Stranger Things in Store for Lands’ End and the Man in the High Castle

LE_a_revLand’s End (LE) recently released their second quarter earnings and it did not look pretty. Sales were down 6.5% across the company to $292 million and, even worse, sales for their Direct Sales segment fell 6.9%. They lost $(1.98) million for the quarter. For the trailing 12 months (latest twelve months or “LTM”), their revenue is $1.37 billion and net loss is $(36.5) million. Since they have negative earnings, I use a sales multiple of 1.0x (based on comps) to value their business at $1.37 billion, which has declined from $1.39 billion based on last quarter’s LTM revenue. They currently have a market cap of $626 million (based on $18.38 per share price 9/2/16), so I think they are still undervalued by $750 million.

Lands’ End earnings were kind of ugly and I was hoping that they would start to turnaround the decline in sales. I know this will take a while and will be bumpy along the way. But I did come across one good piece of information while reading through their earnings call transcript. CEO Federica Marchionni stated that, “We are pleased to be partnering with Amazon to present our Lands’ End Sports, footwear and a native collection of Canvas by Lands’ End beginning by the end of September. This provides an additional channel for us to introduce consumers to our new brand and expanded category.”

Stranger-Things-3In my opinion, this new deal with Amazon helps pave the way for a potential larger relationship in the future, which echoes my position that Lands’ End could be a great acquisition candidate for Amazon, as I wrote in my post Can Lands’ End Right Its Ship? on July 18, 2016. To me, adding some semi-exclusive Lands’ End product to Amazon’s product mix is akin to the original programming strategy in the media space. Online streaming companies are investing heavily in original programming such as, Netflix’s “Stranger Things” and “House of Cards”, and Amazon’s “The Man in the High Castle” and “Transparent”. Original programming creates a draw because it is exclusive content. Extending this, in my opinion, Amazon wants to add exclusive brands like original content to make Amazon the “only place” to get X, in this case Lands’ End and fashion.

ManInHighCastleThis new arrangement to sell Lands’ End product on Amazon gives both partners a chance to see what kind of uplift they both can achieve. Lands’ End may be able to reach additional customers they are not currently selling too, and Amazon gets to see what kind of revenue multiplier they may get from selling Lands’ End products (i.e., what other products/sales do customers buy in addition to the Lands’ End clothes they add to their shopping carts). I would have liked to see the deal involve the Back-to-School season, but I think that’s not really the target market for the Lands’ End Canvas and Sport sub-brands. I did a quick check and Amazon currently has 75 Lands’ End items that are Amazon Prime eligible–I’m not sure how long they have been selling Lands’ End product or if they stealthily added them to their product mix like they did with their own private label apparel brands.

Amazon_Prime_logoAnother interesting aspect is that Lands’ End Canvas has a $50 membership program which entitles you to free shipping and clothing discounts. Think of the possibility of adding this or including this benefit to the Prime membership. I’m just saying…

As a counterpoint, a Wall Street Journal article “Lands’ End to Start Selling Items on” released today points out some pitfalls with selling on Amazon. “Shoemaker Birkenstock informed its retail partners in July that it would stop selling to Amazon in the U.S. as of Jan. 1, and no longer authorize third-party merchants to sell to the site because of high levels of counterfeits and knock-offs.” But in my opinion, as I stated in my original post, Lands’ End is different. It is not a non-exclusive wholesaler like Birkenstock, but, rather, it distributes directly to the consumer with only a small portion sold through Sears. That’s what makes Lands’ End a unique opportunity.

While the relationship is just starting, this helps support my thesis that Lands’ End could be a good acquisition candidate for Amazon giving it a potential for a buyout premium valuation. I’ll be looking to see if this business arrangement expands (e.g., more product or sub-brands added), along with, hopefully, turning their sales growth positive over the next several months.

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