# LANDS' END, INC. (LE) FY 2025 MD&A Verbatim Item 7 Management's Discussion and Analysis from LANDS' END, INC.'s 10-K for fiscal year 2025. SEC filing source: https://www.sec.gov/Archives/edgar/data/799288/000095017025046044/le-20250131.htm Accession: 0000950170-25-046044 Filing date: 2025-03-27 Report date: 2025-01-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/LE/ All MD&A years: /company/LE/mda/ Previous year: /company/LE/mda/fy2024/ (FY 2024) Next year: /company/LE/mda/fy2026/ (FY 2026) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the Consolidated Financial Statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. 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 risks, 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 Statement Concerning Forward-Looking Information” below and Item 1A, Risk Factors, in this Annual Report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This section discusses our results of operations for the year ended January 31, 2025 as compared to the year ended February 2, 2024. For a discussion and analysis of the year ended February 2, 2024 compared to January 27, 2023, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended February 2, 2024, filed with the SEC on April 3, 2024. As used in this Annual Report on Form 10-K, 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. Executive Overview Description of the Company Lands’ End, Inc. is a leading digital retailer of solution-based apparel, swimwear, outerwear, accessories, footwear, home products and uniforms. We offer products online at www.landsend.com, through third-party distribution channels, our own Company Operated stores and third-party license agreements. We also offer products to businesses and schools, for their employees and students, through the Outfitters distribution channel. We are a classic American lifestyle brand that creates solutions for life’s every journey. Lands’ End was founded in 1963 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.” Segment Reporting We identify our operating segments according to how our business activities are managed and evaluated. Following internal organizational changes and realignment of distribution channel responsibilities in Fourth Quarter 2024, our operating segments consisted of: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party, Licensing and Retail. Beginning Fourth Quarter 2024, the Wholesale business is included in Licensing and prior periods were recast to reflect the change in operating segments for comparability purposes. During Fiscal 2022, the Company’s operating segments included Japan eCommerce. We have determined that the U.S. eCommerce, Outfitters and Third Party operating segments share similar economic and other qualitative characteristics, and therefore, the results of these operating segments are aggregated into the U.S. Digital segment. The Europe eCommerce, Licensing and Retail operating segments are not quantitatively significant to be separately reported. See Note 13, Segment Reporting. 30 Table of Contents Distribution Channels We identify six separate distribution channels for revenue reporting purposes. • U.S. eCommerce offers products through our eCommerce website. • Europe eCommerce offers products primarily to consumers located in Europe and through eCommerce international websites and third-party affiliates. • Outfitters sells uniform and logo apparel to businesses and their employees, as well as to student households through school relationships, located primarily in the U.S. • Third Party sells products direct to consumers through third-party marketplace websites. • Licensing earns royalties on the use of Lands’ End trademark and any fulfillment fees for fulfillment services provided by the Company. • Retail sells products through Company Operated stores, located in the U.S. Macroeconomic Challenges Macroeconomic issues which impact consumer discretionary spending, such as realized inflation-based price increases and high interest rates have continued to have an impact on our business. Apparel purchases historically have been influenced by domestic and global economic conditions, which may negatively impact customer demand and may require higher levels of promotion in order to attract and retain customers. Additionally, the variable interest rates associated with our Debt Facilities are negatively affected by higher interest rate environments. Macroeconomic challenges may lead to increased cost of raw materials, packaging materials, labor, energy, fuel, debt and other inputs necessary for the production and distribution of our products. Moreover, uncertainty with respect to trade policy and tariffs, including increased tariffs applicable to countries where our vendors manufacture our product, may result in an increase in the cost of our products. Restructuring During Fiscal 2024 and Fiscal 2023, we reduced approximately 10% of our corporate office positions and incurred restructuring charges, primarily severance and benefit and other related costs. The reductions in the corporate office positions were made to better align with the evolving needs of the business and to invest in key growth areas. For the 52 and 53 weeks ended January 31, 2025 and February 2, 2024, we incurred restructuring charges, primarily severance and benefit costs, related to cost optimization of business operations and strategic initiatives of $5.6 million and $7.3 million, respectively, recorded in Other operating expense, net in the Consolidated Statement of Operations. Lands’ End Japan Closure During Second Quarter 2022, the Board of Directors approved a plan to wind down and cease operations of Lands’ End Japan KK. Lands’ End Japan KK represents the Japan eCommerce operating segment. The final liquidation occurred in First Quarter 2024. We incurred no closing costs in Fiscal 2024 and approximately $0.3 million during Fiscal 2023, respectively, recorded in Other operating expense, net in the Consolidated Statements of Operations. See Note 8, Lands’ End Japan Closure. Basis of Presentation The Consolidated Financial Statements have been prepared in accordance with GAAP and include the accounts of Lands’ End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated. Seasonality