10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 

(Mark One)  
x
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 30, 2015
-OR-
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to                      to                     .
Commission File Number: 001-09769

Lands’ End, Inc.
(Exact name of registrant as specified in its charter)

 
Delaware
 
36-2512786
(State or Other Jurisdiction of
Incorporation of Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1 Lands’ End Lane
Dodgeville, Wisconsin
 
53595
(Address of Principal Executive Offices)
 
(Zip Code)
Issuer’s Telephone Number, Including Area Code: (608) 935-9341
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    YES  x    NO  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  
Large accelerated filer
 
¨
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
 
x
Smaller Reporting Company
¨
Indicate by check mark whether the Registrant is a shell company.    YES  ¨    NO  x
The aggregate market value (based on the closing price of the Registrant's common stock quoted on the NASDAQ Stock Market) of the Registrant's common stock owned by non-affiliates (which are assumed, solely for the purpose of this calculation, to be stockholders other than (i) directors and executive officers of the Registrant and (ii) any person known by the Registrant to beneficially own five percent or more of the Registrant's common shares), as of July 31, 2015, the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $235.8 million.
As of December 2, 2015, the registrant had 31,991,343 shares of common stock, $0.01 par value, outstanding.



LANDS’ END, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 30, 2015
TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
PART I FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
 
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Condensed Consolidated and Combined Statements of Operations
 
 
 
 
 
 
 
Condensed Consolidated and Combined Statements of Comprehensive Operations
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
 
Condensed Consolidated and Combined Statements of Cash Flows
 
 
 
 
 
 
 
 
Condensed Consolidated and Combined Statements of Changes in Stockholders' Equity
 
 
 
 
 
 
 
Notes to Condensed Consolidated and Combined Financial Statements
 
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4.
 
Controls and Procedures
 
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
 
 
 
 
Item 1A.
 
Risk Factors
 
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
Item 5.
 
Other Information
 
 
 
 
 
 
Item 6.
 
Exhibits
 
 
 
 
 
 
 
 
Signatures
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDS’ END, INC.
Condensed Consolidated and Combined Statements of Operations
(Unaudited)
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands except per share data)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Net revenue
 
$
334,434


$
373,082


$
946,235


$
1,050,787

Cost of sales (excluding depreciation and amortization)
 
172,019

 
189,787

 
492,756

 
537,064

Gross profit
 
162,415

 
183,295

 
453,479

 
513,723

 
 
 
 
 
 
 
 
 
Selling and administrative
 
135,867

 
143,370

 
394,261

 
419,859

Depreciation and amortization
 
4,260


4,802


12,874


14,629

Other operating (income) expense, net
 
(1,009
)
 
25

 
(3,366
)
 
45

Operating income
 
23,297

 
35,098

 
49,710

 
79,190

Interest expense
 
6,204

 
6,194

 
18,615

 
14,324

Other expense (income), net
 
796

 
(507
)
 
(210
)
 
(847
)
Income before income taxes
 
16,297

 
29,411

 
31,305

 
65,713

Income tax expense
 
5,572

 
11,420

 
11,395

 
25,009

NET INCOME
 
$
10,725


$
17,991


$
19,910

 
$
40,704

NET INCOME PER COMMON SHARE (Note 4)
 
 
 
 
 
 
 
 
Basic:
 
$
0.34


$
0.56


$
0.62


$
1.27

Diluted:
 
$
0.33

 
$
0.56

 
$
0.62

 
$
1.27

 
 
 
 
 
 


 


Basic weighted average common shares outstanding
 
31,991


31,957


31,975


31,957

Diluted weighted average common shares outstanding
 
32,059


31,971


32,042


31,965

 


See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
1


LANDS’ END, INC.
Condensed Consolidated and Combined Statements of Comprehensive Operations
(Unaudited)
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
NET INCOME
 
$
10,725

 
$
17,991

 
$
19,910

 
$
40,704

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
260


(2,698
)

925


(2,316
)
COMPREHENSIVE INCOME
 
$
10,985

 
$
15,293

 
$
20,835

 
$
38,388


See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
2




LANDS’ END, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
 
October 30, 2015
 
October 31, 2014
 
January 30, 2015
 
 
(unaudited)
 
(unaudited)
 
 
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
104,986


$
105,574

 
$
221,454

Restricted cash
 
3,300


3,300


3,300

Accounts receivable, net
 
37,875

 
39,459

 
30,073

Inventories, net
 
436,712

 
403,938

 
301,367

Deferred tax assets
 

 

 
3,438

Prepaid expenses and other current assets
 
42,187

 
40,361

 
31,408

Total current assets
 
625,060

 
592,632

 
591,040

Property and equipment, net
 
105,661

 
99,070

 
101,223

Goodwill
 
110,000


110,000


110,000

Intangible assets, net
 
528,300


529,369


528,712

Other assets
 
20,335

 
22,942

 
22,462

TOTAL ASSETS
 
$
1,389,356


$
1,354,013


$
1,353,437

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
Accounts payable
 
$
151,429

 
$
157,674

 
$
132,796

Deferred tax liabilities
 
2,526

 
2,850

 

Other current liabilities
 
107,596

 
121,924

 
107,553

Total current liabilities
 
261,551

 
282,448

 
240,349

Long-term debt
 
502,125


507,275


505,988

Long-term deferred tax liabilities
 
182,400

 
172,930

 
184,483

Other liabilities
 
16,390

 
17,439

 
18,424

TOTAL LIABILITIES
 
962,466

 
980,092

 
949,244

Commitments and contingencies
 

 

 

STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Common stock, par value $0.01- authorized: 480,000,000 shares; issued and outstanding: 31,991,343, 31,956,521, 31,956,521
 
320

 
320

 
320

Additional paid-in capital
 
344,156

 
342,130

 
342,294

Retained earnings
 
88,787

 
35,782

 
68,877

Accumulated other comprehensive loss
 
(6,373
)

(4,311
)

(7,298
)
Total stockholders’ equity
 
426,890

 
373,921

 
404,193

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,389,356

 
$
1,354,013

 
$
1,353,437



See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
3


LANDS’ END, INC.
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)

 
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
19,910

 
$
40,704

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 

 

Depreciation and amortization
 
12,874

 
14,629

Product recall
 
(3,371
)
 

Amortization of debt issuance costs
 
1,313

 
1,092

Stock-based compensation
 
2,307

 
1,954

Loss on disposal of property and equipment
 
5

 
45

Deferred income taxes
 
3,381

 
7,730

Change in operating assets and liabilities:
 

 

Inventories
 
(134,690
)
 
(36,306
)
Accounts payable
 
20,078

 
44,989

Other operating assets
 
(18,124
)
 
(23,402
)
Other operating liabilities
 
1,523

 
34,123

Net cash (used in) provided by operating activities
 
(94,794
)
 
85,558

CASH FLOWS FROM INVESTING ACTIVITIES
 

 

Purchases of property and equipment
 
(18,117
)
 
(11,141
)
Net cash used in investing activities
 
(18,117
)

(11,141
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 

Contributions from Sears Holdings, net
 

 
8,784

Proceeds from issuance of long-term debt
 

 
515,000

Payments on term loan facility
 
(3,863
)
 
(2,575
)
Debt issuance costs
 

 
(11,433
)
Dividend paid to a subsidiary of Sears Holdings Corporation
 

 
(500,000
)
Net cash (used in) provided by financing activities
 
(3,863
)
 
9,776

Effects of exchange rate changes on cash
 
306

 
(1,030
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(116,468
)
 
83,163

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
221,454

 
22,411

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
104,986

 
$
105,574

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Unpaid liability to acquire property and equipment
 
$
2,695

 
$
2,030

Income taxes paid
 
$
19,714

 
$
13,013

Interest paid
 
$
17,037

 
$
13,020


See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
4


LANDS’ END, INC.
Condensed Consolidated and Combined Statements of Changes in Stockholders’ Equity
(Unaudited)

 
 
Common Stock Issued
 
Additional Paid-in
 Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive Loss
 
Net Parent
Company
Investment
 
Total
Stockholders'
Equity
(in thousands except share data)
Shares
 
Amount
 
Balance at January 31, 2014

 
$

 
$

 
$

 
$
(1,995
)
 
$
794,309

 
$
792,314

Net income

 

