Lands' End, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Lands End Fourth Quarter and Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to do so through this conference call. Mr. Brady McCracken, you may begin.

Good morning, and thank you for joining the Lands End Earnings Call for a discussion of our Fourth Quarter Earnings and fiscal 2020 results, which we released this morning and can be found on our website, landsend.com. On the call today, you will hear from Jerome Griffith, our Chief Executive Officer, and Jim Gooch, our President and Chief Financial Officer. After the company's prepared remarks, we will conduct a question and answer session. Please also note that the information we're about to discuss includes forward-looking statements. Such statements involve risks and uncertainties. The company's actual results could differ materially from those discussed on this call. Factors that could contribute to such differences include but are not limited to those items noted and included in the company's SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and Form 8-K dated June 2, 2020. The forward-looking information that is provided by the company on this call represents the company's outlook as of today. and we do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company's outlook to change. Of note, in this respect, the COVID-19 pandemic continues to have an impact on our business, and its duration could materially alter our outlook. During this call, we'll be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today, a copy of which is posted in the investor relations section of our website at landsend.com. With that, I will turn the call over to Jerome Griffith.

Thank you, Bernie. Good morning, and thank you for joining us today for a discussion of our fourth quarter and full year results. Looking back on 2020, I'm extremely proud of what our team has accomplished over the past year. Retrospectively, 2020 taught us a lot about the strength and resilience of our business model and the diligence and endurance of our team, for which I am very grateful. We moved quickly to protect our business, our people, and our customers, while at the same time maintaining our focus on the continued execution of our strategic pillars. Getting the product right, being a digitally driven company, implementing a unit channel distribution strategy, and enhancing our infrastructure and processes. As a digitally led e-commerce business, we are uniquely positioned to capitalize on the accelerated shift to online shopping. We benefited from our investments in data analytics, our e-commerce technology, marketing, and business process improvements to drive sales from both existing and new customers. In fact, our new customer acquisition grew 21% for the year, and 14% in the fourth quarter as a result of our data-driven initiatives combined with our comfort-oriented product assortment. To summarize our full-year fiscal 2020 results, we grew adjusted EBITDA by approximately 12% to $87 million and expanded adjusted EBITDA margin by approximately 70 basis points to 6.1%. Revenue increased 1%, excluding the American Airlines launch in fiscal 2019. Total revenue was driven by 9% growth in our global e-commerce business, largely offset by the impact of COVID across our three Outfitters business segments, which Jim will discuss in more detail. Turning to our fourth quarter, in mid-January, we raised our fourth quarter guidance due to our strong holiday performance, and we are pleased to have come in ahead of those expectations. Our global e-commerce business in the fourth quarter was led by the continued emphasis on our Let's Get Comfy initiative through the holiday seasons. Our strongest performing categories were focused on the stay-at-home lifestyle, including sleepwear, loungewear, and knits. Sleepwear, which we marketed for the whole family, was a highlight of the quarter, with customers responding very positively to the versatility in our product assortment. In loungewear, our offering of indoor-outdoor sweats resonated with consumers and more time being spent on outdoor activities and the continued demand for comfort. We also lean more heavily into transitional outerwear during the quarter, which proved to be the right decision with strong reception across fleece and lightweight outerwear. Our knit business remains a top-performing category as we continue to update our style and colors to meet customers' lifestyle needs. We continue to see a strong desire for comfort, quality, and great value that we don't believe is going away. Our e-commerce business in Europe was very strong in the fourth quarter, up 38%. resulting from initiatives we implemented to drive market share gains. We are pleased with the strong acceptance of our brand in Europe, with a more than 100% increase in new customers during the holiday period versus last year. We continue to see opportunity for growth over the long term in this region as we execute a similar playbook to what drove improved performance in the U.S. and advance our market share position. Turning to our recent partnership with Kohl's, we remain pleased with the early results in the business, particularly Kohl's.com We remain on track to expand distribution to 300 Kohl's doors in 2021 and look forward to