Lands' End Lands Hard (News) November 11, 1999

Lands' End Lands Hard

By Dave Marino-Nachison (TMF Braden)
November 11, 1999

Shares of casualwear direct marketer Lands' End (NYSE: LE) gave up approximately 30% of their market value today following news that the company's adoption of an Internet-based business model will take its toll on the company's near-term earnings performance.

Lands' End confirmed today old news that it will trim page circulation by about one-fifth to cut down on unprofitable mailings and help fund its move online. The company now believes fiscal fourth-quarter sales may end up "somewhat down" from year-ago results.

That's a slight step back from the projections Lands' End made in mid-August when reporting fiscal Q2 results: The company said to look for second-half revenues to be about flat with the previous year's. Today, the company announced Q3 numbers, including third-quarter sales that were up just 1% from last year's at $326 million. (Click here for the company's quarterly press release.) Operating margins, however, benefited as a result.

In the first half, the effect was the opposite as Lands' End boosted circulation to help liquidation: Margins were victimized while the company worked to move unwanted merchandise.

Today's news also included more specific information about Lands' End's outlook for next year, the company saying it plans to continue paring back its catalogs in the first half of the upcoming fiscal year -- trimming page circulation in its main monthly catalogs by between 5% and 10%, which will likely hamper revenues -- while boosting capital spending to between $40 million and $50 million with the company's information technology infrastructure in mind. The company's entire planned fiscal 2000 capital budget was less than $30 million.

Lands' End has been gearing up for its online push for some time. It has designed the site, set up an extensive customer service operation, and spent heavily on advertising -- and sales have responded. The company believes, as many direct marketers do, that it can significantly improve profitability by cutting down on production costs associated with its paper catalogs.

Optimism about the company's online potential has had a lot to do with the company's rapid rise over the past year as many believe that Lands' End -- already boasting significant experience in customer service and fulfillment -- would be able to make the transition to the Internet with grace.

The company itself is counting on it. At a recent investors' conference, CEO Dave Dyer said: "In times of change, it's very important to hold fast to basic principles. The way we treat customers, the way we treat our employees, our commitment to quality and value, the fairness in all our dealings -- personal, honest interaction with others -- these are the foundation for Lands' End. They will stay the same."

A transcript of Dyer's comments is available in a company 8-K filing from earlier this month. (Click here for more on that.)

If Lands' End can turn its loyal catalog customer base, which numbers nearly 30 million, into online customers, its Internet operation could make out like gangbusters. And don't count out the effectiveness of its direct mailing expertise either, as the two marketing mediums could very well be used to complement each other.

But although the company's specific financial outlook for upcoming quarters is new information, the Lands' End Internet story is hardly a Wall Street secret. Some analysts, in fact, have been scaling back their recommendations on the company of late based primarily on valuation. Today's move, however, might signal a period of opportunity for investors firmly behind the company's push into e-tailing.

The window may stay open for a while given the company's warning about holiday sales; Q4 is far and away the company's most important period.

Related Links:
Lands' End Web Page
Lands' End Message Board
Lands' End Q3 Earnings Press Release
Lands' End 8-K Filing, 11/1/99

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