 

 
35,782

 

 
4,922

 
40,704

Cumulative translation adjustment, net of tax

 

 

 

 
(2,316
)
 

 
(2,316
)
Stock-based compensation

 

 
1,954

 

 

 

 
1,954

Contribution from parent company, net

 

 

 

 

 
8,784

 
8,784

Dividend paid to parent company

 

 

 

 

 
(500,000
)
 
(500,000
)
Separation related adjustments

 

 

 

 

 
32,481

 
32,481

Reclassification of net parent company investment to common stock and additional paid-in capital in conjunction with the separation
31,956,521

 
320

 
340,176

 

 

 
(340,496
)
 

Balance at October 31, 2014
31,956,521

 
$
320

 
$
342,130

 
$
35,782

 
$
(4,311
)
 
$

 
$
373,921

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 30, 2015
31,956,521

 
$
320

 
$
342,294

 
$
68,877

 
$
(7,298
)
 
$

 
$
404,193

Net income

 

 

 
19,910

 

 

 
19,910

Cumulative translation adjustment, net of tax

 

 

 

 
925

 

 
925

Stock-based compensation

 

 
2,307

 

 

 

 
2,307

Vesting of restricted stock
52,623

 

 

 

 

 

 

Restricted stock shares surrendered for taxes
(17,801
)
 

 
(445
)
 

 

 

 
(445
)
Balance at October 30, 2015
31,991,343

 
$
320

 
$
344,156

 
$
88,787

 
$
(6,373
)
 
$

 
$
426,890




See accompanying Notes to Condensed Consolidated and Combined Financial Statements.
5


LANDS’ END, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business and Separation
Lands' End, Inc. (“Lands’ End” or the “Company”) is a leading multi-channel retailer of casual clothing, accessories and footwear, as well as home products. Lands' End offers products through catalogs, online at www.landsend.com and affiliated specialty and international websites, and through retail locations, primarily at Lands’ End Shops at Sears, stand-alone Lands’ End Inlet stores and international shop-in-shops that sell merchandise in various retail department stores.
Terms that are commonly used in the Company's notes to condensed consolidated and combined financial statements are defined as follows:
• ABL Facility - Asset-based senior secured credit agreement, dated as of April 4, 2014, with Bank of America, N.A and certain other lenders
• Adjusted EBITDA - Adjusted Earnings before Interest, Taxes, Depreciation and Amortization, Other Income, net, and certain significant items
• ASC - FASB Accounting Standards Codification, which serves as the source for authoritative GAAP, except that rules and interpretive releases by the SEC are also sources of authoritative GAAP for SEC registrants
ASU - FASB Accounting Standards Update
• CAM - Common area maintenance for leased properties
• EPS - Earnings per share
• ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
• Facilities - Collectively, the ABL Facility and the Term Loan Facility
• FASB - Financial Accounting Standards Board
• Fiscal 2014 - The fiscal year ended January 30, 2015
• GAAP - Accounting principles generally accepted in the United States
• LIBOR - London inter-bank offered rate
• Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware Corporation, and its consolidated subsidiaries (other than, for all periods following the Separation, Lands' End)
• SEC - United States Securities and Exchange Commission
• Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
• SYW - Shop Your Way member loyalty program
• Tax Sharing Agreement - A tax sharing agreement entered into by Sears Holdings Corporation and Lands' End in connection with the Separation
• Term Loan Facility - Term loan credit agreement, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
Third Quarter 2015 - The thirteen weeks ended October 30, 2015
Third Quarter 2014 - The thirteen weeks ended October 31, 2014

6



• UTBs - Gross unrecognized tax benefits related to uncertain tax positions
Year to Date 2015 - The thirty-nine weeks ended October 30, 2015
Year to Date 2014 - The thirty-nine weeks ended October 31, 2014
On March 14, 2014, the board of directors of Sears Holdings approved the distribution of the issued and outstanding shares of Lands’ End common stock on the basis of 0.300795 shares of Lands’ End common stock for each share of Sears Holdings Corporation common stock held on March 24, 2014. Sears Holdings Corporation distributed 100 percent of the outstanding common stock of Lands’ End to its shareholders on April 4, 2014.
A Registration Statement on Form 10 relating to the Separation was filed by the Company with the SEC, and was subsequently amended by the Company and declared effective by the SEC on March 17, 2014. The Company’s common stock began “regular way” trading on the NASDAQ Stock Market after the distribution date under the symbol “LE”.
Prior to the completion of the Separation, Sears Holdings transferred all the remaining assets and liabilities of Lands’ End that were held by Sears Holdings to Lands’ End or its subsidiaries. Lands’ End also paid a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation.
Basis of Presentation
The financial statements presented herein represent (i) periods prior to April 4, 2014 when Lands' End was a wholly owned subsidiary of Sears Holdings Corporation (referred to as “Combined Financial Statements”) and (ii) the period as of and subsequent to April 4, 2014 when Lands' End became a separate publicly-traded company (referred to as “Consolidated Financial Statements”).
The Condensed Consolidated and Combined 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 and Combined 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 17, 2015.
Our historical Combined Financial Statements have been prepared on a stand-alone basis and have been derived from the consolidated financial statements and accounting records of Sears Holdings. The Combined Financial Statements include Lands’ End, Inc. and subsidiaries and certain other items related to the Lands’ End business which were held by Sears Holdings prior to the Separation. These items were contributed by Sears Holdings to Lands’ End, Inc. prior to the Separation. These historical Combined Financial Statements reflect the Company's financial position, results of operations and cash flows in conformity with GAAP.
All intracompany transactions and accounts have been eliminated. Prior to the Separation, all intercompany transactions between Sears Holdings and Lands’ End were considered to be effectively settled in the Condensed Combined Financial Statements at the time the transactions were recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Condensed Combined Statements of Cash Flows as a financing activity.
Upon completion of the Separation, the Company had 31,956,521 shares of common stock outstanding at a par value of $0.01 per share. After Separation adjustments were recorded, the remaining Net parent company investment, which includes all earnings prior to Separation, was transferred to Additional paid-in capital.

7



As a business operation of Sears Holdings, Lands' End did not maintain its own tax and certain other corporate support functions prior to the Separation. Lands' End entered into agreements with Sears Holdings for the continuation of certain of these services, as well as to support the Lands' End Shops at Sears. These expenses had been allocated to Lands’ End based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis based upon revenue, headcount, square footage or other measures. Lands’ End considers the expense allocation methodology and results to be reasonable for all periods presented. However, the costs and allocations charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. The historical Condensed Combined Financial Statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future, or what they would have been if it had been a stand-alone company during all periods presented. See Note 9 - Related Party Transactions.
Prior to the Separation, Sears Holdings provided financing, cash management and other treasury services to Lands' End. Sears Holdings used a centralized approach to its United States domestic cash management and financing of its operations. The majority of the Company's cash was transferred to Sears Holdings on a daily basis. Sears Holdings was also the Company's only source of funding for its operating and investing activities. Upon Separation, cash and restricted cash held by Sears Holdings were not allocated to Lands’ End unless the cash or restricted cash was held by an entity that was transferred to Lands’ End. Sears Holdings’ third-party debt, and the related interest expense, was not allocated to Lands' End for any of the periods presented as it was not the legal obligor of the debt and the Sears Holdings' borrowings were not directly attributable to the Company's business.
NOTE 2. INCOME TAXES
Lands’ End and Sears Holdings Corporation entered into a Tax Sharing Agreement in connection with the Separation which governs Sears Holdings Corporation’s and Lands’ End’s respective rights, responsibilities and obligations after the Separation with respect to liabilities for United States federal, state, local and foreign taxes attributable to the Lands’ End business. In addition to the allocation of tax liabilities, the Tax Sharing Agreement addresses the preparation and filing of tax returns for such taxes and dispute resolution with taxing authorities regarding such taxes. Generally, Sears Holdings Corporation is liable for all pre-Separation United States federal, state and local income taxes. Lands’ End generally is liable for all other income taxes attributable to its business, including all foreign taxes.
As of October 30, 2015, the Company had gross UTBs of $8.2 million. Of this amount, $5.3 million would, if recognized, impact its effective tax rate, with the remaining amount being comprised of UTBs related to gross temporary differences or other indirect benefits. Pursuant to the Tax Sharing Agreement, Sears Holdings Corporation is generally responsible for all United States federal, state and local UTBs through the date of the Separation and, as such, an indemnification asset from Sears Holdings Corporation for the pre-Separation UTBs is recorded in Other assets in the Condensed Consolidated Balance Sheets.
The Company classifies interest expense and penalties related to UTBs and interest income on tax overpayments as components of income tax expense. As of October 30, 2015, the total amount of interest expense and penalties recognized on our balance sheet was $5.5 million ($3.6 million net of federal benefit). The total amount of net interest expense recognized in the Condensed Consolidated and Combined Statements of Operations was insignificant for all periods presented. The Company files income tax returns in both the United States and various foreign jurisdictions. The Company is under examination by various income tax jurisdictions for the years 2009 to 2014.
Impacts of Separation
Prior to the Separation, the tax provision and related tax accounts represented the tax attributable to the Company as if the Company filed a separate tax return. However, the computed obligations were settled through Sears Holdings Corporation.

