LE - Lands' End: There Is Upside Here For A Trade

2023-12-05 16:15:47 ET

Summary

• Lands' End stock has been beaten down over the past two years, but there are trading opportunities within the volatility.
• The company faces intense competition and lacks a strong competitive advantage, making it more suitable for short-term trading rather than long-term investment.
• Despite declining sales, Lands' End has made efforts to improve margins and inventory management, leading to a potential upside in the stock.
• Lands' End sports a decent balance sheet, along with share repurchases and a respectable Q4 guide.

Lands' End, Inc. ( LE ) has seen its stock beaten down badly over the last two years. But within this beatdown, there have been some very clear trading opportunities. We posit the stock can be a trading vehicle over the next few weeks following a mostly better-than-expected just-reported Q3 .

Make no mistake, this digital retailer faces tons of competition. While there is some brand power, largely there is no moat. We would not be investors here but rather view the play as a more short-term trading vehicle. The company specializes in casual clothing, swimwear, footwear, and home products. They offer a wide range of brands that have some recognition, including the flagship Lands' End, Lands' End Lighthouse, Drifter, and several others. On top of that, they generate some small revenues from the sale of uniforms.

It has been a struggle for the retailer, dealing with massive competition, inflation in the cost of goods and labor, difficulty moving inventory, and margin pressure. That said, we think you can speculate for an upside to over $8 here.

As you can see from the long-term chart, we are not too far off of the COVID lows. But the one-year chart really gets at the trading vehicle aspect of the name.

As such, we see this as a play that we think can work out, as shares look to move higher in this range. Here is a suggested play from the team at our Investing Group.

The Play

Target entry 1: $7.20-$7.30 (40% of position)

Target entry 2: $6.80-$6.90 (60% of position)

Target exit: $8.00 if one leg, $7.70 if two legs

Stop loss: $6.30

Options consideration: Options suggestions are reserved for members of our Investing Group and are not made public.

Discussion

Lands' End, Inc. stock has suffered mostly because sales are falling. It is almost as simple as that in the long run. Revenue in the just-reported quarter was $324.7 million and fell 12.5% from last year. Now, we mentioned this is a digitally focused retailer, and global online revenue was $216.4 million, a decrease of 13.2% from $249.2 million a year ago. Not great. Some of the decline in sales was due to the closing of Lands' End Japan. Lands' End Japan closed at the end of fiscal 2022. Adjusting for this, we would still see online sales decrease by 9.7%.

So why get excited about a company with declining sales? Well, it does not matter where it has been, but where it is going. The fact is that while sales have suffered for a while, the company has made strong efforts to boost its margins and has actually done a strong job with moving inventory. This has us bullish for a shorter-term move. In fact, the company saw gross margin expansion of approximately 700 basis points and adjusted EBITDA for Q3 came in above the high end of the company's guidance range. In terms of inventory, it was outstanding. The company saw a 25% reduction in year-over-year inventory. That is tremendous execution, all things considered.

What really catches our eye is that as we look deeper, this is not a one-off result. This was the third successive quarter of significant inventory and margin improvement. For those who are interested in the long-term story , management has employed a new strategy for marketing and targeting its clients, using data to help drive decisions, and it is paying off, as evidenced by the margin expansion .

What is more, the company looks to emerge from being a money loser. The Q4 guide is strong, and that gives us some confidence that the stock is going to inflect toward the higher end of its trading range. Net revenue for Q4 will be between $490 million and $520 million, and on those sales it sees overall net income to be between $5.5 million or $0.18 per share at the midpoint. Adjusted EBITDA looks strong and is expected to be around $30 million, while adjusted diluted earnings per share should hit $0.30. This is a very positive outlook for Q4.

There are other catalysts as well, particularly internationally. Gross margin in Europe is widening. In Q3, we note that margins widened almost 1,000 basis points year-over-year. The company is also in the midst of a licensing strategy, which adds royalty guarantees and new income streams for the company, allowing them to invest more into their technological marketing capabilities to maximize sales, target repeat customers, and continue moving inventory with strong margins on those sales.

The LE balance sheet is in relatively good shape here, too. It was led by the aforementioned 25% improvement in their inventory. Year-to-date net cash provided by operations was $163 million per year more than last year, primarily due to inventory productivity. These are buried positives masked by the headline numbers.

There is some debt here but at manageable levels in our estimation. They have a term loan balance or $234 million and a $275 million asset-based lending facility that had $110 million of borrowings outstanding. That was a $50 million reduction in that balance. However, higher rates are leading to higher interest expense, so this remains a risk.

But, the company is still repurchasing shares as well. In Q3, they repurchased $3 million worth of shares under the company's previously announced $50 million share repurchase authorization, bringing the balance of the remaining authorization to $32 million as we start Q4.

Overall, Lands' End, Inc. has been a struggling retailer, but management is executing on improvements. We think it is speculative, but there is an upside in the defined trading range that you can consider.

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