Daily Double
November 8, 1999

Lands' End Inc.

(NYSE: LE)
Phone: 608-935-4391
Website: www.landsend.com
Price (11/5/99): $80

By Rick Aristotle Munarriz (TMF Edible)

How Did it Double?

Open up your sails and let the northerly wind take you away. For earthy basics catalog retailer Lands' End, the last few months have been filled with smooth upstream sailing. On the surface there might not appear to be much bon in the voyage. Sales are up a scant 7% so far this year. However, the deeper one dives into those numbers, the better Lands' End looks. By holding back on catalog mailings, the company has been able to produce more with less. Fiscal 1999, which ended in January, had been a bit of a dud. While sales climbed 8.5% higher, earnings had been cut in half. So far this year, earnings have bounced back and inventory has been trimmed down. The company is simply more efficient now. Making up for what will be a 20% reduction in catalog mailings by the end of the year, the company has seen explosive growth in sales at its website. Breezing along in the online and offline realms -- can one really chart a better course than that?

Business Description

Gary Comer was working for a Chicago-based sailmaker in 1963 when it dawned on him that many of the customers were looking for sailboat fittings to complement the sail purchases. Lands' End Yacht Stores was born! The company opened up a store and set up a mail order business down in the basement. Things were slow at first -- and generating 15 orders was considered a good day. Times have changed. Today Lands' End has a mailing list of 29 million. Last year the company sent out 259 million full-priced catalogs. The direct retailer sells casual clothing for the entire family as well as items like shoes, luggage, and home furnishings.

Financial Facts

Income Statement
12-month sales: $1407.8 million
12-month income: $37.0 million*
12-month EPS: $1.20*
Profit Margin: 2.6%
Market Cap: $2456 million
(*Includes non-recurring items)

Balance Sheet
Cash: $6.3 million
Current Assets: $251.5 million
Current Liabilities: $143.6 million
Long-term Debt: None

Ratios
Price-to-earnings: 66.7
Price-to-sales: 1.7

How Could You Have Found This Double?

Mail-order companies -- and Lands' End is the country's fifth largest -- have been Internet naturals. They have perfected the process of order fulfillment and now, in theory, the online stores should generate even greater cost savings.

Lands' End was one of the first to recognize the power of e-commerce. Two years ago the company generated $18 million in online sales while most brick and mortar apparel chains were still pondering the new medium's feasibility.

Internet sales more than tripled last year, to $61 million, and seem to be trending towards $150 million this year. Lands' End has routinely touted its online growth.

"From an expense perspective, it is less costly to advertise and take orders on the Internet, and over time, we will be able to mail fewer catalogs to those customers who prefer e-commerce shopping," said CEO David Dyer in the fiscal 1999 annual report.

The online emphasis, which finds Lands' End spending a healthy $20 million to market its dynamic website this year, was no surprise. The turnaround was also effectively spelled out when the company rightfully projected that a reduction in catalog mailings would lead to a more productive and profitable year.

Where to From Here?

With Internet sales now breaking into double-digit percentages of total revenues, a field trip is probably in order. Checking out the company's online store is likely to be a confidence builder for investors.

Lands' End's site is a solid collection of retail items, historical anecdotes, and online shopping innovations.

A clever enhancement to the company's cyberstore is its "Shop with a friend" feature. Two users can team up on separate computers and browse the store together. If you need more help, there is Lands' End customer service and live assistance online, too.

The company's unconditional money back policy -- "Guaranteed. Period." -- has won it customer loyalty, and more than 10 million different shoppers have placed orders with the company over the past three years. (Oddly enough, the company's unconditional guarantee policy was actually deemed illegal in Germany last month.)

On the earnings front, analysts expect Lands' End to earn $2.00 a share this year and $2.37 next year. That 18.5% growth rate is half the earnings multiple granted to the stock right now. So, Lands' End is not the bargain it was earlier this year. However, the company continues to establish itself as the class of mail order and specialty apparel e-commerce. Premium valuations are often awarded to market leaders. Hearty sails find gusty winds. The bon meets the voyage.

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