continuing to grow this partnership. Meanwhile, one of our newer initiatives, the Land's End Marketplace, grew to 24 new sellers in fiscal 2020. While still a very small business, we're encouraged by the response thus far. We skewed these offerings to home-related brands over holiday to align with consumer demand for decor as they continue to spend most of their time at home. Turning to marketing, we continue to emphasize our digital initiatives. During the quarter, we significantly increased our social media presence, which drove increased traffic to our site. We also continue to upgrade dynamic promotions through testing on landsend.com to determine what customers best react to as we refine our promotional strategies to focus on driving sales at higher margins. As we begin to envision what the world will look like post-COVID, we believe many of the changes the retail industry has experienced are here to stay. This includes both the accelerated shift towards digital and the strong demand for casual, both of which are at the core of what we do. Our performance over the last years furthers our confidence that we are well positioned to achieve long-term profitable growth. Before I turn it to Jim, I'd like to address the press release you may have seen earlier this week announcing his appointment to president of Land's End. Jim's been an incredible partner as we executed the transformation of the business through the execution of our strategic pillars. He will continue to serve as CFO in addition to taking on the oversight of our e-commerce, international, outfitters, third party, and retail businesses. Sarah Rasmussen, Executive Vice President and Chief Customer Officer, will assume oversight of the company's information technology and performance marketing functions. Peter Gray, Executive Vice President Chief Administrative Officer, and General Counsel, will assume responsibility for distribution center operations. We have assembled an incredibly talented management team with these three executives, in addition to Chay Tai, Executive Vice President, Chief Product Officer, and Matt Traynor, Senior Vice President and Brand Creative. I will focus the majority of my time on our strategic direction and further growth opportunities as we continue our journey forward. I'll further speak to this when I review our three-year financial targets following Jim's discussion. With that, I'll turn it over to Jim.

Thank you, Jerome, and good morning. We're very pleased with the strong results we delivered in the fourth quarter and throughout 2020 as we continue to make progress across our strategic initiatives. For the fourth quarter, total revenue did decrease 2 percent to $538.4 million compared to $549.5 million last year. After you exclude the sales from the American Airlines launch last year, revenue increased almost 6%. This was above our previously updated guidance of 528 to 533 million announced in mid-January. Our global e-commerce sales increased 8%. We saw growth in our U.S. and international businesses with Europe leading the way with an increase of 38% for the quarter. Our better-than-expected results were driven by strong performance across a number of our key categories, including fleece, sleepwear, and knits. Strong growth in these categories was supported by marketing strategies that continued to message the comfort and value in our product assortments. This quarter, we began breaking out sales for third-party, which includes U.S. wholesale revenues and sales on third-party marketplaces. Revenue in this segment increased to $21.3 million. a 298% increase as compared to last year. This increase was driven by the launch of our entire product assortment on Kohl's.com and a curated assortment of our key items in 150 of their store locations. Partially offsetting the strong global e-commerce and third-party growth, sales in our outfitter business was down 54%. After adjusting for the American Airlines launch last year, sales in outfitters decreased approximately 21%. The outfitters business remain challenged largely due to the ongoing impact of COVID on our travel related national accounts and our small and mid-sized businesses. However, what's encouraging is based on the progress we've seen in each of our outfitter business segments during the quarter, we expect the recovery to accelerate in 2021. We expect this recovery to be led by our small and medium-sized business segments and school uniforms, while national accounts are likely to take a bit longer to fully recover. Gross margin in the fourth quarter decreased approximately 30 basis points to 39.5% as compared to last year. Gross margin was impacted by higher shipping costs as well as sales mix from our growing lower margin third-party business. This was largely upset by our improved promotional strategies and continued use of data analytics for both our pricing and inventory management. As a percentage of sales, SG&A increased slightly by 20 basis points due to the deleverage from the American Airlines launch last year. Net income for the quarter was $19.9 million, or $0.60 per share, compared to net income of $25.5 million, or $0.78 per share, last year. In addition to these gap measures, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was $46.1 million, which was above our updated