Fairholme Capital decreases its position in Lands’ End
Highlights of Fairholme Capital's third quarter 13F (Part 9 of 9)
Fairholme Capital’s 3Q14 positions
In 3Q14, Fairholme Capital Management added a new position in Chesapeake Energy (CHK) and increased its stake in Sears Holdings Corporation (SHLD). During the third quarter, the fund sold its common equity positions in government-sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC). It exited its stake in Genworth Financial (GNW) and reduced its positions in American International Group (AIG), St. Joe Company (JOE), Lands’ End (LE), and Leucadia National Corporation (LUK).
Fairholme Capital and Lands’ End
In 3Q14, Fairholme Capital Management reduced its position in Lands’ End (LE) by ~2.9 million shares. It now holds 448,000 shares in Lands’ End, which accounts for 0.23% of the fund’s portfolio size.
Overview of Lands’ End
Lands’ End is a multichannel retailer whose product line includes casual clothing, accessories, footwear, and home products. Lands’ End conducts its business primarily through the Internet and mail order channels. It has retail operations in North America, Europe, and Asia. The company’s operations are reported under the following two segments:
The Direct Segment (85% of revenues), which sells its products through direct mail catalogs and e-commerce websites
The Retail Segment (15% of revenues), which sells its products through dedicated stores
The history of Lands’ End traces back to 1963 when it was established in Chicago, Illinois. The company became successful, and then Sears acquired it in May 2002 in a $1.9-billion cash deal. Lands’ End, which separated from Sears in April 2014, was one of Sears’ few profitable businesses. The split involved the exchange of 0.3 shares of Lands’ End for each share of Sears for cumulative proceeds of more than $500 million. While Sears no longer has control of Lands’ End, the two parties entered into a couple of business transition arrangements for Lands’ End shops at Sears and Lands’ End’s participation in Sears’ Shop Your Way program.
The spinoff seems to have affected Sears more
Lands’ End experienced a revenue decline of 2.8% year-over-year to $373.1 million in 3Q14. This was due mainly to the decrease in Lands’ End shops at Sears, the decrease in Shop Your Way redemption credits stemming from the agreement with Sears, and a 3.1% fall in same-stores sales. Lands’ End’s presence at Sears dropped to 242 stores as of October 31, 2014, from 275 stores a year earlier.
Despite this setback, Lands’ End, through its cost-cutting initiatives, managed to improve its operating margin by 340 bps (basis points) year-over-year to 9.4%. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was $93.9 million compared to $69.9 million in the prior year quarter. Net income increased 26% year-over-year to $18 million. Year to date, the company has generated $74.4 million in free cash flow compared to its cash burn situation for the same period in the prior year. This comes in stark contrast to Sears whose losses have been mounting in addition to its weakening operating cash flows.
Although Lands’ End’s earnings fell short of analysts’ estimates, management for Lands’ End was satisfied with the progress. Edgar Huber, president and CEO of Lands’ End, said that initiatives such as the enhancement of the digital shopping experience, disciplined expense controls, and changes to the merchandise architecture contributed to another quarter of solid operating earnings.
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