8



As a result of the Separation, the Company began filing its own income tax returns and, as a result certain tax attributes previously included in Net parent company investment were reclassified. Specifically, subsequent to the Separation the Company reclassified (i) $30.4 million of deferred tax assets related primarily to foreign tax credits; and (ii) a $13.7 million reserve, including $5.0 million of accrued interest and penalties, for uncertain tax positions out of Net parent company investment and into Deferred tax liabilities and Other liabilities, respectively. In addition, pursuant to the Tax Sharing Agreement, at Separation a $13.7 million receivable was recorded by the Company to reflect the indemnification by Sears Holdings Corporation of the pre-Separation UTBs for which Sears Holdings is responsible. This receivable has been included in Other assets in the Condensed Consolidated Balance Sheets and is $13.5 million at October 30, 2015.
During the Third Quarter 2015, Sears Holdings settled tax audits in certain state tax jurisdictions related to pre-Separation. As a result, the Company has re-evaluated the reserves for the pre-Separation period and recorded a $1.2 million reduction in income tax expense, before consideration of federal income tax benefit. Under the Tax Sharing Agreement, Sears Holdings indemnifies the Company for such liabilities and, as a result, the Company reduced the indemnification receivable by $1.2 million; such reduction was reflected as a decrease in Other assets in the Condensed Consolidated Balance Sheets and as Other expense (income), net in the Condensed Consolidated and Combined Statements of Operations.
NOTE 3. STOCK-BASED COMPENSATION
Accounting standards require, among other things, that (i) the fair value of all stock awards be expensed over their respective vesting periods; (ii) the amount of cumulative compensation cost recognized at any date must at least be equal to the portion of the grant-date value of the award that is vested at that date and (iii) compensation expense include a forfeiture estimate for those shares not expected to vest. Also in accordance with these provisions, for awards that only have a service requirement with multiple vest dates, the Company is required to recognize compensation cost on a straight-line basis over the requisite service period for the entire award.
The Company has granted time vesting stock awards ("Deferred Awards") and performance-based stock awards ("Performance Awards") to employees at management levels and above. Deferred Awards were granted in the form of restricted stock units that only require each recipient to complete a service period. Deferred Awards generally vest ratably over three years or in full after a three year period. Performance Awards were granted in the form of restricted stock units which have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. Performance Awards have annual vesting, but due to the performance criteria, are not eligible for straight-line expensing. Therefore, Performance Awards are amortized using a graded expense process. The fair value of all awards is based on the closing price of the Company’s common stock on the grant date. Compensation expense is reduced for estimated forfeitures of those awards not expected to vest due to employee turnover.
The following table summarizes the Company’s stock-based compensation expense, which is included in Selling and administrative expense in the Condensed Consolidated and Combined Statements of Operations:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Performance Awards
 
$
315

 
$
1,086

 
$
1,096

 
$
1,804

Deferred Awards
 
471

 
86

 
1,211

 
150

Total stock-based compensation expense

$
786


$
1,172


$
2,307


$
1,954

Awards Granted Year to Date 2015
The Company granted Deferred Awards to various employees during the Year to Date 2015, which generally vest in full after a three year period. There were no Performance Awards granted in the Year to Date 2015.

9



Changes in the Company’s Unvested Stock Awards Year to Date 2015
Deferred Awards
(in thousands, except per share amounts)
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Unvested Deferred Awards, as of January 31, 2015
 
44

 
$
28.01

Granted
 
145

 
32.47

Vested
 
(9
)
 
28.02

Forfeited
 
(13
)
 
28.26

Unvested Deferred Awards, as of October 30, 2015
 
167

 
31.84

Total unrecognized stock-based compensation expense related to unvested Deferred Awards approximated $4.1 million as of October 30, 2015, which will be recognized over a weighted average period of approximately 2.3 years.
Performance Awards
(in thousands, except per share amounts)
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Unvested Performance Awards, as of January 31, 2015
 
197

 
$
28.01

Granted
 

 

Vested
 
(43
)
 
27.86

Forfeited
 
(37
)
 
28.30

Unvested Performance Awards, as of October 30, 2015
 
117

 
27.97

Total unrecognized stock-based compensation expense related to unvested Performance Awards approximated $1.4 million as of October 30, 2015, which will be recognized over a weighted average period of approximately 1.6 years.
NOTE 4. EARNINGS PER SHARE
The numerator for both basic and diluted EPS is net income. The denominator for basic EPS is based upon the number of weighted average shares of Lands’ End common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of Lands' End common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with the FASB ASC. For periods ended April 4, 2014 and prior, basic and diluted earnings per share are computed using the number of shares of Lands’ End common stock outstanding on April 4, 2014, the date on which the Lands’ End common stock was distributed to the shareholders of Sears Holdings Corporation.
The following table summarizes the components of basic and diluted earnings per share:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands, except per share amounts)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Net income
 
$
10,725

 
$
17,991

 
$
19,910

 
$
40,704

 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
31,991

 
31,957

 
31,975

 
31,957

Dilutive effect of stock awards
 
68

 
14

 
67

 
8

Diluted weighted average shares outstanding
 
32,059

 
31,971

 
32,042

 
31,965

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.34

 
$
0.56

 
$
0.62

 
$
1.27

Diluted earnings per share
 
$
0.33

 
$
0.56

 
$
0.62

 
$
1.27


10




Anti-dilutive stock awards are comprised of awards which are anti-dilutive in the application of the treasury stock method and are excluded from the diluted weighted average shares outstanding. Total anti-dilutive stock awards were 129 and 126,602 shares for the Third Quarter 2015 and Year to Date 2015, respectively. There were no anti-dilutive stock awards for the Third Quarter 2014 and Year to Date 2014.
NOTE 5. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) encompasses all changes in equity other than those arising from transactions with stockholders, and is comprised solely of foreign currency translation adjustments.
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Beginning balance: Accumulated other comprehensive loss (net of tax of $3,572, $988, $3,931 and $1,211, respectively)
 
$
(6,633
)
 
$
(1,613
)
 
$
(7,298
)
 
$
(1,995
)
Other comprehensive income (loss):
 
 
 
 
 


 


Foreign currency translation adjustments (net of tax (expense) benefit of $(141), $1,654, $(500) and $1,431, respectively)
 
260

 
(2,698
)
 
925

 
(2,316
)
Ending balance: Accumulated other comprehensive loss (net of tax of $3,431, $2,642, $3,431 and $2,642, respectively)
 
$
(6,373
)
 
$
(4,311
)
 
$
(6,373
)
 
$
(4,311
)
No amounts were reclassified out of Accumulated other comprehensive loss during any of the periods presented.
NOTE 6. DEBT
The Company's debt consisted of the following:
 
 
October 30, 2015
 
October 31, 2014
 
January 30, 2015
 
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
Term Loan Facility, maturing April 4, 2021
 
$
507,275

 
4.25
%
 
$
512,425

 
4.25
%
 
$
511,138

 
4.25
%
ABL Facility, maturing April 4, 2019
 

 
%
 

 
%
 

 
%
 
 
507,275

 
 
 
512,425

 
 
 
511,138

 
 
Less: Current maturities in Other current liabilities
 
5,150

 
 
 
5,150

 
 
 
5,150

 
 
Long-term debt
 
$
502,125

 
 
 
$
507,275

 
 
