RELATED PARTY AGREEMENTS AND TRANSACTIONS

According to statements on form Schedule 13D filed with the SEC by ESL, ESL beneficially owned significant portions of both the Company's and Sears Holdings Corporation's outstanding shares of common stock. Therefore Sears Holdings Corporation, the Company's former parent company, is considered a related party both prior to and subsequent to the Separation. Additionally, in Fiscal 2016, ESL purchased approximately $10.7 million of the Company's outstanding debt at a discount of approximately $2.7 million. Due to the related party relationship, this discount was considered a cancellation of debt under Section 108 of the Internal Revenue Code, triggering additional income tax payments due in the current period for the Company.

Prior to the Separation, Sears Holdings Corporation (including certain non-Lands’ End subsidiaries) and the Company entered into various agreements to, among other things: (i) support the Lands’ End Shops at Sears; (ii) provide various general corporate services; (iii) support the Company's participation in the SYW program; and (iv) allow for the use of intellectual property or services. The amounts charged to the Company by Sears Holdings do not necessarily reflect the costs of obtaining the services from unaffiliated third parties or of the Company providing the applicable services itself. Management believes that such costs are reasonable; however, the Combined Financial Statements contained herein may not be indicative of the Company’s financial position, operating results, and cash flows in the future, or what they would have been if it had been a stand-alone company during all periods presented. Unless indicated otherwise, the fees and expense charged are included in Selling and administrative expense in the Consolidated and Combined Statements of Operations.

In its annual report on Form 10-K for its fiscal year ended January 28, 2017, Sears Holdings disclosed that its historical operating results indicate substantial doubt exists related to its ability to continue as a going concern. Sears Holdings also disclosed they believe that actions they have taken in the last 12 months and expected benefits from actions in 2017 are probable of occurring and mitigating the substantial doubt raised by their historical operating results and therefore will satisfy their liquidity needs the 12 months following the issuance of their financial statements.

In connection with the Separation, the Company entered into various agreements with Sears Holdings, certain of which have been subsequently amended, which, among other things, (i) govern specified aspects of the Company's relationship following the Separation, especially with regards to the Lands’ End Shops at Sears, and (ii) establish terms pursuant to which subsidiaries of Sears Holdings Corporation are providing services to the Company, including the International Buying Office under the Buying Agency Agreement.

References to and descriptions of the agreements below represent the agreements entered into in connection with the Separation, and as amended, where applicable.

The components of the transactions between the Company and Sears Holdings, which exclude pass-through payments to third parties, are as follows:

Lands’ End Shops at Sears

Related party costs charged by Sears Holdings to the Company related to Lands’ End Shops at Sears are as follows:



(in thousands)	Fiscal 2016		Fiscal 2015		Fiscal 2014
Rent, CAM and occupancy costs	$	24,727	$	25,239	$	26,605
Retail services, store labor	24,052		26,773		31,087
Financial services and payment processing	2,834		2,792		3,034
Supply chain costs	979		985		1,044
Total expenses	$	52,592	$	55,789	$	61,770
Number of Lands’ End Shops at Sears at period end ⁽¹⁾	216		227		236

⁽¹⁾ During Fiscal 2016, Fiscal 2015 and Fiscal 2014, 11, 9 and 38 Lands’ End Shops at Sears were closed, respectively.

Rent, CAM and Occupancy Costs

The Company rents space in store locations owned or leased by Sears Roebuck. The agreements include a cost per square foot for rent, CAM and occupancy costs. The lease terms for the individual store locations generally terminate effective January 31, 2018, 2019, or 2020.

Retail Services, Store Labor

The Company contracts with Sears Roebuck to provide hourly labor and required systems and tools to service customers in the Lands’ End Shops at Sears. This includes dedicated staff to directly engage with customers and allocated overhead. The dedicated staff undergoes specific Lands’ End brand training. Required tools include point-of-sale, price lookup and labor scheduling systems.

Financial Services and Payment Processing

The Company contracts with SHMC to provide retail financing and payment solutions, primarily based upon customer credit card activity, including third-party payment acceptance, credit cards and gift cards.

Supply Chain Costs

The Company contracts with Sears Roebuck to provide logistics, handling, transportation and other services, primarily based upon inventory units processed, to assist in the flow of merchandise from vendors to the Lands’ End Shops at Sears locations.