We experience seasonal fluctuations in our Net revenue and operating results and historically have realized a significant portion of our yearly net revenue and earnings during our fourth fiscal quarter. We generated approximately 31 Table of Contents 34.0% of our yearly net revenue in the fourth quarters of Fiscal 2024 and Fiscal 2023. Thus, lower than expected fourth quarter net revenue may have an adverse impact on our annual operating results. Working capital requirements typically increase during the second and third quarters of the fiscal year as inventory builds to support peak selling periods and typically decrease during the fourth quarter of the fiscal year as inventory is sold. Cash provided by operating activities is typically higher in the fourth quarter of the fiscal year due to reduced working capital requirements during that period. Results of Operations Fiscal Year. Our fiscal year end is on the Friday preceding the Saturday closest to January 31 each year. The fiscal periods in this report are presented as follows, unless the context otherwise requires: [[GREPCENT_TABLE]] [["Fiscal Year","","Ended","","Weeks"],["2024","","January 31, 2025","","52"],["2023","","February 2, 2024","","53"]] [[/GREPCENT_TABLE]] The following table sets forth, for the periods indicated, selected income statement data: [[GREPCENT_TABLE]] [["","","Fiscal 2024","","","Fiscal 2023"],["(in thousands)","","$\u2019s","","","% of Net Revenue","","","$\u2019s","","","% of Net Revenue"],["Net revenue","","$","1,362,935","","","","100.0","%","","$","1,472,508","","","","100.0","%"],["Cost of sales (excluding depreciation and amortization)","","","709,590","","","","52.1","%","","","846,981","","","","57.5","%"],["Gross profit","","","653,345","","","","47.9","%","","","625,527","","","","42.5","%"],["Selling and administrative","","","561,804","","","","41.2","%","","","550,211","","","","37.4","%"],["Depreciation and amortization","","","33,772","","","","2.5","%","","","38,465","","","","2.6","%"],["Goodwill impairment","","","-","","","","\u2014","%","","","106,700","","","","7.2","%"],["Other operating expense, net","","","6,812","","","","0.5","%","","","7,666","","","","0.5","%"],["Operating income (loss)","","","50,957","","","","3.7","%","","","(77,515",")","","","(5.3",")%"],["Interest expense","","","40,439","","","","3.0","%","","","48,291","","","","3.3","%"],["Loss on extinguishment of debt","","","-","","","","\u2014","%","","","6,666","","","","0.5","%"],["Other expense (income), net","","","22","","","","0.0","%","","","(655",")","","","(0.0",")%"],["Income (loss) before income taxes","","","10,496","","","","0.8","%","","","(131,817",")","","","(9.0",")%"],["Income tax expense (benefit)","","","4,263","","","","0.3","%","","","(1,133",")","","","(0.1",")%"],["Net income (loss)","","$","6,233","","","","0.5","%","","$","(130,684",")","","","(8.9",")%"]] [[/GREPCENT_TABLE]] Depreciation and amortization are 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. Definitions, Reconciliations and Uses of Non-GAAP Financial Measures In addition to our Net income (loss) determined in accordance with GAAP, for purposes of evaluating operating performance, we report the following non-GAAP measures: Adjusted net income (loss) and Adjusted EBITDA. Adjusted net income (loss) is also expressed on a diluted per share basis. We believe presenting non-GAAP financial measures provides useful information to investors, allowing them to assess how the business performed excluding the effects of significant non-recurring or non-operational amounts. We believe the use of the non-GAAP financial measures facilitates comparing the results being reported against past and future results by eliminating amounts that we believe are not comparable between periods and assists investors in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s own methods for evaluating business performance. 32 Table of Contents Our management uses Adjusted net income (loss) and Adjusted EBITDA to evaluate the operating performance of our business for comparable periods and to discuss our business with our Board of Directors, institutional investors and other market participants. Adjusted EBITDA is also used as the basis for a performance measure used in executive incentive compensation. The methods we use to calculate our non-GAAP financial measures may differ significantly from methods other companies use to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted net income (loss) and Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as these measures may exclude a number of important cash and non-cash recurring items. Adjusted net income (loss) is defined as net income (loss) excluding significant non-recurring or non-operational items as set forth below. Adjusted net income (loss) is also presented on a diluted per share basis. While Adjusted net income (loss) is a non-GAAP measurement, management believes that it is an important indicator of operating performance and useful to investors. • Other significant non-recurring or non-operational 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 and are described below: • Restructuring – primarily severance and benefit costs for Fiscal 2024 and Fiscal 2023, respectively. • Goodwill and long-lived asset impairment – charges associated with the non-cash write down of certain long-lived assets and goodwill for Fiscal 2024 and Fiscal 2023, respectively. • Exit costs – charges associated to exit the kids and footwear lines of business including inventory excess and obsolescence reserves, inventory discounts and operational charges recorded in Fiscal 2024 and Fiscal 2023, respectively, in conjunction with our licensing arrangements commencing in Fiscal 2024. • Loss on extinguishment of debt – prepayment premium associated with the repayment of the Former Term Loan Facility before the scheduled maturity date and the write off of related unamortized original issue discount and debt issuance costs of the Former Term Loan Facility for Fiscal 2023. • (Gain) loss on disposal of property and equipment – gain on sale of a building and excess land in Fiscal 2024. • Lands’ End Japan closure – net operating income (loss) from liquidation and closing costs recorded for Fiscal 2023. 