 
$
505,988

 
 

The following table summarizes the Company's borrowing availability under the ABL Facility:
 
 
October 30, 2015
 
October 31, 2014
 
January 30, 2015
ABL maximum borrowing
 
175,000

 
175,000

 
175,000

Outstanding Letters of Credit
 
18,523

 
13,514

 
15,541

Borrowing availability under ABL
 
156,477

 
161,486

 
159,459

Interest; Fees
The interest rates per annum applicable to the loans under the 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

11



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, and will range from 1.50% to 2.00% in the case of LIBOR borrowings and will range from 0.50% to 1.00% in the case of base rate borrowings.
Customary agency fees are payable in respect of both Facilities. The ABL Facility fees also include (i) commitment fees, based on a percentage ranging from approximately 0.25% to 0.38% 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 Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ 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 coverage ratio of 1.0 to 1.0. The Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Facilities as of October 30, 2015.
The 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.
NOTE 7. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The Company determines fair value of financial assets and liabilities based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:
Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information.
Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.
Level 3 inputs—unobservable inputs for the asset or liability.
Restricted cash is reflected on the Condensed Consolidated Balance Sheets at fair value. The fair value of restricted cash as of October 30, 2015, October 31, 2014 and January 30, 2015 was approximately $3.3 million based on Level 1 inputs. Restricted cash amounts are valued based upon statements received from financial institutions.
Cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are reflected on the Condensed Consolidated Balance Sheets at cost, which approximates fair value due to the short-term nature of these instruments.
Carrying values and fair values of long-term debt, including the short-term portion, in the Condensed Consolidated Balance Sheets are as follows:
 
 
October 30, 2015
 
October 31, 2014
 
January 30, 2015
(in thousands)
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt, including short-term portion
 
$
507,275

 
$
473,668

 
$
512,425

 
$
500,895

 
$
511,138

 
$
491,331

Long-term debt was valued utilizing level 2 valuation techniques based on the closing inactive market bid price on October 30, 2015, October 31, 2014, and January 30, 2015. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of October 30, 2015, October 31, 2014, and January 30, 2015.

12



NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The Company's intangible assets consist of a trade name, goodwill and customer lists valued as a result of business combinations accounted for under the purchase accounting method. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The net carrying amounts of goodwill, trade names and customer lists are included within the Company's Direct segment. There were no impairments of goodwill or intangible assets during any periods presented or since the goodwill and intangible assets were first recognized. Total amortization expense relating to intangible assets for the periods presented was:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Amortization expense
 
$

 
$
658

 
$
412

 
$
1,973


The following summarizes the Company's goodwill and intangible assets:
 
 
 
 
 
October 30, 2015
 
October 31, 2014
 
January 30, 2015
(in thousands)
 
Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Amortizing intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists
 
10
 
$
26,300

 
$
26,300

 
$
26,300

 
$
25,231

 
$
26,300

 
$
25,888

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
 
 
528,300

 

 
528,300

 

 
528,300

 

Gross intangible assets
 
 
 
$
554,600

 
$
26,300

 
$
554,600

 
$
25,231

 
$
554,600

 
$
25,888

Total intangible assets, net
 
 
 
$
528,300

 
 
 
$
529,369

 
 
 
$
528,712

 
 
Goodwill
 
 
 
$
110,000

 
 
 
$
110,000

 
 
 
$
110,000

 
 

NOTE 9. RELATED PARTY TRANSACTIONS
According to statements on form 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.
Prior to the Separation, Sears Holdings Corporation (including certain non-Lands’ End subsidiaries) and the Company entered into various agreements to, among other things: (i) support the Lands’ End Shops at Sears; (ii) provide various general corporate services; (iii) support the Company's participation in the SYW program; and (iv) allow for the use of intellectual property or services. The amounts charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. Management believes that such costs are reasonable; however, the Combined Financial Statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future, or what they would have been if it had been a stand-alone company during all periods presented.
In connection with the Separation, the Company entered into various agreements with Sears Holdings which, among other things, (i) govern specified aspects of the Company's relationship following the Separation, especially with regards to the Lands’ End Shops at Sears, and (ii) establish terms pursuant to which subsidiaries of Sears Holdings Corporation are providing services to us.

13



See further descriptions of the transactions in the Company's 2015 Annual Report on Form 10-K. The components of the transactions between the Company and Sears Holdings, which exclude pass-through payments to third parties, are as follows:
Lands’ End Shops at Sears
Related party costs charged by Sears Holdings to the Company related to Lands’ End Shops at Sears are as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Retail services, store labor
 
$
6,774

 
$
7,899

 
$
20,051

 
$
23,208

Rent, CAM and occupancy costs
 
6,167

 
6,485

 
19,049

 
20,078

Financial services and payment processing
 
627

 
713

 
1,876

 
2,144

Supply chain costs
 
219

 
246

 
768

 
751

Total expenses
 
$
13,787

 
$
15,343

 
$
41,744

 
$
46,181

Number of Lands’ End Shops at Sears at period end
 
227

 
242

 
227

 
242

General Corporate Services
Related party costs charged by Sears Holdings to the Company for general corporate services are as follows:
 
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Sourcing
 
$
3,632

 
$
3,203

 
$
7,670

 
$
6,939

Shop Your Way
 
751

 
992

 
2,007

 
3,040

Shared services
 
111

 
150

 
393

 
409

Co-location and services
 

 
2

 

 
15

Total expenses
 
$
4,494

 
$
4,347

 
$
10,070

 
$
10,403

Use of Intellectual Property or Services
Related party revenue and costs charged by the Company to and from Sears Holdings for the use of intellectual property or services is as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Call center services
 
$
674

 
$
605

 
$
1,343

 
$
1,462

Lands' End business outfitters revenue
 
323

 
450

 
1,043

 
1,682

Credit card revenue
 
300

 
353

 
868

 
1,025

Royalty income
 
60

 
20

 
183

 
67

Gift card revenue (expense)
 
(5
)
 
(72
)
 
(16
)
 
254

Total income
 
$
1,352

 
$
1,356

 
$
3,421

 
$
4,490

Call Center Services
The Company has entered into a contract with Sears Holdings Management Corporation, a subsidiary of Sears Holdings Corporation, to provide call center services in support of Sears Holdings’ SYW member loyalty program.

14



This income is net of agreed upon costs directly attributable to the Company providing these services. The income is included in Net revenue and costs are included in Selling and administrative expenses in the Condensed Consolidated and Combined Statements of Operations. Total call center service income included in Net revenue was $2.2 million, $2.1 million, $5.3 million and $5.6 million for the Third Quarter 2015, Third Quarter 2014, Year to Date 2015 and Year to Date 2014, respectively.
Additional Balance Sheet Information
At October 30, 2015, October 31, 2014 and January 30, 2015 the Company included $5.1 million, $5.8 million and $5.7 million in Accounts receivable, net, respectively and $9.4 million, $11.0 million and $9.1 million in Accounts payable, respectively, in the Condensed Consolidated Balance Sheets to reflect amounts due from and owed to Sears Holdings.
At October 30, 2015, October 31, 2014 and January 30, 2015 a $13.5 million, $14.1 million and $14.3 million receivable, respectively, was recorded by the Company in Other assets in the Condensed Consolidated Balance Sheets to reflect the indemnification by Sears Holdings Corporation of the pre-Separation UTBs (including penalties and interest) for which Sears Holdings Corporation is responsible Under the Tax Sharing Agreement. The Company reduced the indemnification receivable by $1.2 million in the Third Quarter 2015 as discussed in Note 2 Income Taxes.
NOTE 10. SEGMENT REPORTING
The Company is a leading multi-channel retailer of casual clothing, accessories and footwear, as well as home products, and has two reportable segments: Direct and Retail. Both segments sell similar products and provide services. Product revenues are divided by product categories: Apparel and Non-apparel. The Non-apparel revenues include accessories, footwear, and home goods. Services and other revenue includes embroidery, monogramming, gift wrapping, shipping and other services. Net revenue is aggregated by product category in the following table:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Net revenue:
 
 
 
 
 
 
 
