S&P Downgrades Lands' End (LE) to 'B' Following Recent Quarterly Results

Standard & Poor's Ratings Services lowered its corporate credit rating to 'B' from 'B+' on Wisconsin-based apparel retailer Lands' End Inc. (Nasdaq: LE). The outlook is stable.

At the same time, we lowered the issue-level rating on the term loan to 'B' from 'B+'. We also revised the recovery rating to '4' from '3', indicating our expectation of average recovery on the low end of the 30% to 50% range.

"The rating action reflects Lands' End Inc.'s performance that was meaningfully below our expectations in recent quarters. We believe ineffective merchandising, disadvantageous retail store positioning (nearly all physical locations are within struggling retailer Sears), and management's lack of ability to leverage the company's infrastructure and expertise in the direct-to-consumer channel have weakened the company's competitive position, and will remain key issues that will weigh on company performance over the next 12 to 24 months," said credit analyst Andrew Bove. "In addition, we expect the specialty apparel industry to remain very competitive on price over this time frame as consumers continue to spend cautiously on discretionary goods."

The stable outlook reflects our view that, although we forecast weak operating trends over the next 12 months, we expect credit metrics to remain in line with our current assessment of the company's financial risk over that time frame. We also expect liquidity to remain "adequate".

We could lower the ratings if sales and profit declines become more severe than our base-case expectation. This could be the result of additional merchandise missteps leading to further traffic declines, along with increased competition from specialty apparel, off-price, and e-commerce retailers further pressuring profitability. Under this scenario, revenues would decrease in the mid-single digits in fiscal 2016 and gross margin would contract by 50 basis points (bps) below our base-case forecast, resulting in negative free operating cash flow in fiscal 2016. At that time, leverage would be in the low-to-mid 5.0x area and FFO/debt would be in the low-10% area.

Although unlikely in the near-term, we could raise the ratings if the company reverses negative operating trends faster than expected, and is able to improve its merchandising, resulting in increased customer traffic. Under this scenario, revenue growth in 2016 would be flat-to-slightly positive with direct segment and same-store sales both being positive, and margins would expand by an additional 50 bps over our base-case forecast. We would also expect these positive operating trends would continue over the next 12 to 24 months. At that time, leverage would be in the high-3.0x area, and FFO/debt would be in the high-teens range. We could also raise the ratings if improved merchandise execution and operating efficiency result in a more favorable assessment of the company's business risk.

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