Lands’ End Stock Price Has Seen a Massive Surge: Is The Company Now Overvalued?

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Written By Marcus Reynolds

Lands’ End, Inc. is a predominantly e-commerce-based retailer known for its swimwear, outerwear, footwear, and other apparel products. The company operates multiple brands and also offers B2B sales across various categories, providing businesses with custom-branded apparel.

Revenue Breakdown and Stock Performance

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Lands’ End’s revenues are segmented as follows: Direct (e-commerce), Outfitters (B2B), Third Party (marketplace and licensing), and Retail. Despite a recent 54% stock price increase in the past year, the company has faced significant challenges.

Since 2014, the stock has lost over half its value, and the company has not been able to pay dividends due to its overleveraged financial position.

Long-Term Demand Trends

Historically, Lands’ End has struggled with growth. From FY2010 to the current trailing twelve months, the company’s top line has declined at a compound annual growth rate (CAGR) of -1.0%.

While revenues have remained stable from FY2020, inflation in US apparel has increased by around 9.8%, indicating that Lands’ End’s sales have not kept pace in nominal terms.

This sluggish revenue growth has impacted profitability, resulting in a high debt load of $286.1 million in long-term debt and current portions of long-term debt as of Q1 2024.

Interest expenses over the past twelve months have totaled $46.3 million, compared to an operating income of just $29.4 million, highlighting the company’s financial strain.

Margin Challenges

Lands’ End’s margins have also been under pressure. The trailing operating margin stands at a weak 2.0%, down from historical trends. The company has faced challenges such as excess inventory post-pandemic, leading to significant discounting and a temporary slump in gross margins.

However, the gross margin has shown some recovery, nearing pre-pandemic levels.

Strategic Shift Towards Third Party Sales

Lands’ End’s strategy involves increasing third-party sales through partnerships with retailers like Macy’s, Target, Amazon, Kohl’s, and Costco. In FY2023, third-party revenues were stagnant after significant growth in FY2022.

However, Q1 2024 saw a 62.9% growth in third-party revenues, offsetting declines in other segments.

Despite this positive performance, overall revenues for Q1 2024 declined by 7.8% year-over-year to $285.5 million. The company also reported a normalized EPS of -$0.20, beating analysts’ estimates.

The Outfitters segment, in particular, faced a significant decline due to the expiration of a large B2B contract with Delta Air Lines.

Valuation and Financial Outlook

Lands’ End’s current valuation appears unattractive. To estimate the fair value, a discounted cash flow (DCF) model was constructed, projecting poor single-digit growth below expected inflation from FY2024 to FY2029.

The model assumes margin expansion from a 2.5% EBIT margin in FY2023 to 4.0% by FY2027, supported by improved net income guidance for FY2024.

Despite these projections, the fair value estimate of $9.34 per share is 30% below the current stock price, indicating potential overvaluation. The weighted average cost of capital (WACC) used in the model is 10.95%, derived from a capital asset pricing model.

Potential Upside Risks

While the base scenario is weak, there are potential upside risks. Sustainable sales growth from third-party sales, better stabilization in e-commerce sales, or significant new long-term deals in the Outfitters segment could positively impact Lands’ End’s financial trajectory.

However, these scenarios are not considered the base case, and investors should remain cautious.

Proceed With Caution

Credits: DepositPhotos

Lands’ End faces significant challenges with declining long-term sales, weak margins, and high debt. Despite recent growth in third-party sales, the overall growth outlook remains poor.

Given the current valuation and ongoing financial strain, the company’s prospects appear overvalued.

In summary, while there are potential upside risks, the base scenario suggests caution. Lands’ End needs to demonstrate consistent sales growth and margin improvement to justify its current valuation and become an attractive investment.



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