We came across a bearish thesis on (NASDAQ:LE) on ValueInvestorsClub by Manchu. In this article, we will summarize the bears’ thesis on LE. The company’s shares were trading at $15.33 when this thesis was published, vs. the closing price of $13.84 on Jan 07.
Lands’ End, Inc. operates as a digital retailer of apparel, swimwear, outerwear, accessories, footwear, home products, and uniforms in the United States, Europe, Asia, and internationally. eCommerce revenue accounts for 70.8% of its revenue, followed by uniform and logo business segment Outfitters (18.3%), Third-party (7.6%) and Retail (3.2%).
Except for the Third-Party segment, every other business has been witnessing a negative growth rate. eCommerce has been down for 10 consecutive quarters. LE had to exit Japan and its international operations have disappointed. The number of retail sales has reduced from 290 a decade ago to only 25 due to heavy losses. The benefits of an expanding gross margin have been offset by a higher SG&A expense incurred due to higher digital marketing efforts.
The balance sheet size has been optimized under the new leadership. Leaner inventory levels have ensured better free cash flows. However, the tailwinds from better working capital seem to erode with operating cash flow reducing from $55 million in H1-23 to $5 million in H1-24. The waning cash flows have resulted in high debt levels with Net Debt/EBITDA hovering around 4x. The net debt of the firm stands at $264 million, with most of it maturing before 2028. This will have a significant impact on its fundamentals amidst shrinking business, lower margins and a high interest rate.
The valuation of 34x trailing P/E seems unjustified for a declining business. The headwind from external factors also provides a less-than-conducive environment for future business. A 10% decline in web traffic is expected to play spoilsport for its online business. Credit card sales declined by 13% in Q3-24, compared to an expected -2%. Winter sales are also expected to be lower, with temperatures higher by 7-10 degrees. The fact that it is trading at a premium valuation compared to its peers doesn’t help either.
While we acknowledge the potential of LE as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.