General Corporate Services

Related party costs charged by Sears Holdings to the Company for general corporate services are as follows:



(in thousands)	Fiscal 2016		Fiscal 2015		Fiscal 2014
Sourcing	$	10,878	$	9,609	$	8,986
Shop Your Way	2,301		2,896		4,202
Shared services	192		484		559
Co-location and services	—		—		15
Total expenses	$	13,371	$	12,989	$	13,762

Sourcing

The Company contracts with a subsidiary of Sears Holdings to provide agreed upon buying agency services, on a non-exclusive basis, in foreign territories from where the Company purchases merchandise. These services, primarily based upon quantities purchased, include quality-control functions, regulatory compliance, product claims management and new vendor selection and setup assistance. During Second Quarter 2016 the Company entered into a new buying agency services agreement with a subsidiary of Sears Holding and terminated the agreement that was entered into at the time of the Separation. The new agreement provides for a higher commission rate and a higher annual commission minimum, as well as enhanced sourcing services, including for product development, costing analyses, vendor communications, vendor strategy and quality assurance. Certain of these amounts are capitalized into inventory and are expensed through cost of goods sold over the course of inventory turns and included in Cost of sales in the Consolidated and Combined Statements of Operations.

Shop Your Way

The Company contracts with SHMC to participate in Sears Holdings’ SYW program. Customers earn points issued by SHMC on purchases which may be redeemed to pay for future purchases. The Company pays SHMC an agreed-upon fee for points issued in connection with purchases from the Company. Depending on the ratio of points redeemed in Lands’ End formats to points issued in Lands’ End formats in the previous 12 months, the Company generally either pays additional fees or is reimbursed fees by SHMC. All SYW program expenses are recorded in Cost of sales in the Consolidated and Combined Statements of Operations.

Shared Services

The Company contracts with SHMC to provide certain shared corporate services. These shared services include compliance.

Use of Intellectual Property or Services

Related party revenue and costs charged by the Company to and from Sears Holdings for the use of intellectual property or services is as follows:



(in thousands)	Fiscal 2016			Fiscal 2015			Fiscal 2014
Call center services	$	2,124		$	2,344		$	2,346
Lands' End business outfitters revenue	1,574			1,398			1,995
Credit card revenue	1,147			1,274			1,519
Royalty income	221			220			79
Gift card revenue (expense)	(32		)	(33		)	239
Total	$	5,034		$	5,203		$	6,178

Call Center Services

The Company has entered into a contract with SHMC to provide call center services in support of Sears Holdings’ SYW program. This income is net of agreed upon costs directly attributable for the Company providing these services. The income is included in Net revenue and costs are included in Selling and administrative expenses in the Consolidated and Combined Statements of Operations. Total call center service income included in Net revenue was $8.2 million, $8.6 million and $8.1 million in Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively. The contract for call center services will expire on April 30, 2017.

Lands' End Business Outfitters Revenue

The Company sells store uniforms and other company apparel to Sears Holdings from time to time. Revenue related to these sales is included in Net revenue in the Consolidated and Combined Statements of Operations.

Credit Card Revenue

The Company has entered into a contract with SHMC to provide credit cards for customer sales transactions. The Company earns revenue based on the dollar volume of revenue and receives a fee based on the generation of new credit card accounts. This income is included in Net revenue in the Consolidated and Combined Statements of Operations.

Royalty Income

The Company entered into a licensing agreement with SHMC whereby royalties are paid in consideration for sharing or use of intellectual property. Royalties received under this agreement are included in Net revenue in the Consolidated and Combined Statements of Operations.

Gift Card Revenue (Expense)

The Company has entered into a contract with SHCP to provide gift cards for use by the Company. The Company offers gift cards for sale on behalf of SHCP and redeems such items on the Company’s internet websites, retail stores and other retail outlets for merchandise. The Company receives a commission fee on the face value for each gift card it sells, and a payment from Sears Holdings for certain Lands' End-branded gift cards that are redeemed by Sears Holdings for non-Lands' End merchandise. The Company pays a transaction/redemption fee to SHCP for each gift card the Company redeems. The income, net of associated expenses, is included in Net revenue in the Consolidated and Combined Statements of Operations.

Additional Related Party Balance Sheet Information

At January 27, 2017 and January 29, 2016, the Company included $3.7 million and $3.9 million in Accounts Receivable, net, respectively, and $3.1 million and $2.7 million in Accounts payable, respectively, in the Consolidated Balance Sheets to reflect amounts due from and owed to Sears Holdings. At January 27, 2017 and January 29, 2016, a $11.4 million and $13.7 million receivable, respectively, was recorded by the Company in Other assets in the Consolidated Balance Sheets to reflect the indemnification by Sears Holdings Corporation of the pre-Separation uncertain tax positions (including penalties and interest) for which Sears Holdings Corporation is responsible.