Revisiting Lands' End, A Richly Priced Niche Clothing And Accessory Company

I have worn Lands' End (LE) clothing most of my life, and when the company was first bought by Sears (OTCPK:SHLDQ), then spun-off, it definitely got my interest. Shortly after the spin-off, I wrote an article pointing out that Lands' End was highly priced at the time due to the large payments the company had made and still owed Sears, their marketing agreements and other headwinds facing the company. Since then, unsurprisingly, Sears has gone bankrupt, but, interestingly, Lands' End doubled in price, dropped back, and meandered in the teens and twenties per share. As of Monday, 21 December, the stock trades at $20.48 a share. However, this belies valuation multiples akin to a growth stock, not a traditional, niche clothing and accessory retailer. On top of that, one of Lands' Ends' most notable aspects is how distinctly non-trendy they are. Just today, I joked to a friend, "you don't become a Lands' End customer, you are born into being a Lands' End customer." Paying a P/E of 38 and potentially a forward P/E of 75 is outrageous for a steady but not spectacularly performing company and leaves no room for negative surprises and little forecast near-term earnings growth.

It isn't that Lands' End is a train wreck and likely to join many of their peers and competitors in bankruptcy. The company knows their market, and while (finally) displaying some diversity in their advertising and models, they aren't chasing trends like some clothing retailers. While boring, this allowed Lands' End to survive the Sears ownership period and immediate struggles after the spin-off, including large cash payments back to Sears. Targeted ads and catalog mailings instead of "carpet bombing" their customers, quality at good prices for their market, and consistent business and school sales add up to a sustainable if boring business. But being not overtly flashy matches well with their demographic. But then, there is the P/E multiple, which is quite honestly in nose-bleed territory.

Across the board, Lands' End's financials are not bad, and, as previously mentioned, many companies in this sector have not fared well, even prior to the pandemic but especially since March. Like most, Lands' End stock price was battered in the spring but has recovered very well. The positives are that the company has an adequate covered ratio and current ratio, and with efficient operations already in place, little risk of bankruptcy. However, going forward, the company's returns and ability to generate profits does not match the price Mr. Market is valuing them at. With Lands' End having never paid a dividend since being spun-off, a purchase made today would have to rely on capital gains alone for profitable returns. With a consistent yet mature business model, it is likely that Lands' End's profits won't rise spectacularly. At the same time, if earnings do grow post-pandemic and the quarterly swings with profitable and losing quarters mixed throughout the year end, what anticipated profitability would have to be reached to generate a satisfactory return? A fairly stable, slowly growing company, even in today's inflated "TINA/FOMO" market, likely will not command P/E multiples in the high 20s, 30s or higher indefinitely. The company's own Q4 earnings estimate, historically their strongest quarter, has the wide range of $.41-$.53. Q4 has historically accounted for over half the company's annual earnings, and sometimes nearly 100%. Being very optimistic on the company's recent roll-out into Kohl's (NYSE:KSS) stores and online, refinancing debt activities, and other efficiencies, imagine a doubling of Q4 profits for a full year and an estimated $1 per share in bottom line earnings. This is more a "quess-timate", so other numbers could be just as valid. This would, unlike the very high future P/E in the 70s based on one analyst, leads to a P/E of 20. Which of these is more realistic, both as an earnings forecast and a valuation multiple for a solid but not spectacular, industry-changing company like Lands' End? The former estimate leaves an investor incredibly vulnerable to changing sentiment or an earnings miss. An optimistic estimate of $1 in earnings leaves a modest upside but is based on very favorable results and execution.

While I remain a fan of Lands' End products, I cannot be a fan of the stock at these multiples. I don't see a collapse, but at the same time, I don't anticipate meaningful appreciation. Buying at these prices leaves an investor completely reliant on capital gains from an already inflated price and little game-changing events likely to occur in the foreseeable future. The best would be a neutral outcome, and with no dividend, other opportunities likely exist.

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