Land’s End, Inc. $LE
My Investment Checklist
1. Is the company undervalued?
EV/EBIT: 21.48
EV/Sales: 0.43
Price/Book: 0.71
$LE has hit a rough patch in their business with demand slowing and earnings falling off a cliff. Furthermore Land’s End has balance sheet concerns and was forced take on additional debt earlier in the year. Notwithstanding the company is trading near all time lows in regards to revenues and assets. If the business mean reverts, then $LE should be able to pay down debt and potentially get a re-rating as a result.
2. Can I easily explain what the company does?
Yes, they’re an international retailer with an ecommerce focus. Their most notable brand is Land’s End and they sell apparel, footwear, and home décor.
3. Does the cash flow statement line up with income statement?
Yes, surprisingly cash from operations has been higher than reported income:
Most of their capital went towards a buildup of inventories and capital expenditures. Inventories are up 18% YOY, which is suboptimal but a majority of this increase is coming from early receipts for the upcoming holiday season. Additionally the inventory increase isn’t terrible relative to most peers. Finally the need to raise debt, is troubling especially considering that $LE generated significant FCF in the preceding two years.
4. Is the Balance Sheet Healthy?
Total Cash: $28.8M
Total Debt: $437.8M
Current Ratio: 1.92
As previously mentioned, $LE is in a precarious debt situation with over a 5X net debt to EBITDA ratio. That is frankly awful, but likely overstated as the business is under earning. For example, net debt to EBITDA was less than 2X at the beginning of 2022. Nonetheless there’s a lot of work to be done here. Net interest payments in the last 12 months totaled ~$36M, compared to ~$32M in operating income over the same period. You don’t have to graduate from Columbia Business School to know that a company is in deep doo-doo if they earn less than their debt costs. Moreover $LE is in a problematic position even compared to a peak year of earnings. For instance, net interest coverage is still only 2.2X when using 2021 as a proxy. Suffice to say I doubt shareholders are sleeping soundly at night with this balance sheet.
5. How profitable is the business?
Gross Margins: 39.3%
Operating Margins: 2%
Net Margins: (0.1)%
As you can see $LE is struggling to generate any profits. Although the business has fared better historically:
Nevertheless this is a disgusting business with a terrible track record of reinvestment. On the bright side, there’s plenty of room from improvement. Just getting back to historically profitability would imply a double in operating profits. Additionally Land’s End has decent gross profitability, so if they can reign in SG&A the business could show much better earnings moving forward. However that doesn’t seem to be a big initiative of management so I wouldn’t expect any meaningful change here.
6. What is the company’s growth potential?
10-yr Revenue CAGR: (0.5)%
10-yr Operating Profit CAGR: (0.25)%
10-yr FCF CAGR: (5.5)%
Again we see abysmal results, although the business environment is much different today than it was in 2013. For instance since 2017 sales have grown at a 3.4% CAGR and EBIT has compounding at a 26% CAGR. In fairness this is cherry picking the best sample over the last decade, but sales growth has been mostly consistent over the last 6 years. All in all I wouldn’t expect much growth moving forward, but don’t think the company is a melting ice cube.
7. Is management rewarding shareholders?
Negative, $LE doesn’t offer a dividend or repurchase any shares in the open market. Moreover Land’s End issues stock based compensation every year, however it’s a modest amount. Candidly $LE is a long ways away from being able to return capital back to shareholders. Their debt level should be the primary concern for shareholders at the moment.
8. How does the company stack up against their peers?
Poshmark Inc $POSH is probably the closest competitor to $LE
$POSH EV/Sales: 2.37
Price/Book: 3.57
Gross Margin: 83.3%
$POSH is more profitable on a gross margin basis and has a significantly better balance sheet. However $POSH is burning thru cash and issuing a massive amount of SBC every year. I have a very difficult time valuing businesses that are still in their growth phase and losing money, so for that reason $LE wins by default.
9. What’s the counter argument?
The counter argument is that operating costs will continue to rise with demand remaining low. This will lead to lackluster earnings and ultimately a debt death spiral.
This argument makes all the sense in the world to me. $LE essentially needs to operate at a 4% operating margin, just to service their debt. This seems like a zombie company that has a very high probability of being out of business in 10 years.
10. Is there something I think the market may be missing?
I don’t believe so, Mr. Market is correctly pricing this company below book value for obvious reasons. Barring a massively pickup in profitability, I simply don’t see how $LE can service their debt let alone reinvest back into the business.
Final Thoughts:
It should come as no surprise that I’m passing on $LE. The company screens cheap, but is wildly over valued in my view. My base case would actually be $LE going to 0, due to debt concerns. With that said, I don’t short stocks and would not recommend shorting to any retail investor.
***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours. This article is intended for educational purposes only and in no way should be interpreted as investment advice