33 Table of Contents The following table sets forth, for the periods indicated, a reconciliation of Net income (loss) to Adjusted net income (loss) and Adjusted diluted net earnings (loss) per share: [[GREPCENT_TABLE]] [["(in thousands, except per share amounts)","","Fiscal 2024","","","Fiscal 2023"],["Net income (loss)","","$","6,233","","","$","(130,684",")"],["Restructuring","","","5,558","","","","7,305"],["Goodwill and long-lived asset impairment","","","3,818","","","","106,700"],["Exit costs","","","927","","","","9,279"],["Loss on extinguishment of debt","","","\u2014","","","","6,666"],["Lands\u02bc End Japan closure","","","\u2014","","","","(215",")"],["(Gain) loss on disposal of property and equipment","","","(2,501",")","","","\u2014"],["Tax effects on adjustments (1)","","","(1,463",")","","","(3,834",")"],["ADJUSTED NET INCOME (LOSS)","","$","12,572","","","$","(4,783",")"],["ADJUSTED DILUTED NET EARNINGS (LOSS) PER SHARE","","$","0.40","","","$","(0.15",")"],["Diluted weighted average common shares outstanding","","","31,664","","","","31,970"]] [[/GREPCENT_TABLE]] (1) The tax impact of adjustments is calculated at the applicable U.S. and non-U.S. Federal and State statutory rates. 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. • 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 and are described below: • Restructuring – primarily severance and benefit costs for Fiscal 2024 and Fiscal 2023, respectively. • Goodwill and long-lived asset impairment – charges associated with the non-cash write down of certain long-lived assets and goodwill in Fiscal 2024 and Fiscal 2023. • Exit costs – charges associated to exit the kids and footwear lines of business including inventory excess and obsolescence reserves, inventory discounts and operational charges recorded in Fiscal 2024 and Fiscal 2023, respectively, in conjunction with our licensing arrangements commencing in Fiscal 2024. • Lands’ End Japan closure – net operating income (loss) from liquidation and closing costs recorded in Fiscal 2023. • Net gain or loss on disposal of property and equipment – disposal of property and equipment in Fiscal 2024 and Fiscal 2023. • Other – amortization of transaction related costs associated with our Licensing distribution channel in Fiscal 2023. 34 Table of Contents The following table sets forth, for the periods indicated, selected income statement data, both in dollars and as a percentage of Net revenue and a reconciliation of Net income (loss) to Adjusted EBITDA: [[GREPCENT_TABLE]] [["(in thousands)","","Fiscal 2024","","","Fiscal 2023"],["Net income (loss)","","$","6,233","","","","0.5","%","","$","(130,684",")","","","(8.9",")%"],["Income tax expense (benefit)","","","4,263","","","","0.3","%","","","(1,133",")","","","(0.1",")%"],["Interest expense","","","40,439","","","","3.0","%","","","48,291","","","","3.3","%"],["Loss on extinguishment of debt","","","\u2014","","","","\u2014","","","","6,666","","","","0.5","%"],["Other expense (income), net","","","22","","","","0.0","%","","","(655",")","","","(0.0",")%"],["Operating income (loss)","","","50,957","","","","3.7","%","","","(77,515",")","","","(5.3",")%"],["Depreciation and amortization","","","33,772","","","","2.5","%","","","38,465","","","","2.6","%"],["Restructuring","","","5,558","","","","0.4","%","","","7,305","","","","0.5","%"],["Goodwill and long-lived asset impairment","","","3,818","","","","0.3","%","","","106,700","","","","7.2","%"],["Exit costs","","","927","","","","0.1","%","","","9,279","","","","0.6","%"],["Lands\u02bc End Japan closure","","","\u2014","","","","\u2014","","","","(215",")","","","(0.0",")%"],["(Gain) loss on disposal of property and equipment","","","(2,433",")","","","(0.2",")%","","","93","","","","0.0","%"],["Other","","","\u2014","","","","\u2014","","","","189","","","","0.0","%"],["Adjusted EBITDA","","$","92,599","","","","6.8","%","","$","84,301","","","","5.7","%"]] [[/GREPCENT_TABLE]] In assessing the operational performance of our business, we consider a variety of financial measures. We operate in six separate distribution channels for revenue reporting purposes: U.S. eCommerce, Europe eCommerce, Outfitters, Third Party, Licensing and Retail. A key measure in the evaluation of our business is revenue performance by distribution channel as well as consolidated Gross margin. We manage and assess the performance of each of our operating segments using Variable profit, which is defined as Net revenue minus cost of sales and variable selling expenses. This segment measure excludes fixed personnel costs, incentive compensation, office occupancy, information technology, professional fees and depreciation and amortization. See Note 13, Segment Reporting for more information regarding Variable profit, which is a non-GAAP measure, as well as a reconciliation of Variable profit to Income (loss) before income taxes. We use Net revenue to evaluate revenue performance for the U.S. eCommerce, Europe eCommerce, Outfitters, Third Party and Licensing distribution channels. We use GMV, which equals total order value of all Lands’ End branded merchandise sold to customers through business-to-consumer and business-to-business channels, as well as the retail value of the merchandise sold through third party distribution channels, as an important indicator of the performance of the comparable growth of the total brand. For our Retail distribution channel, we use Same Store Sales as a key measure in evaluating performance. A Company Operated store is included in U.S. Same Store Sales calculations when it has been open for at least 14 months. Online sales and sales generated through our in-store web portal are considered revenue in our U.S. eCommerce and are excluded from U.S. Same Store Sales. 