 
Apparel
 
$
272,228

 
$
300,398

 
$
783,841

 
$
862,044

Non-apparel
 
40,708

 
50,210

 
106,536

 
127,524

Services and other
 
21,498

 
22,474

 
55,858

 
61,219

Total net revenue
 
$
334,434

 
$
373,082

 
$
946,235

 
$
1,050,787

The Company identifies reportable segments according to how business activities are managed and evaluated. Each of the Company’s operating segments are reportable segments and are strategic business units that offer similar products and services but are sold either directly from its warehouses (Direct) or through its retail stores (Retail). Adjusted EBITDA is the primary measure used to make decisions on allocating resources and assessing performance of each operating segment. Adjusted EBITDA is computed as Income before taxes appearing on the Condensed Consolidated and Combined Statements of Operations net of interest expense, depreciation and amortization and other significant items that while periodically affecting the Company's results, may vary significantly from period to period and may have a disproportionate effect in a given period, which may affect comparability of results. Reportable segment assets are those directly used in or clearly allocable to an operating segment’s operations. Depreciation, amortization, and property and equipment expenditures are recognized in each respective segment. There were no material transactions between reporting segments for the Third Quarter 2015 and Third Quarter 2014 and Year to Date 2015 and Year to Date 2014.
The Direct segment sells products through the Company’s e-commerce websites and direct mail catalogs. Operating costs consist primarily of direct marketing costs (catalog and e-commerce marketing costs); order processing and shipping costs; direct labor and benefits costs and facility costs. Assets primarily include goodwill and trade name intangible assets, inventory, accounts receivable, prepaid expenses (deferred catalog costs), technology infrastructure, and property and equipment.
The Retail segment sells products and services through dedicated Lands’ End Shops at Sears across the United States, the Company’s stand-alone Lands’ End Inlet stores and international shop-in-shops. Operating costs

15



consist primarily of labor and benefits costs; rent, CAM and occupancy costs; distribution costs; and in-store marketing costs. Assets primarily include retail inventory, fixtures and leasehold improvements.
The Corporate segment records revenues related to a licensing agreement with Sears Holdings Management Corporation, a subsidiary of Sears Holdings Corporation, whereby royalties are paid in consideration for sharing or use of intellectual property. Corporate overhead and other expenses include unallocated shared-service costs, which primarily consist of employee services and financial services, legal and corporate expenses. These expenses include labor and benefits costs, corporate headquarters occupancy costs and other administrative expenses. Assets include corporate headquarters and facilities, corporate cash and cash equivalents and deferred income taxes.
Financial information by segment is presented in the following tables.
SUMMARY OF SEGMENT DATA

 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Net revenue:
 



 
 
 
 
Direct
 
$
287,778


$
320,286

 
$
805,886

 
$
888,889

Retail
 
46,597


52,776

 
140,166

 
161,831

Corporate / other
 
59


20

 
183

 
67

Total net revenue
 
$
334,434

 
$
373,082

 
$
946,235

 
$
1,050,787

 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Adjusted EBITDA:
 
 
 
 
 
 
 
 
Direct
 
$
36,951

 
$
47,767

 
$
85,316

 
$
115,550

Retail
 
(1,714
)
 
816

 
(907
)
 
4,102

Corporate / other
 
(8,689
)
 
(8,658
)
 
(25,191
)
 
(25,788
)
Total adjusted EBITDA
 
$
26,548

 
$
39,925

 
$
59,218

 
$
93,864

 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Depreciation and amortization:
 
 
 
 
 
 
 
 
Direct
 
$
3,385

 
$
3,822

 
$
10,280

 
$
11,682

Retail
 
510

 
643

 
1,506

 
1,938

Corporate / other
 
365

 
337

 
1,088

 
1,009

Total depreciation and amortization
 
$
4,260

 
$
4,802

 
$
12,874

 
$
14,629

(in thousands)
 
October 30, 2015
 
October 31, 2014
 
January 30, 2015
Total assets:
 
 
 
 
 

Direct
 
$
1,166,991

 
$
1,127,221

 
$
1,023,364

Retail
 
79,492

 
80,406

 
67,765

Corporate / other
 
142,873

 
146,386

 
262,308

Total assets
 
$
1,389,356

 
$
1,354,013

 
$
1,353,437


16



 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
October 30, 2015
 
October 31, 2014
 
October 30, 2015
 
October 31, 2014
Capital expenditures:
 
 
 
 
 
 
 
 
Direct
 
$
4,415

 
$
4,962

 
$
17,717

 
$
10,393

Retail
 
95

 
310

 
148

 
452

Corporate / other
 
87

 
153

 
252

 
296

Total capital expenditures
 
$
4,597

 
$
5,425

 
$
18,117

 
$
11,141

NOTE 11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is party to various legal proceedings arising in the ordinary course of business. The Company's legal proceedings typically include actions include commercial, intellectual property, employment, regulatory and consumer fraud claims. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. The Company does not believe that the outcome of any current legal proceeding would have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
Beginning in 2005, the Company initiated the first of several claims in Iowa County Circuit Court against the City of Dodgeville (the "City") to recover overpaid taxes resulting from the city’s excessive property tax assessment of the Company’s headquarters campus. As of December 3, 2015, the City has refunded, as the result of various court decisions, over $4.0 million in excessive taxes and interest to the Company in the following amounts: (1) approximately $1.6 million arising from the 2005 and 2006 tax years that were recognized in the fiscal year ended January 29, 2010; (2) approximately $1.6 million arising from the 2007, 2009 and 2010 tax years, recognized in the fiscal year ended January 31, 2014; and (3) approximately $0.9 million arising from the 2008 tax year, recognized in the fiscal year ended January 30, 2015. The claims arising from 2005 and 2006 tax years are closed. The Company's claim arising from the 2008 tax year remains unresolved, with respect to a single issue, and is pending before the Wisconsin Court of Appeals. The Company's claims arising from tax years 2007 and 2009 through 2015 remain unresolved, as is the Company's administrative claim for the 2014 and 2015 are still pending before the Circuit Court on several unresolved issues. The Company believes that the potential additional aggregate recovery from the City of Dodgeville arising from the 2007 to 2015 tax years will range from $2.8 million to $4.6 million, none of which has been recorded in the Condensed Consolidated and Combined Financial Statements.
NOTE 12. SUPPLEMENTAL FINANCIAL INFORMATION
Product Recall Accrual Adjustment
On March 24, 2015 Lands' End announced a recall of selected styles of children's sleepwear that did not meet the federal flammability standard. As a result of the recall, the Company recorded a product recall accrual of $4.7 million which had the impact of reducing Operating income in the fourth quarter of Fiscal 2014. In the Third Quarter 2015 and Year to Date 2015, the Company recorded income of approximately $1.0 million and $3.4 million, respectively, in Other operating (income) expense, net in the Condensed Consolidated and Combined Statements of Operations related to the product recall accrual. The income relates to reversals of the accrual and a vendor payment received in relation to the recall. The customer return rates for the recalled products have been below estimates, despite efforts by the Company to contact impacted customers. The remaining accrual balance at October 30, 2015 was $0.1 million.
Non-cash Transactions
Certain non-cash transactions resulted at the time of the Separation. Such transactions were accounted for as an adjustment to Net parent company investment and did not result in cash flows as follows: (i) a $1.5 million liability related to postretirement benefits was transferred to Sears Holdings Corporation as it assumed administration and funding of the plan after the Separation, and (ii) as described in Note 2 - Income Taxes, upon Separation, certain tax attributes previously included within Net parent company investment were reclassified.

