By Brian Graney (TMF Panic)
May 11, 2000

The last 12 months have been a pretty bumpy ride for catalog and Internet casualwear retailer Lands' End (NYSE: LE), with the company's share price bouncing around like a cork in rough surf. Today, the stock bobbed up and down some more after the company put up its fiscal Q1 results. Net sales fell 8% compared to a year ago to $266 million, although last year's results benefited from the firm's Willis & Geiger business that has since been discontinued. Excluding Willis & Geiger, sales were down 5% for the quarter, with sales at the firm's "core" primary monthly catalog down 8% and international sales off 10%.

What really threw investors for a loop this morning, though, was the company's EPS of a mere $0.01, far below the First Call mean estimate of $0.16. This is the second earnings miss in a row for Lands' End, which has been punished for its non-conformity to Wall Street's expectations with a 60% drop in its share price over the past six months. But with the market's gyrations, the firm's shares recovered from an early drop this morning and were actually trading up by mid-day.

Judging from the company's press release language today, the rough ride may not be over quite yet. First-half sales are expected to increase at a low-single-digit percentage rate, down from the prior guidance of a mid-single-digit uptake. Likewise, first half earnings will come in below last year's results, instead of the strong increase that had been forecasted.

The picture is expected to get substantially brighter in the fourth quarter, when Lands' End expects to jack up its page circulation with holiday catalogs. The strategy is expected to pay off in improved results compared to a year ago when a key Thanksgiving-time catalog was axed. The underlying theme of this latest round of guidance seems to be "have patience, dear investors." Whether investors will comply and wait for the better days to come, though, is largely out of the company's hands at this point.

What Land's End does have control over is its own internal operations, which the company believes are much better aligned with the concept of long-term value creation than they were a year ago. "The initiative over the last four quarters to reduce unprofitable mailings with significant cuts in circulation is completed, and the company will now focus on growth from a more productive base," the firm promised in its press release today. Indeed, many signs of a leaner and meaner Lands' End are starting to show up as the firm appears to have gotten its inventory act together.

As cost of goods sold represent inventoriable costs, any rationalization in the way a company deals with its inventory will show up on both the income statement (in lower cost of sales) and on the balance sheet (in lower inventory account totals).
In short, the firm's gross margins have gone up as previously slow-moving inventory has been shoved out the door, with Q1 inventory account shrinking 7% compared to a year ago. Computed on a quarterly basis, the firm's cash conversion cycle has improved to 66.1 days from 78.1 days during last Q1.

Also heartening is the fact that Lands' End has done a better job than most other catalog firms in transitioning to the Internet and benefiting from the selling efficiencies inherent to the medium. Make no mistake, catalogs are the bread-and-butter business at Lands' End, not the Internet. Momentum traders may have forgotten about that point during the stock's run-up late last year. But even as a small fraction of the overall business, the firm's e-commerce unit is producing some very real results.

Online sales in Q1 doubled from a year ago, according to the firm. Further, those online sales have been ramped-up without causing too much of a strain on the company's total cost structure. Some commentators have suggested that part of Lands' End problem over the past few months has been its recent e-commerce spending, but the numbers don't seem to bear those worries out. Capital spending in fiscal 2000 came in at $28 million, down 40% from the prior year and a manageable 135% of annual depreciation and amortization expense. In Q1, the spending picture looks even better, with capital additions coming in at just 43% of quarterly depreciation and amortization.

With a streamlined operating model and lower spending needed in future months to support the growing e-commerce business, a strong case can be made that Lands' End is indeed in better overall business shape than it was a year ago despite the lumpy near-term earnings picture. Sales growth is the major factor to be concerned about looking further out. However, with the firm's shares trading about where they were at this time a year ago, investors with timeframes longer than just a few quarters may want to give Lands' End another look.

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