35 Table of Contents Discussion and Analysis Fiscal 2024 Compared to Fiscal 2023 Gross Merchandise Value Gross Merchandise Value (“GMV”) increased low-single digits compared to Fiscal 2023. Excluding the 53rd week of Fiscal 2023, GMV increased mid-single digits. Net Revenue Total Net revenue was $1.36 billion in Fiscal 2024, a decrease of $109.6 million or 7.4% from $1.47 billion in Fiscal 2023. The decrease in Net revenue was driven by the transition of the kids and footwear product lines to licensing arrangements and optimizing promotional activity as we focused on higher quality sales resulting in higher gross margins and increased gross profit. Excluding the net impact of transitioning kids and footwear product lines to licensing arrangements of $96.6 million, the $31.2 million inventory buyout by a corporate client at the end of its contract in Fiscal 2023 and the impact of the 53rd week in Fiscal 2023 of $16.2 million, total Net revenue increased $34.5 million or 2.6% compared to Fiscal 2023. U.S. Digital Segment Net revenue was $1.15 billion in Fiscal 2024, a decrease of $138.6 million or 10.7% from $1.29 billion in Fiscal 2023. Excluding the net impact of the licensing transition, the inventory buyout and the 53rd week, U.S. Digital Segment Net revenue increased $3.7 million or 0.3% compared to Fiscal 2023. U.S. eCommerce Net revenue decreased 9.4%, driven by the transition of kids and footwear products from a direct to a license model, continued promotional productivity within swimwear, outerwear and newness in adjacent product categories and improved inventory management resulting in higher margins with lower clearance inventory sales. Excluding the net impact of the licensing transition and the 53rd week, U.S. eCommerce Net revenue increased 2.3% compared to Fiscal 2023. Outfitters Net revenue decreased 15.5%, primarily driven by inventory sales to a corporate client at the conclusion of their contract in the First Quarter 2023. Excluding the inventory buyout and the 53rd week, Outfitters Net revenue decreased 2.9% compared to Fiscal 2023. Third Party Net revenue decreased 10.1%, primarily driven by continued promotional productivity with curated assortments and improved inventory management resulting in higher gross margins. Excluding the impact of the 53rd week, Third Party Net revenue decreased 8.7% compared to Fiscal 2023. Europe eCommerce Net revenue was $103.1 million in Fiscal 2024, a decrease of $9.8 million or 8.7% from $112.9 million in Fiscal 2023. The decrease in Europe eCommerce Net revenue was primarily driven by the continued focus on gross margin improvement through higher gross profit sales as well as a decrease in markdown and clearance sales. Licensing and Retail Net revenue was $105.4 million in Fiscal 2024, an increase of $38.9 million or 58.5% from $66.5 million in Fiscal 2023, primarily driven by revenue from licensing arrangements including Lands’ End produced inventory sold to a licensee in First Quarter 2024 in connection with the transition of kids’ products from a direct to a license model. Our U.S. Company Operated Stores experienced an increase of 3.0% in Same Store Sales as compared to Fiscal 2023. On January 31, 2025, there were 23 U.S. Company Operated stores included in Same Store Sales compared to 26 U.S. Company Operated stores on February 2, 2024. Gross Profit In Fiscal 2024, total Gross profit increased 4.4% to $653.3 million compared to $625.5 million for Fiscal 2023. Gross margin increased 550 basis points to 47.9% in Fiscal 2024 compared to 42.5% in Fiscal 2023. The improvement in Gross margin was primarily driven by leveraging the strength in the swimwear, outerwear and newness in adjacent 36 Table of Contents product categories across the channels, lower promotional activity and improvements in both inventory management and supply chain costs for Fiscal 2024 compared to Fiscal 2023. Selling and Administrative Expenses Selling and administrative expenses were $561.8 million, or 41.2% of total Net revenue in Fiscal 2024, compared to $550.2 million, or 37.4% of total Net revenue in Fiscal 2023. The approximately 380 basis points increase was driven by deleveraging from lower revenues, higher digital marketing spend focused on new customer acquisition and third party professional services. Depreciation and Amortization Depreciation and amortization were $33.8 million in Fiscal 2024, a decrease of $4.7 million or 12.2%, compared to $38.5 million in Fiscal 2023. The decrease in depreciation and amortization is primarily driven by lower software depreciation in Fiscal 2024 as a result of major projects becoming fully depreciated. Other Operating Expense, Net Other operating expense, net was $6.8 million in Fiscal 2024 compared to $7.7 million in Fiscal 2023. Operating Income (Loss) Operating income was $51.0 million in Fiscal 2024, compared to Operating loss of $77.5 million in Fiscal 2023. The increase of $128.5 million was primarily attributed to the $106.7 million non-cash goodwill impairment charge recorded in Third Quarter 2023. Interest Expense Interest expense was $40.4 million in Fiscal 2024, compared to $48.3 million in Fiscal 2023. The $7.9 million decrease was primarily driven by lower ABL Facility interest related to lower average outstanding balances and lower amortization of debt issuance costs and lower applicable interest rates on the Current Term Loan Facility. Loss on Extinguishment of Debt There was no loss on extinguishment of debt in Fiscal 2024, compared to $6.7 million in Fiscal 2023. We incurred a 1% prepayment premium and recorded the write-off of unamortized original issue discount and debt issuance costs related to the repayment of our Former Term Loan Facility before the scheduled maturity date in Fiscal 2023. Other Expense (Income) Other expense was insignificant in Fiscal 2024 compared to other income of $0.7 million in Fiscal 2023. Income Tax Expense (Benefit) Income tax expense of $4.3 million was recorded for Fiscal 2024 which resulted in an effective tax rate of 40.6%. This compared to Income tax benefit of $1.1 million in Fiscal 2023 which resulted in an effective tax rate of 0.9%. The Fiscal 2024 tax rate was higher than Fiscal 2023 primarily due to an impairment of goodwill recorded in Fiscal 2023 that was not deductible for tax purposes and as a result of pretax income in Fiscal 2024 compared to a pretax loss in Fiscal 2023. Net Income (Loss) As a result of the above factors, Net income was $6.2 million, or diluted earnings per share of $0.20 in Fiscal 2024 compared to Net loss of $130.7 million, or diluted loss per share of $4.09 in Fiscal 2023. 