17



NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This update requires an entity to classify deferred tax liabilities and assets as noncurrent within a classified statement of financial position. ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early application is permitted as of the beginning of the interim or annual reporting period. The adoption of this guidance is not expected to have a material impact on the Company's Condensed Consolidated and Combined Financial Statements.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. Under this ASU, non-LIFO inventory will be measured at the lower of cost and net realizable value, eliminating the options that currently exist for market valuation. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. No other changes were made to the current guidance on inventory measurement. This guidance will be effective for Lands' End in the first quarter of its fiscal year ending January 27, 2017 and only applies to our international inventory as United States inventory is valued using LIFO. The adoption of this guidance is not expected to have a material impact on the Company's Condensed Consolidated and Combined Financial Statements.
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU 2015-05, Customers' Accounting for Fees Paid in a Cloud Computing Arrangement, which clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. This guidance will be effective for Lands' End in the first quarter of its fiscal year ending January 27, 2017. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's Condensed Consolidated and Combined Financial Statements.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the required presentation of debt issuance costs from an asset on the balance sheet to a deduction from the related debt liability. This guidance will be effective for Lands' End in its fiscal year ending January 27, 2017. The adoption of this guidance is not expected to have a material impact on the Company's Condensed Consolidated and Combined Financial Statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance was deferred by ASU 2015-14, issued by the FASB in August 2015, and will be effective for Lands' End in the first quarter of its fiscal year ending February 1, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's Condensed Consolidated and Combined Financial Statements.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which modifies the requirements for disposals to qualify as discontinued operations and expands related disclosure requirements. This guidance will be effective for Lands' End in its fiscal year ending January 29, 2016. The adoption of this guidance is not expected to have a material impact on the Company's Condensed Consolidated and Combined Financial Statements.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the Condensed Consolidated and Combined 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 risk, 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 ended January 30, 2015, 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 Lands' End, Inc. and its subsidiaries. Our fiscal year ends on the Friday preceding the Saturday closest to January 31. Other terms that are commonly used in this Quarterly Report on Form 10-Q are defined as follows:
ABL Facility - Asset-based senior secured credit agreement, dated as of April 4, 2014, with Bank of America, N.A and certain other lenders
ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
Facilities - Collectively, the ABL Facility and the Term Loan Facility
Fiscal 2014 - The fiscal year ended January 30, 2014
GAAP - Accounting principles generally accepted in the United States
UK Borrower - A United Kingdom subsidiary borrower of Lands’ End under the ABL Facility
Same Store Sales - Net sales, from stores that have been open for at least 12 full months where selling square footage has not changed by 15% or more within the past fiscal year
SEC - United States Securities and Exchange Commission
Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware Corporation, and its consolidated subsidiaries (other than, for all periods following the Separation, Lands' End)
Sears Roebuck - Sears, Roebuck and Co., a subsidiary of Sears Holdings Company
Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
Term Loan Facility - Term loan credit agreement, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
Third Quarter 2015 - the thirteen weeks ended October 30, 2015
Third Quarter 2014 - the thirteen weeks ended October 31, 2014
Year to Date 2015 - the thirty-nine weeks ended October 30, 2015
Year to Date 2014 - the thirty-nine weeks ended October 31, 2014
Introduction
Management's discussion and analysis of financial condition and results of operations accompanies our Condensed Consolidated and Combined Financial Statements and provides additional information about our business, financial condition, liquidity and capital resources, cash flows and results of operations. We have organized the information as follows:
Executive overview. This section provides a brief description of our business, accounting basis of presentation and a brief summary of our results of operations.

19



Discussion and analysis. This section highlights items affecting the comparability of our financial results and provides an analysis of our combined and segment results of operations for the 2015 and 2014 third fiscal quarter and year to date periods.
Liquidity and capital resources. This section provides an overview of our historical and anticipated cash and financing activities. We also review our historical sources and uses of cash in our operating, investing and financing activities.
Quantitative and qualitative disclosures about market risk. This section discusses how we monitor and manage market risk related to changing currency rates. We also provide an analysis of how adverse changes in market conditions could impact our results based on certain assumptions we have provided.
Application of critical accounting policies and estimates. This section summarizes the accounting policies that we consider important to our financial condition and results of operations and which require significant judgment or estimates to be made in their application.
Executive Overview
Description of the Company
Lands’ End, Inc. is a leading multi-channel retailer of casual clothing, accessories and footwear, as well as home products. We offer products through catalogs, online at www.landsend.com and affiliated specialty and international websites, and through retail locations, primarily at Lands’ End Shops at Sears, stand-alone Lands’ End Inlet stores and international shop-in-shops that sell merchandise in various retail department stores. We are a classic American lifestyle brand with a passion for quality, legendary service and real value, and we seek to deliver timeless style for men, women, kids and the home. Lands’ End was founded in 1963 in Chicago 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.”
On March 14, 2014, the board of directors of Sears Holdings approved the distribution of the issued and outstanding shares of Lands’ End common stock on the basis of 0.300795 shares of Lands’ End common stock for each share of Sears Holdings common stock held on March 24, 2014, the record date. Sears Holdings distributed 100 percent of the outstanding common stock of Lands’ End to its shareholders on April 4, 2014.
The Company identifies reportable segments according to how business activities are managed and evaluated. Each of the Company’s operating segments are reportable segments and are strategic business units that offer similar products and services but are sold either directly from our warehouses (Direct) or through our retail stores (Retail).
Basis of Presentation
The financial statements presented herein represent (i) periods prior to April 4, 2014 when we were a wholly owned subsidiary of Sears Holdings Corporation (referred to as “Combined Financial Statements”) and (ii) the period as of and subsequent to April 4, 2014 when we became a separate publicly-traded company (referred to as “Consolidated Financial Statements”).
Our historical Combined Financial Statements have been prepared on a stand-alone basis and have been derived from the consolidated financial statements of Sears Holdings and accounting records of Sears Holdings. The Combined Financial Statements include Lands’ End, Inc. and subsidiaries and certain other items related to the Lands’ End business which were held by Sears Holdings prior to the Separation, primarily the Lands’ End Shops at Sears. These items were contributed by Sears Holdings to Lands’ End, Inc. prior to the Separation. These historical Combined Financial Statements reflect our financial position, results of operations and cash flows in conformity with GAAP.
All intracompany transactions and accounts have been eliminated. Prior to the Separation, all intercompany transactions between Sears Holdings and Lands’ End were considered to be effectively settled in the Combined Financial Statements at the time the transactions were recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Condensed Consolidated and Combined Statements of Cash Flows as a financing activity.
Upon completion of the Separation, the Company had 31,956,521 shares of common stock outstanding at a par value of $0.01 per share. After Separation adjustments were recorded, the remaining Net parent company investment, which includes all earnings prior to the Separation, was transferred to Additional paid-in capital.

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Following the Separation, we began operating as a separate, publicly traded company, independent from Sears Holdings. According to statements on form 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.
The success of our Retail segment depends on the performance of the Lands’ End Shops at Sears. Under the terms of the master lease agreement and master sublease agreement pursuant to which Sears Roebuck leases or subleases to us the premises for the Lands’ End Shops at Sears, Sears Roebuck has certain rights to (1) relocate our leased premises within the building in which such premises are located, subject to certain limitations, including our right to terminate the applicable lease if we are not satisfied with the new premises, and (2) terminate without liability the lease with respect to a particular Lands’ End Shop if the overall Sears store in which such Lands’ End Shop is located is closed or sold. Sears Holdings announced that it intends to continue to right-size, redeploy and highlight the value of its assets, including its real estate portfolio, in its transition from an asset-intensive, store-focused retailer and that it has entered into lease agreements with third party retailers for stand-alone stores. On July 7, 2015, Sears Holdings completed a rights offering and sale-leaseback transaction (the “Seritage transaction”) with Seritage Growth Properties (“Seritage”), a recently formed, independent publicly traded real estate investment trust. Sears Holdings disclosed that as part of the Seritage transaction, it sold 235 properties to Seritage (the “REIT properties”) along with Sears Holdings’ 50% interest in each of three real estate joint ventures (collectively, the “JVs”). Sears Holdings also disclosed that it contributed 31 properties to the JVs (the “JV properties”). As of October 30, 2015, 59 of the REIT properties contained a Lands’ End Shop and 15 of the JV properties contained a Lands’ End Shop, the leases with respect to which Sears Roebuck retained for its own account. Sears Holdings disclosed that Seritage and the JVs have a recapture right with respect to approximately 50% of the space within the stores at the REIT properties and JV properties (subject to certain exceptions), and with respect to nine of the stores that contain a Lands’ End Shop, Seritage has the additional right to recapture 100% of the space within the Sears Roebuck store. If Sears Roebuck continues to dispose of retail stores that contain Lands’ End Shops, and/or offer us relocation alternatives for Lands’ End Shops that are less attractive than the current premises, our business and results of operations could be adversely affected. On October 30, 2015 the Company operated 227 Lands’ End Shops at Sears, compared with 242 Lands’ End Shops at Sears on October 31, 2014.
Seasonality
We experience seasonal fluctuations in our net revenue and operating results and historically have realized a significant portion of our net sales and earnings for the year during our fourth fiscal quarter. We generated approximately 34% of our net sales in the fourth fiscal quarter of the past three years. 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 third quarter of the fiscal year as inventory builds to support peak shipping/selling period 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 Weeks Ended

