boosted-by-higher-sales-margins-2014-06-12?reflink=MW_news_stmp

 

Interesting info, same-store sales increase 3.4% for Sears store locations!

[ni-co]

This was a really great quarter for LE. Not only did they grow their total sales by 3.6% but – leaving aside interest expense on the $500m dividend to SHLD – costs and expenses in relation to sales actually went down with the separation from SHLD! I don't think that this was to be expected at all. If they are able to keep costs down, 2014 could already become a great year.

 

Land's End resultats are out:  http://www.marketwatch.com/story/lands-end-profit-boosted-by-higher-sales-margins-2014-06-12?reflink=MW_news_stmp

 

Interesting info, same-store sales increase 3.4% for Sears store locations!

 

At least in part, this might be the result of closing the bad Sears stores and keeping the good ones.

[alertmeipp]

This was a really great quarter for LE. Not only did they grow their total sales by 3.6% but costs and expenses in relation to sales actually went down with the separation from SHLD. I don't think that this was to be expected at all. If they are able to keep costs down 2014 could already become a great year.

 

Land's End resultats are out:  http://www.marketwatch.com/story/lands-end-profit-boosted-by-higher-sales-margins-2014-06-12?reflink=MW_news_stmp

 

Interesting info, same-store sales increase 3.4% for Sears store locations!

 

At least in part, this might be the result of closing the bad Sears stores and keeping the good ones.

 

I am out of Land's completely, I wonder what will Eddie do for his position? Maybe a short squeeze will happen at this spin-off? My understand is the short position will be transferred after spin-off?

[ni-co]

This was a really great quarter for LE. Not only did they grow their total sales by 3.6% but costs and expenses in relation to sales actually went down with the separation from SHLD. I don't think that this was to be expected at all. If they are able to keep costs down 2014 could already become a great year.

 

Land's End resultats are out:  http://www.marketwatch.com/story/lands-end-profit-boosted-by-higher-sales-margins-2014-06-12?reflink=MW_news_stmp

 

Interesting info, same-store sales increase 3.4% for Sears store locations!

 

At least in part, this might be the result of closing the bad Sears stores and keeping the good ones.

 

I am out of Land's completely, I wonder what will Eddie do for his position? Maybe a short squeeze will happen at this spin-off? My understand is the short position will be transferred after spin-off?

 

I added to my position at $26.50…

 

I think most of the shorts are out by now – the SHLD short thesis doesn't apply to LE at all. A short squeeze has already happened on the first two or three days of trading. I think that Lampert will simply hold his position.