37 Table of Contents Adjusted Net Income (Loss) As a result of the above factors, Adjusted net income was $12.6 million and Adjusted diluted earnings per share was $0.40 in Fiscal 2024 compared to Adjusted net loss of $4.8 million and Adjusted diluted net loss per share of $0.15 in Fiscal 2023, representing an increase of $17.4 million, or $0.55 per diluted share. Adjusted EBITDA As a result of the above factors, Adjusted EBITDA was $92.6 million in Fiscal 2024, compared to $84.3 million in Fiscal 2023. U.S. Digital Segment Results of Operations Variable Profit U.S. Digital Segment Variable profit was $265.4 million in Fiscal 2024, a decrease of $0.5 million compared to $265.9 million in Fiscal 2023. U.S. Digital Segment Variable profit was 23.0% of Net revenue in Fiscal 2024, which is an increase of 240 basis points compared to 20.6% of Net revenue in Fiscal 2023. The increase in Variable profit as a percentage of Net revenue was driven by continued promotional activity, supply chain improvements in Product and Shipping cost of goods sold partially offset by an increase in Marketing expenses. Product cost of goods sold was $444.1 million or 38.5% of Net revenue in Fiscal 2024 compared to $553.2 million or 42.8% of Net revenue in Fiscal 2023. Shipping cost of goods sold was $157.6 million or 13.6% of Net revenue in Fiscal 2024 compared to $190.1 million or 14.7% of Net revenue in Fiscal 2023. The improvement in Product and Shipping cost of goods sold as a percent of Net revenue was primarily due to improvements in both inventory management and supply chain costs for Fiscal 2024 compared to Fiscal 2023. Marketing expenses were $179.5 million or 15.5% of Net revenue in Fiscal 2024 compared to $174.7 million or 13.5% of Net revenue in Fiscal 2023. The increase in Marketing expenses was primarily due to higher digital spend focused on new customer acquisition. U.S. Digital Segment Fiscal 2023 Compared to Fiscal 2022 U.S. Digital Segment Net revenue was $1.29 billion in Fiscal 2023, a decrease of $15.6 million or 1.2% from $1.31 billion in Fiscal 2022. U.S. eCommerce Net revenue decreased by 2.7%, primarily driven by promotional productivity in key product solutions and adjacent product categories with improved inventory management resulting in higher margins with lower clearance inventory sales. Outfitters Net revenue increased 1.5%. Third Party Net revenue increased 6.6%, primarily driven by growth in online sales through existing marketplaces. U.S. Digital Segment Variable profit was $265.9 million in Fiscal 2023, an increase of $31.3 million compared to $234.6 million in Fiscal 2023. U.S. Digital Segment Variable profit was 20.6% of Net revenue in Fiscal 2023, which was an increase of 270 basis points compared to 17.9% of Net revenue in Fiscal 2022. The increase in Variable profit as a percentage of Net revenue was driven by continued promotional productivity, supply chain improvements in Product and Shipping cost of goods sold partially offset by an increase in Marketing expenses. Product cost of goods sold was $553.2 million or 42.8% of Net revenue in Fiscal 2023 compared to $590.1 million or 45.1% of Net revenue in Fiscal 2022. Shipping cost of goods sold was $190.1 million or 14.7% of Net revenue in Fiscal 2023 compared to $213.8 million or 16.3% of Net revenue in Fiscal 2022. The improvement in Product and Shipping cost of goods sold as a percent of Net revenue was primarily driven by leveraging the strength in product solutions and newness across the channels, reduction in clearance inventory and improvements in supply chain costs for Fiscal 2023 compared to Fiscal 2022. Marketing expenses were $174.7 million or 13.5% of Net 38 Table of Contents revenue in Fiscal 2023 compared to $167.4 million or 12.8% of Net revenue in Fiscal 2022. The increase in Marketing expenses was primarily due to higher digital spend focused on new customer acquisition. Liquidity and Capital Resources Liquidity Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. The ABL Facility had no balance outstanding as of January 31, 2025, other than letters of credit. Cash generated from our net revenue and profitability, and to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a significant amount of net revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year. We expect that our cash on hand and cash flows from operations, along with revolving on the ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. ABL Facility Our $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and is available for working capital and other general corporate liquidity needs and matures on July 29, 2026. The amount available to borrow is the lesser of (1) the Aggregate Commitments of $275.0 million (“ABL Facility Limit”) or (2) the Borrowing Base or Loan Cap which is calculated from Eligible Inventory, Trade Receivables and Credit Card Receivables, all foregoing capitalized terms not defined herein are as defined in the ABL Facility. Effective with the Fourth Amendment to the ABL Facility executed May 12, 2023, the benchmark interest rate was changed from LIBOR to SOFR plus an adjustment of 0.10% for all loans (“ABL Adjusted SOFR”). Loan interest rates are selected at the borrower’s election, is either (1) ABL Adjusted SOFR, or (2) a base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the one-month ABL Adjusted SOFR rate plus 1.00%, or (c) the Wells Fargo “prime rate.” The borrowing margin for ABL Adjusted SOFR loans is (i) less than $95.0 million, 1.25%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 1.50%, and (iii) greater than or equal to $180.0 million, 1.75%. For base rate loans, the borrowing margin is (i) less than $95.0 million, 0.50%, (ii) equal to or greater than $95.0 million but less than $180.0 million, 0.75%, and (iii) greater than or equal to $180.0 million, 1.00% (“Applicable Borrowing Margin”). The Applicable Borrowing Margin for all loans is based upon the average daily total loans outstanding for the previous quarter. The Fourth Amendment had no material interest rate impact. The ABL Facility fees include (i) commitment fees of 0.25% based upon the average daily unused commitment (aggregate commitment less loans and letter of credit outstanding) under the ABL Facility for the preceding fiscal quarter, (ii) customary