 
October 30, 2015
 
October 31, 2014
(in thousands)
 
$’s

% of
Net revenue
 
$’s
 
% of
Net revenue
Net revenue
 
$
334,434

 
100.0
 %
 
$
373,082

 
100.0
 %
Cost of sales (excluding depreciation and amortization)
 
172,019

 
51.4
 %
 
189,787

 
50.9
 %
Gross profit
 
162,415

 
48.6
 %
 
183,295

 
49.1
 %
Selling and administrative
 
135,867

 
40.6
 %
 
143,370

 
38.4
 %
Depreciation and amortization
 
4,260

 
1.3
 %
 
4,802

 
1.3
 %
Other operating (income) expense, net
 
(1,009
)
 
(0.3
)%
 
25

 
 %
Operating income
 
23,297

 
7.0
 %
 
35,098

 
9.4
 %
Interest expense
 
6,204

 
1.9
 %
 
6,194

 
1.7
 %
Other expense (income), net
 
796

 
0.2
 %
 
(507
)
 
(0.1
)%
Income before income taxes
 
16,297

 
4.9
 %
 
29,411

 
7.9
 %
Income tax expense
 
5,572

 
1.7
 %
 
11,420

 
3.1
 %
Net income
 
$
10,725

 
3.2
 %
 
$
17,991

 
4.8
 %
 
 
39 Weeks Ended
 
 
October 30, 2015
 
October 31, 2014
(in thousands)
 
$’s
 
% of
Net revenue
 
$’s
 
% of
Net revenue
Net revenue
 
$
946,235

 
100.0
 %
 
$
1,050,787

 
100.0
 %
Cost of sales (excluding depreciation and amortization)
 
492,756

 
52.1
 %
 
537,064

 
51.1
 %
Gross profit
 
453,479

 
47.9
 %
 
513,723

 
48.9
 %
Selling and administrative
 
394,261

 
41.7
 %
 
419,859

 
40.0
 %
Depreciation and amortization
 
12,874

 
1.4
 %
 
14,629

 
1.4
 %
Other operating (income) expense, net
 
(3,366
)
 
(0.4
)%
 
45

 
 %
Operating income
 
49,710

 
5.3
 %
 
79,190

 
7.5
 %
Interest expense
 
18,615

 
2.0
 %
 
14,324

 
1.4
 %
Other expense (income), net
 
(210
)
 
 %
 
(847
)
 
(0.1
)%
Income before income taxes
 
31,305

 
3.3
 %
 
65,713

 
6.3
 %
Income tax expense
 
11,395

 
1.2
 %
 
25,009

 
2.4
 %
Net income
 
$
19,910

 
2.1
 %
 
$
40,704

 
3.9
 %
Depreciation and amortization is 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 $10.7 million and $18.0 million for the Third Quarter 2015 and Third Quarter 2014, respectively. We recorded Net income of $19.9 million and $40.7 million for the Year to Date 2015 and Year to Date 2014, respectively. 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 and Combined Statements of Operations net of Income tax expense, Other (income) expense, net, 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, as well as executive compensation metrics, for comparable

22



periods. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of 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 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 costs.
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.
For the Third Quarter 2015 and Year to Date 2015, we excluded benefits related to reversals of portions of the product recall accrual recognized in Fiscal 2014, and related vendor payments as these were unusual events that affect the comparability of our financial results.
For the Third Quarter 2015, Third Quarter 2014, Year to Date 2015 and Year to Date 2014, we excluded the gain or loss on disposal of property and equipment as management considers the gains or losses on disposal of assets to result from investing decisions rather than ongoing operations.
 

 
13 Weeks Ended

 
October 30, 2015

October 31, 2014
(in thousands)
 
$’s

% of
Net revenue

$’s

% of
Net revenue
Net income
 
$
10,725

 
3.2
 %
 
$
17,991

 
4.8
 %
Income tax expense
 
5,572

 
1.7
 %
 
11,420

 
3.1
 %
Other expense (income), net
 
796

 
0.2
 %
 
(507
)
 
(0.1
)%
Interest expense
 
6,204

 
1.9
 %
 
6,194

 
1.7
 %
Operating income
 
23,297

 
7.0
 %
 
35,098

 
9.4
 %
Depreciation and amortization
 
4,260

 
1.3
 %
 
4,802

 
1.3
 %
Product recall
 
(1,007
)
 
(0.3
)%
 

 
 %
(Gain) loss on disposal of property and equipment
 
(2
)
 
 %
 
25

 
 %
Adjusted EBITDA
 
$
26,548

 
7.9
 %
 
$
39,925

 
10.7
 %

 
39 Weeks Ended

 
October 30, 2015
 
October 31, 2014
(in thousands)
 
$’s
 
% of
Net revenue
 
$’s
 
% of
Net revenue
Net income
 
$
19,910

 
2.1
 %
 
$
40,704

 
3.9
 %
Income tax expense
 
11,395

 
1.2
 %
 
25,009

 
2.4
 %
Other expense (income), net
 
(210
)
 
 %
 
(847
)
 
(0.1
)%
Interest expense
 
18,615

 
2.0
 %
 
14,324

 
1.4
 %
Operating income
 
49,710

 
5.3
 %
 
79,190

 
7.5
 %
Depreciation and amortization
 
12,874

 
1.4
 %
 
14,629

 
1.4
 %
Product recall
 
(3,371
)
 
(0.4
)%
 

 
 %
Loss on disposal of property and equipment
 
5

 
 %
 
45

 
 %
Adjusted EBITDA
 
$
59,218

 
6.3
 %
 
$
93,864

 
8.9
 %
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments, Direct (sold through e-commerce websites and direct mail catalogs) and Retail (sold through stores).

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A key measure in the evaluation of our business is revenue performance by segment. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.
To evaluate revenue performance for the Direct segment we use Net revenue. For our Retail segment, we use Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15% or more as a result of a remodel, expansion, reduction or relocation are excluded from Same Store Sales calculations until the first day they have comparable prior year sales. Online sales and sales generated through our in-store computer kiosks are considered revenue in our Direct segment and are excluded from Same Store Sales.
Discussion and Analysis
Third Quarter 2015 compared with the Third Quarter 2014
Net Revenue
Net revenue for the Third Quarter 2015 was $334.4 million, compared with $373.1 million in the comparable period of the prior year, a decrease of $38.7 million or 10.4%. The decrease was comprised of a decrease in our Direct segment of $32.5 million and a decrease in our Retail segment of $6.2 million.
Net revenue in our Direct segment was $287.8 million for the Third Quarter 2015, a decrease of $32.5 million, or 10.1% from the comparable period of the prior year. During the quarter Net revenue was impacted by internal and external factors. The decrease was primarily attributable to internal factors which include a reduced promotional approach, planned reduction in catalog circulation, and a lack of customer acceptance of the product offering. These internal factors were partially offset by increased Net revenue attributable to our new marketing strategies. External factors that contributed to the decrease in Net revenue during the quarter include operating in a highly promotional retail environment and unseasonably warm weather compared to last year. The international markets were also impacted by changes in currency exchange rates which negatively impacted reported revenue by $5.0 million. Excluding the impact of currency exchange rates, international Net revenue increased slightly.
Net revenue in our Retail segment was $46.6 million for the Third Quarter 2015, a decrease of $6.2 million, or 11.7% from the comparable period of the prior year. The decrease was driven by an 8.9% decrease in same store sales, and a decrease in the number of Lands’ End Shops at Sears. The same store sales decrease was attributable to the same factors which impacted our direct segment as well as declining traffic at our Lands' End Shops at Sears. On October 30, 2015, the Company operated 227 Lands’ End Shops at Sears, 14 global Lands’ End Inlet stores and five international shop-in-shops compared with 242 Lands’ End Shops at Sears, 14 global Lands’ End Inlet stores and five international shop-in-shops on October 31, 2014.
Gross Profit
Total gross profit decreased 11% to $162.4 million and gross margin decreased 50 basis points to 48.6% of total Net revenue, in the Third Quarter 2015, compared with $183.3 million, or 49.1% of total Net revenue, for the Third Quarter 2014. The gross profit decrease was comprised of a decrease in our Direct segment of $17.6 million and a decrease in our Retail segment of $3.3 million.
Gross profit in the Direct segment was $141.9 million compared with $159.5 million for the Third Quarter 2015 and Third Quarter 2014, respectively. Gross margin in the Direct segment decreased approximately 50 basis points to 49.3% in the Third Quarter 2015 versus 49.8% in the comparable prior year period, primarily attributable to the negative effect of changes in foreign exchange rates.
Retail segment gross profit decreased $3.3 million to $20.5 million in the Third Quarter 2015 from $23.8 million in the Third Quarter 2014. Retail segment gross margin decreased approximately 110 basis points to 44.0% compared with 45.1% for the Third Quarter 2015 and Third Quarter 2014, respectively, driven by increased promotional activity.
Selling and Administrative Expenses
Selling and administrative expenses were $135.9 million, or 40.6% of total Net revenue compared with $143.4 million or 38.4% of total Net revenue in the Third Quarter 2015 and Third Quarter 2014, respectively. The decrease in Selling and administrative expenses was primarily due to a decrease of $6.8 million in the Direct segment and a decrease of $0.8 million in the Retail segment. Of the $7.5 million decrease, changes in currency exchange rates favorably impacted Selling and

