I don't know about you, but when I think of companies that are dedicated to selling clothing, accessories, and other related products, I often think of either distributors that see their products sold through retailers or retailers themselves. But now, more than ever, shopping online is a major activity that is responsible for countless billions of dollars worth of commerce every year. Finding a player that excels in this space can be difficult because of how competitive the market is. But one interesting prospect that deserves attention is Lands’ End (NASDAQ:LE). Although fundamental performance has been a bit lumpy from year to year, the company is trading at levels that should be considered quite cheap in the grand scheme of things. What's more, the firm generates the lion's share of its portfolio from online activities, making it distinct in that manner from many of its other clothing and accessories competitors. All of these factors combined make the business a fundamentally attractive opportunity for the right kind of investor.
In its annual report, Lands’ End describes its business as a uni-channel retailer focused on providing casual clothing, accessories, footwear, and home products. Unlike many companies in this space, Lands’ End generates the bulk of its sales from online activities. For instance, we need only look at how the business performed in 2021. During that year, 62.8% of its revenue came from what it calls its US eCommerce functions. As its name suggests, this portion of the business is dedicated to the sale of products through the company’s eCommerce website. However, there are other sources of revenue for the firm. Based on the data provided, a further 13.5% of revenue is attributable to its International operations. This unit involves the sale of products to customers largely centered across Europe and Japan through the company’s eCommerce international websites and third-party affiliates.
There are, of course, other sources of revenue for the company. For instance, last year, the business generated 15.5% of sales from what it calls Outfitters. This unit involves the sale of uniform and logo apparel to businesses and employees of said businesses. Sales also include those made to student households that the company connects with by using its relationships with schools. 5.3% of revenue, meanwhile, comes from Third Party activities. This essentially involves the sale of products through third-party marketplace websites and through domestic wholesale customers. That leaves the remaining 2.9% of revenue coming from Retail operations that largely consist of sales of products through the company’s operated stores. It's also important to note the geographical concentration of the company. Last year, 85.1% of revenue came from the U.S. market. 11% was attributable to Europe, while 2.7% came from Asia. That left the remaining 1.2% of sales coming from other nations that, individually, do not account for any meaningful portion of sales. It is worth noting, however, that in 2021, the company fulfilled orders to customers spread across 144 different countries. So that leaves each bit of the remaining revenue attributable to all of those nations not counted in the aforementioned groups.
Over the past few years, fundamental performance for the company has been rather mixed. Between 2017 and 2020, for instance, revenue we're stuck in a very narrow range of between $1.41 billion and $1.45 billion, with no clear trend in either direction. 2021 proved to be a remarkable year for the company, however, with sales of the business surging to $1.64 billion. According to management, the strongest growth in sales for the company came from Outfitters and Third Party activities in the former, the rise was largely driven by stronger demand within the company's travel-related national accounts, as well as in school uniforms. The company attributed the stronger demand for school uniforms to a recovery in the back-to-school shopping patterns of many consumers. Meanwhile, for the latter, the bulk of the increase was attributable to a mix of having a full year's worth of product assortment online at Kohl’s (KSS) and the addition of its products to a further 150 Kohl’s retail locations, bringing the company's exposure up to 300 retail locations in all.
Just as revenue has demonstrated no real trend over the years, the same can be said of profitability. Net income has jumped all over the place, ranging from a low point of $10.8 million in 2020 to a high point of $33.4 million last year. Of course, there are other profitability metrics to consider. One of these is operating cash flow. This has shown a lumpy generally positive trend as the metric grew from $28.4 million in 2017 to $70.6 million last year. An even stronger trend can be seen by looking at this number after removing changes in working capital. In four of the past five years, this metric increased, eventually rising from $26.6 million in 2017 to $85.2 million last year. Even better has been EBITDA, which has grown consistently year after year, rising from $54 million in 2017 to $119 million last year.
When it comes to the company's 2022 fiscal year, management expects sales to come in somewhere between $1.68 billion and $1.75 billion. In addition to this, the business anticipates net profits of between $24 million and $35 million. Meanwhile, EBITDA should be between $105 million and $120 million. No estimate was given for operating cash flow. But if we assume that it will shrink at the same rate that EBITDA well, then we should get an adjusted figure for this of roughly $80.5 million. Taking these figures, we can easily value the company. Using our 2021 figures, the firm is trading at a price-to-earnings multiple of 14.4. The price to operating cash flow multiple is 5.6, while the EV to EBITDA multiple is 5.8. Using our 2022 estimates, meanwhile, we end up with readings of 16.3, 6, and 6.2.
As part of my analysis, I decided to compare Lands’ End to five similar firms. In any one valuation approach, only three or four of the five companies posted a positive reading. With that in mind, I calculated a range for the price to earnings multiple of 1.1 to 21.1. In this case, three of the four companies were cheaper than Lands’ End. Using the price to operating cash flow approach, the range was from 4.2 to 16.4. In this scenario, only one company was cheaper than our target. And finally, using the EV to EBITDA approach, the range was from 1.9 to 21.3. In this scenario, two of the four firms were cheaper than our prospect.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Vipshop Holdings (VIPS)||6.9||N/A||1.9|
|Duluth Holdings (DLTH)||12.8||4.2||4.6|
|PetMed Express (PETS)||21.1||16.4||12.3|
|Stitch Fix (SFIX)||N/A||9.8||N/A|
Based on all the data provided, it seems to me that Lands’ End is not exactly a fantastic company. However, shares do look affordable at this time. This is true on both an absolute basis and relative to similar companies. What's more, the business is showing continued growth this year, even though some profitability metrics are likely to worsen. All of this combined makes me view the company slightly favorably, with the thought in mind that this might make for a good prospect for investors who don't mind some volatility from year to year and who also want exposure to a fundamentally cheap stock.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.