letter of credit fees and (iii) customary annual agent fees. There was no balance outstanding under the ABL Facility as of January 31, 2025 and February 2, 2024. The balance of outstanding letters of credit was $10.1 million and $9.1 million as of January 31, 2025 and February 2, 2024, respectively. The borrowing availability under the ABL Facility was $129.3 million and $167.2 million as of January 31, 2025 and February 2, 2024, respectively Long-Term Debt On December 29, 2023, we entered into the Current Term Loan Facility which provides borrowings of $260.0 million, the proceeds of which were used to repay all of the indebtedness under the Former Term Loan Facility and to pay fees and expenses in connection with the financing. Origination costs, including a 3% original issue discount of $7.8 million and debt origination fees of $3.8 million, were incurred in connection with entering into the Current Term Loan Facility. The Current Term Loan Facility will mature on December 29, 2028, and amortizes at a rate equal to 1.25% per quarter. Depending upon the Company’s Total Leverage Ratio, as defined in the Current Term Loan Facility, 39 Table of Contents mandatory prepayments in an amount equal to a percentage of the Company’s excess cash flows in each fiscal year, ranging from 0% to 75% are required. The Current Term Loan Facility also has typical prepayment requirements for the proceeds of certain asset sales, casualty events and extraordinary receipts. Voluntary prepayment and certain mandatory prepayments made (i) between December 30, 2024 and December 29, 2025 would result in a prepayment premium equal to 2% of the principal amount of the loan prepaid, (ii) between December 30, 2025 and December 29, 2026, would result in a prepayment premium equal to 1% of the principal amount of the loan prepaid, (iii) between December 30, 2026 and December 29, 2027, would result in a prepayment premium equal to 0.5% of the principal amount of the loan prepaid and (iv) thereafter no prepayment premium is due. The interest rates per annum applicable to the loans under the Current Term Loan Facility are based on a fluctuating rate of interest equal to, at the Company’s election, either (1) Term Loan Adjusted SOFR loan (subject to a 2% floor) plus an applicable margin, or (2) an alternative base rate loan plus an applicable margin. The applicable margin is based on the Company’s net leverage and will be, (i) for Term Loan Adjusted SOFR loans, 8.25% per annum if the total leverage ratio is greater than or equal to 2.75:1.00, 8.00% per annum if the total leverage ratio is less than 2.75:1.00 but greater than or equal to 2.25:1.00, and 7.75% per annum if the total leverage ratio is less than 2.25:1.00 and (ii) for base rate loans, 7.25% per annum if the total leverage ratio is greater than or equal to 2.75:1.00, 7.00% per annum if the total leverage ratio is less than 2.75:1.00 but greater than or equal to 2.25:1.00, and 6.75% per annum if the total leverage ratio is less than 2.25:1.00. In each case, the net leverage is determined as of the last day of each applicable measurement period. Effective with the First Amendment to the Former Term Loan Facility executed June 22, 2023, the interest rate benchmark changed from LIBOR to Term Loan Adjusted SOFR. The annual interest rate applicable to the loans under the Former Term Loan Facility was based on a fluctuating rate of interest measured by reference to, at the borrower’s election, either (1) a Term Loan Adjusted SOFR rate plus 9.75% or (2) an alternative base rate (which was the greater of (i) the prime rate published in the Wall Street Journal, (ii) the federal funds rate, which was to be no lower than 0.00% plus ½ of 1.00%, or (iii) the one month Term Loan Adjusted SOFR rate plus 1.00% per annum) plus 8.75%. Both the Current Term Loan Facility and the Former Term Loan Facility contain customary agency fees. Debt Facilities Guarantees; Security All obligations under the Debt Facilities are unconditionally guaranteed by Lands’ End, Inc. and, subject to certain exceptions, each of its existing and future direct and indirect subsidiaries. The ABL Facility is secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Current Term Loan Facility is also secured by a second priority security interest in the same collateral, with certain exceptions. The Current Term Loan Facility is also secured by a first priority security interest in certain property and assets, including certain fixed assets such as real estate, stock of subsidiaries and intellectual property, in each case, subject to certain exceptions. The ABL Facility is also secured by a second priority interest in the same collateral, with certain exceptions. Representations and Warranties; Covenants Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict Lands’ End, Inc.’s and its subsidiaries’ ability 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. The Current Term Loan Facility contains financial covenants, including a quarterly maximum total leverage ratio test and a monthly minimum liquidity test. 40 Table of Contents Under the ABL Facility, if excess availability falls below the greater of 10% of the Loan Cap amount or $15.0 million, the Company will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt 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. As of January 31, 2025, we were in compliance with our financial covenants in the Debt Facilities. Events of Default The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control. Cash Flows from Operating Activities Operating activities generated net cash of $53.1 million and $130.6 million in Fiscal 2024 and Fiscal 2023, respectively. In Fiscal 2024, net cash generated by operating activities decreased $77.5 million compared to Fiscal 2023 due to changes in working capital, primarily the reduction of cash used for inventories during Fiscal 2023. Cash Flows from Investing Activities Net cash used in investing activities was $35.0 million and $34.9 million during Fiscal 2024 and Fiscal 2023, respectively. Cash used in investing activities for both years was primarily used for investments to update our digital information technology infrastructure. For Fiscal 2025, we plan to invest approximately $30.0 million in capital expenditures for strategic investments and infrastructure, primarily in technology and general corporate needs. Cash Flows from Financing Activities Net cash used in financing activities was $26.6 million and $110.1 million during Fiscal 2024 and Fiscal 2023, respectively. The decrease in net cash used in financing activities is primarily due to lower inventory levels. Contractual Obligations and Off-Balance-Sheet Arrangements We have no material off-balance-sheet arrangements other than the guarantees and contractual obligations that are discussed below. Information concerning our obligations and commitments to make future payments under contracts such as lease agreements and other contingent commitments, as of January 31, 2025, is aggregated in the following table: [[GREPCENT_TABLE]] [["","","Payments Due by Period"],["(in thousands)","","Total","","","1 Year or less","","","2-3 Years","","","4-5 Years","","","After 5 years"],["Operating leases (1)","","$","29,083","","","$","6,006","","","$","11,387","","","$","8,396","","","$","3,294"],["Principal payments on long-term debt","","","247,000","","","","13,000","","","","26,000","","","","208,000","","","","\u2014"],["Interest on Term Loan Facility and ABL Facility fees","","","112,919","","","","31,794","","","","57,072","","","","24,053","","","","\u2014"],["Purchase obligations (2)","","","126,507","","","","126,507","","","","\u2014","","","","\u2014","","","","\u2014"],["Total contractual obligations","","$","515,509","","","$","177,307","","","$","94,459","","","$","240,449","","","$","3,294"]] [[/GREPCENT_TABLE]] (1) Operating lease obligations consist primarily of future minimum lease commitments related to our operating leases (refer to Note 4, Leases, of the Consolidated Financial Statements for further details). (2) Purchase obligations primarily represent open purchase orders for inventory. 41 Table of Contents Financial Instruments with Off-Balance-Sheet Risk The $275.0 million committed revolving ABL Facility includes a $70.0 million sublimit for letters of credit and has a maturity date of July 29, 2026. The ABL Facility is available for working capital and other general corporate liquidity needs. There was no balance outstanding as of January 31, 2025 and February 2, 2024. The balance of outstanding letters of credit was $10.8 million and $9.1 million as of January 31, 2025 and February 2, 2024, respectively. Application of Critical Accounting Estimates Our Consolidated Financial Statements have been prepared in accordance with GAAP, which requires management to make estimates and judgments that affect amounts reported in the Consolidated Financial Statements and accompanying notes. While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from our estimates and assumptions. Our estimation processes contain uncertainties because they require management to make assumptions and apply judgment to make these estimates. Should actual results be different than our estimates, we could be exposed to gains or losses from differences that may be material. Inventory Valuation Our inventories consist of merchandise purchased for resale and are recorded at the lower of cost or net realizable value. The nature of our business requires that we make a significant amount of our merchandising decisions and corresponding inventory purchase commitments with vendors several months in advance of the time in which a particular merchandise item is intended to be included in the merchandise offerings. These decisions and commitments are based upon, among other possible considerations, historical sales with identical or similar merchandise, our understanding of then-prevailing trends and influences, and an assessment of likely economic conditions and various competitive factors. For financial reporting and tax purposes, our United States inventory, primarily merchandise held for sale, is stated at last-in, first-out (“LIFO”) cost, which is adjusted to the lower of cost or market. We account for our non-United States inventory on the first-in, first-out (“FIFO”) method. The United States inventory accounted for using the LIFO method as of percentage of the total inventory was 93% at January 31, 2025 and February 2, 2024. We continually make assessments as to whether the carrying cost of inventory exceeds its market value and, if so, by what dollar amount. Excess inventories may be disposed of through our normal course of business. Based on historical results experienced through various methods of disposition, we will write down the carrying value of inventories that are not expected to be sold at or above cost. The excess and obsolete reserve balances were $11.7 million and $18.1 million as of January 31, 2025, and February 2, 2024, respectively. The decrease in the excess and obsolete reserve balance is primarily due to reduction in kids and footwear inventory in conjunction with our licensing arrangements. For the inventory marked down to net realizable value, a one percentage point increase in our assumed recovery rates at January 31, 2025, would have had an immaterial impact on our Consolidated Financial Statements. Goodwill and Indefinite-lived Intangible Asset Impairment Assessments Goodwill and the indefinite-lived trade name intangible asset are tested separately for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment assessments contain multiple uncertainties because the calculation requires management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. If actual results fall short of our estimates and assumptions used in estimating future cash flows and asset fair values, we may incur future impairment charges that could be material. 