24



administrative expenses by approximately $2.4 million. Excluding impacts of foreign currency exchange, savings were primarily attributable to lower marketing investment and a decrease in incentive compensation expenses.
The Direct segment Selling and administrative expenses were $104.9 million compared with $111.7 million for the Third Quarter 2015 and Third Quarter 2014, respectively. Of the $6.8 million or 6.1% decrease, changes in currency exchange rates favorably impacted Selling and administrative expenses by $2.4 million. The currency neutral decrease of $4.3 million was primarily attributable to a decrease in marketing investment of $4.2 million as this investment was aligned with current marketing strategies during the quarter.
The Retail segment Selling and administrative expenses were $22.2 million compared with $23.0 million for the Third Quarter 2015 and Third Quarter 2014, respectively. The $0.8 million or 3.5% decrease was primarily attributable to a decrease in personnel and other expenses related to closed stores.
Corporate / other Selling and administrative expenses increased to $8.8 million in the Third Quarter 2015 compared to $8.7 million in the Third Quarter 2014 as a decrease in incentive compensation was offset by increased benefits and third party professional fees during the quarter.
Depreciation and Amortization
Depreciation and amortization expense decreased 11.3% to $4.3 million in the Third Quarter 2015 from $4.8 million in Third Quarter 2014 primarily attributable to an increase in fully depreciated assets.
Other Operating (Income) / Expense, Net
Other operating (income) / expense, net includes $1.0 million dollars of income related to the product recall reserve recorded in the fourth quarter of fiscal 2014. The $1.0 million dollars is a reversal of the product recall reserve and a vendor payment received in relation to the recall. The customer return rates for the recalled products have been lower than estimated despite the efforts by the Company to contact impacted consumers. The remaining reserve is insignificant.
Operating Income

As a result of the above factors, Operating income decreased to $23.3 million in the Third Quarter 2015 from $35.1 million in Third Quarter 2014.
Interest Expense
Interest expense was unchanged at $6.2 million in the Third Quarter 2015 compared to the Third Quarter 2014.
Other (Income) / Expense, Net
Other (Income) / Expense, Net includes a charge of $1.2 million from the reduction to a tax receivable from our former parent as a result of favorable tax settlements in certain tax jurisdictions. Consequently, there is a $1.2 million reduction in income tax expense (before consideration of federal income tax impact).
Income Tax Expense
Income tax expense was $5.6 million for the Third Quarter 2015 compared with $11.4 million in the Third Quarter 2014. The decrease was primarily attributable to lower Operating income. The effective tax rate was 34.2% in the Third Quarter 2015 compared with 38.8% in the Third Quarter 2014. The decrease in the effective tax rate was driven by the previously mentioned favorable tax settlements in the Third Quarter 2015.
Net Income
As a result of the above factors, Net income decreased to $10.7 million and diluted earnings per share decreased to $0.33 in the Third Quarter 2015 compared with Net income of $18.0 million and diluted earnings per share of $0.56 in the Third Quarter 2014. The product recall accrual adjustment favorably impacted Net income by $0.6 million (after tax) and

25



earnings per share by $0.02. The impact of changes in currency exchange rates negatively impacted Net Income by $1.4 million (after tax) and earnings per share by $0.04.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA decreased 33.5% to $26.5 million in the Third Quarter 2015 from $39.9 million in the Third Quarter 2014. The impact of changes in currency exchange rates negatively impacted EBITDA by $2.3 million.
Year to Date 2015 compared with the Year to Date 2014
Net Revenue
Net revenue for the Year to Date 2015 was $946.2 million, compared with $1,050.8 million in the comparable period of the prior year, a decrease of $104.6 million or 9.9%. The decrease was comprised of a decrease in our Direct segment of $83.0 million and a decrease in our Retail segment of $21.6 million.
Net revenue in our Direct segment was $805.9 million for the Year to Date 2015, a decrease of $83.0 million, or 9.3% from the comparable period of the prior year. The decrease was attributable to declines in all of our markets. We realized declining performance driven by a reduced promotional approach, a decrease in catalog circulation and lower customer acceptance of our product offering in a challenging retail environment, partially offset by our new marketing strategies. The international markets were also impacted by changes in currency exchange rates which negatively impacted reported revenue by $22.1 million.
Net revenue in our Retail segment was $140.2 million for the Year to Date 2015, a decrease of $21.6 million, or 13.4% from the comparable period of the prior year. The decrease was attributable to a 9.6% decrease in same store sales, driven by lower sales in the Company’s Lands’ End Shops at Sears, and a decrease in the number of Lands’ End Shops at Sears.
Gross Profit
Total gross profit decreased 12% to $453.5 million and gross margin decreased 100 basis points to 47.9% of total Net revenue, compared with $513.7 million, or 48.9% of total Net revenue, for the Year to Date 2015 and Year to Date 2014, respectively.
Gross profit in the Direct segment was $390.5 million compared with $440.4 million for the Year to Date 2015 and Year to Date 2014, respectively. The decrease in Gross profit is largely attributable to lower revenue. Gross margin in the Direct segment decreased approximately 100 basis points to 48.5% in the Year to Date 2015 versus 49.5% in the comparable prior year period, primarily attributable to changes in currency exchange rates.
Retail segment gross profit decreased $10.5 million to $62.8 million in the Year to Date 2015 from $73.3 million in the Year to Date 2014, primarily attributable to decreased revenues. Retail segment gross margin decreased approximately 50 basis points to 44.8% compared with 45.3% for the Year to Date 2015 and Year to Date 2014, respectively, primarily attributable to recent promotional activity and Year to Date 2014 mark out of stock favorability, partially offset by improved clearance pricing.
Selling and Administrative Expenses
Selling and administrative expenses were $394.3 million, or 41.7% of total Net revenue compared with $419.9 million or 40.0% of total Net revenue in the Year to Date 2015 and Year to Date 2014, respectively. The $25.6 million decrease was attributable to a $19.6 million decrease in the Direct segment, a $5.5 million decrease in the Retail segment, and a $0.5 million decrease in the Corporate segment. Selling and administrative expenses were favorably impacted by $10.0 million during the Year to Date 2015 period due to changes in currency exchange rates.
The Direct segment Selling and administrative expenses were $305.2 million compared with $324.8 million for the Year to Date 2015 and Year to Date 2014, respectively. The $19.6 million or 6.0% decrease was primarily due to changes in the currency exchange rates which impacted Direct Selling and administrative expenses by $10.0 million. Excluding the impacts of foreign currency exchange, savings were attributable to a decrease in marketing spend of $6.2 million driven by reduction in catalog circulation and a decrease in incentive compensation of $4.3 million.

26



The Retail segment Selling and administrative expenses were $63.7 million compared with $69.2 million for the Year to Date 2015 and Year to Date 2014, respectively. The $5.5 million or 7.9% decrease was primarily attributable to a decrease in store personnel related expenses of $4.1 million and a $0.9 million decrease in occupancy costs attributable to operating fewer store locations.