15 April 2014

Summary company financials ($m)

Year end January FY2012 FY2013 FY2014 FY2015E
Price 26.01 Revenue 1,725.6 1,585.9 1,562.9 1,529.3
Market cap ($m) 831.2 4.2% -8.1% -1.5% -2.1%
Enterprise value ($m) 1,241.1 EBIT 121.8 84.5 128.3 135.8
7.1% 5.3% 8.2% 8.9%
Interest 0.1 0.1 -19.7 -19.7
Free float 51% Net income 76.2 49.8 66.7 71.3
Net debt (cash) -15.6 -28.3 -22.4 410.0
Shares outstanding 32.0 32.0 32.0 32.0
EV/Sales 0.79 0.81
EV/EBIT 9.7 9.1
PE 14.1 11.7
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Lands' End, Inc.
Revenue growth
EBIT margin
On March 14, 2014, the Sears Holdings board of directors approved the spin off of Lands' End. Lands' End Inc is one of the largest Direct Sales
clothing businesses in the US. In the year ending January 2014, the company derived 66% of its revenue online at www.landsend.com, 17% from
its mail order catalogue, and the remaining 16% through Lands' Ends Shops at Sears. Lands' End, founded 50 years ago by Gary Comer to sell
sailboat hardware and equipment by catalogue, reported $1.55bn in revenue, and generated 18% of its revenue outside the US.

At Sears, Lands' End leases average space per store of 7,300 square feet. The Lands' End Sears retail outlets have weak key performance
indicators (KPIs) and negative revenue growth. Lands' End weekly retail revenue per square foot was just $2.34 at Sears in the year to January
2014, versus for example an equivalent figure of $7.16 for Gap retail stores. Lands' End retail stores achieved an EBIT margin of 0.4% in the year
to January 2014, after a series of losses in preceding years. The size of the retail business continues to shrink, both in terms of store numbers
(Jan 2014: 290, Jan 2012: 306) and revenue (Jan 2014: $259m, Jan 2012: $298m). Over time we would expect the relative size of this business to
decrease further from the current 16% of group revenue -- as management continue to rationalise store numbers and focus on the higher
density sites only.

More promising is Lands' End's Direct Sales business. The division has revenues of $1.30bn, of which $1.04bn are achieved online at
www.landsend.com, and the remaining $260m from the Lands' End catalogue. Whilst overall Direct Sales revenues are flat, within the segment
our backed out estimates suggest the online revenues have grown at average 9.5% from January 2011 to current whilst the catalogue revenues
have shrunk by a comparable annual rate of 23.5%. Online revenues now represent 80% of Total Direct sales:

Year to Jan Total Direct Growth Online Growth Catalogue Growth Online % of Total Direct
Revenues Revenues Revenues
2011 $1,379 $796 $583 58%
2012 $1,428 4% $927 16.5% $501 (14.1%) 65%
2013 $1,304 (9%) $953 2.7% $351 (29.8%) 73%
2014 $1,304 0% $1,043 9.5% $261 (25.8%) 80%

The growth of the online segment of Direct Sales has also brought gross margin benefits. Online Direct Sales has certain advantages over the
catalogue business model. Specifically, online can adjust pricing mid-season relative to sell through. Prices on fast-selling lines can be raised
such that they do not sell out, and the pricing of slower selling lines can be lowered early so the need for greater end of season discounting is
reduced. Such strategies have enabled gross margins of the online activities at Lands' End to be 800 basis points higher than the gross margins
achieved by the catalogue activities (our analysis implies). As online has grown to represent the larger portion of Direct Sales revenue, the
overall Direct Sales gross margin has grown from 44.5% in the year to January 2011 to 46.3% in the year to January 2014:

Year to Jan Online Online gross Catalogue Catalogue gross Total Direct
Revenues margin (implied) Revenues margin (implied) Gross margin (actual)
2011 $796 48% $583 40% 44.5%
2012 $927 48% $501 40% 45.2%
2013 $953 48% $351 40% 45.9%
2014 $1,043 48% $261 40% 46.3%

The investment case for Lands' End therefore has at its fulcrum the continued growth of online revenue from www.landsend.com. Our
estimates suggest online will represent 74% of group revenue in the year to January 2015, and 79% the year thereafter. The growth of online
will not only be the dominant factor driving group revenue against the continuing counterweight from catalogue and retail store revenue
shrinkage, but online growth will also drive group profitability given online's 48% gross margin versus equivalent gross margins of 40% for
catalogue and 41% for retail store activities.

The equity valuation of Lands' End Inc is not demanding if the online business can continue to grow. Lands' End trades at 0.8x Enterprise Value
to trailing Revenue (also 0.8x EV to forward Revenue), and 14.1x Equity to trailing Earnings (11.7x forward). Assuming a continued growth rate
in online revenue of 9% per annum and the associated gross margin benefits, our model suggests the company trades on 9.6x Earnings for the
year ending January 2017 with group EBIT margin rising 160 basis points to 9.6% from the 8.2% reported in the year to January 2014. Whilst the
sole quarterly update (Q4 to Jan 2014) from the company supports our thesis of continuing margin improvement, further information from the
company is currently limited due to little historical detail being provided when Lands End was part of Sears Holdings. Investors may become
more confident with regard to Lands' End's outlook as more datapoints emerge.