42 Table of Contents Goodwill impairment assessments In Fiscal 2023, in connection with the preparation of the financial statements for the quarter ended October 27, 2023, we considered the decline in our stock price and market capitalization, as well as the then current market and macroeconomic conditions, to be a triggering event for the U.S. eCommerce and Outfitters reporting units and therefore completed an interim test for impairment of goodwill for these reporting units as of October 27, 2023. We tested goodwill for impairment using a one-step quantitative test. The quantitative test compared the reporting unit’s fair value to its carrying value. An impairment was recorded for any excess carrying value above the reporting unit’s fair value, not to exceed the amount of goodwill. We estimated fair value of its reporting units using a discounted cash flow model, commonly referred to as the income approach. The income approach used a reporting unit’s projection of estimated operating results and cash flows that was discounted using a weighted-average cost of capital that reflected then current market conditions appropriate to our reporting unit. The discounted cash flow model used management’s best estimates of economic and market conditions over the projected period using the best information available, including growth rates in revenues, costs and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions included terminal value growth rates, weighted average cost of capital and changes in future working capital requirements. The testing resulted in goodwill impairment of the remaining $70.4 million and $36.3 million of goodwill allocated to our U.S. eCommerce and Outfitters reporting units, respectively. Indefinite-lived intangible asset impairment assessments Our indefinite-lived intangible asset is the Lands’ End trade name. We review the trade name for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The fair value of the trade name indefinite-lived intangible asset is estimated using the relief from royalty method. The relief from royalty method is based on the assumption that, in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class. The relief from royalty method involves two steps: (1) estimation of reasonable royalty rates for the assets and (2) the application of these royalty rates to a forecasted net revenue stream and discounting the resulting cash flows to determine a present value. We multiplied the selected royalty rate by the forecasted net revenue stream to calculate the cost savings (relief from royalty payment) associated with the asset. The cash flows are then discounted to present value using the selected discount rate and compared to the carrying value of the asset. In Fiscal 2024, Fiscal 2023 and Fiscal 2022, we tested the indefinite-lived intangible asset for impairment. In Fiscal 2024, the fair value was substantially in excess of the carrying value. In Fiscal 2023 and Fiscal 2022, fair value exceeded the carrying value by less than 15%. As such, no trade name impairment charges were recorded in any of the periods presented. Revenue Recognition While revenue recognition for us does not involve significant judgment, it represents an important accounting policy. For sales shipped from our distribution centers, we recognize revenue and the related cost of goods sold at the time the products are received by the customers. For sales transacted at stores, revenue is recognized when the customer receives and pays for the merchandise at the register. We record an allowance for estimated returns based on our historical return patterns and various other assumptions that management believes to be reasonable. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our sales return allowance. A one percentage point increase in our assumed returns rate at January 31, 2025 would have an immaterial impact on our 43 Table of Contents Consolidated Financial Statements. We have not made any material changes in the accounting methodology used to estimate future sales returns in the past three fiscal years. Provision for Income Taxes We record a valuation allowance against our deferred tax assets when it is more likely than not that some portion or all of such deferred tax assets will not be realized. In determining the need for a valuation allowance, management is required to make assumptions and to apply judgment, including forecasting future income, taxable income and the mix of income or losses in the jurisdictions in which we operate. Our effective tax rate in a given financial statement period may also be materially impacted by changes in the mix and level of income or losses, changes in the expected outcome of audits, or changes in the deferred tax valuation allowance. At any point in time, many tax years are subject to or in the process of being audited by various taxing authorities. To the extent our estimates of settlements change, or the final tax outcome of these matters is different from the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made. Our income tax expense includes changes in our estimated liability for exposures associated with our various tax filing positions. Determining the income tax expense for these potential assessments requires management to make assumptions that are subject to factors such as proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations, and resolution of tax audits. We performed an evaluation over our deferred tax assets and determined that a valuation allowance is considered necessary. See Note 11, Income Taxes, for further details on the valuation allowance. We believe the judgments and estimates discussed above are reasonable. However, if actual results fall short of our estimates or assumptions, we may be exposed to losses or gains that could be material. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This document contains forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, future events and performance. These statements may discuss, among other things, our net sales, gross merchandise value (GMV), gross margin, operating expenses, operating income, net income, adjusted net income, Adjusted EBITDA, cash flow, financial condition, financings, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, market opportunities and general market and industry conditions. We generally identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely,” “targeting” or the negative version of these words or comparable words. Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include those set forth under Item 1A, Risk Factors, in this Annual Report on Form 10-K. Forward-looking statements speak only as of the date on which they are made. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations. 44 Table of Contents