guidance of $43 to $45 million. Turning to the balance sheet, inventories at the end of the quarter were $382.1 million compared to $375.7 million a year ago. The strong sell-through of our global e-commerce business has positioned us with healthy and lean inventories as we head into 2021. Inventory levels related to our outfitter business are elevated, although this is not a seasonal or fashion product, and therefore we expect to work through this merchandise as these business segments continue to recover in 2021. Before providing our outlook, I would like to share an update on our CapEx plans. Overall, we are projecting CapEx to be approximately $26 million for 2021. In addition to our increased spending for our customer-facing initiatives, we have started the initial planning for our new warehouse management system. The first phase of this project will be focused on labor savings and package consolidation while optimizing our third-party carrier rates. We expect this implementation to drive operational efficiencies and working capital improvements. Now I'd like to discuss our outlook for the first quarter and first half of 2021, as well as our outlook for the full year. As we think about the relative performance, our outlook reflects strong growth over pre-pandemic levels, particularly taking into account that 2021 will be a recovery period in our outfitters business. Beginning with the first quarter, we expect net revenue to be between $275 and $285 million, driven by our global e-commerce business. We expect a net loss of $10.5 to $8 million and diluted loss per share to be between $0.32 and $0.25. We expect adjusted EBITDA to be in the range of $4 to $7 million. As a reminder, last year's first quarter was negatively impacted by the onset of COVID, which was followed by a recovery to double-digit growth in our global e-commerce business in the second quarter. For the first half, we expect net revenue to be between $600 and $620 million, driven by our global e-commerce business, third party, and the continued recovery of our outfitters business. We expect a net loss of $16.5 to $11.5 million and diluted loss per share to be between $0.50 and $0.36. We expect adjusted EBITDA to be in the range of $14 to $20 million. For the full year, we expect net revenue to be between $1.52 and $1.57 billion, primarily driven by our global e-commerce business and the continued recovery in our outfitters business. We expect net income of $11 to $19 million and diluted earnings for share to be between $0.34 and $0.58. We expect adjusted EBITDA to be in the range of $88 to $98 million. With that, I'll turn the call back over to Jerome to discuss the progress on our core growth strategies.

Thanks, Jim. While we are extremely pleased with the progress we have made over the last four years, we remain excited about the significant growth opportunity that lies ahead as we further advance our initiatives across our core strategic pillars and adapt to the changing consumer environment. Our efforts have clearly transitioned from executing a turnaround in our business performance beginning in 2017 to driving long-term profitable growth. As a reflection of the confidence and optimism in our business, in January, we provided new three-year financial targets. For 2023, we expect revenue of $1.9 billion to $2.1 billion, representing a CAGR of 10% to 14% over the next three years. This revenue target assumes organic growth in both U.S. and international e-commerce businesses, an extended recovery and new initiatives in our outfitters business, continued growth in Land's End as a marketplace, and expansion of our third-party distribution. We expect to achieve adjusted EBITDA margin in the high single-digit range, assuming a stable to slightly higher gross margin, as well as an improved SG&A rate with cost efficiencies. As previously mentioned, we were very pleased with the response to our product offering in the quarter. We will continue to lead with our Let's Get Comfy theme as we begin to introduce new versatile knit-based products that consumers can wear whether doing calls from home or as they begin to return to the office. We will also maintain our focus on wear-now apparel with the introduction of seasonal colors and knits and transitional outerwear as we head into spring. As we look forward, we will continue to leverage our use of data analytics to inform product assortments as we adapt to consumer needs. Our proven track record of getting the product right gives us confidence in our ability to continue to meet the ever-changing needs of our growing active customer base. Within digital, we remain focused on driving traffic and growing market share as we refine and leverage our search engine optimization techniques, as well as our promotional and markdown strategy to deliver growth. Similar to our approach to product development, our data-driven marketing enables us to optimize spend while we expand market share. Next, I'd like to spend a little time on how we see our Outfitters business evolving. While we expect to see the recovery continue in this business as we emerge from the pandemic, we are increasing our focus on driving growth in our small and medium-sized business segment. We believe there's potential to drive a more consistent revenue stream in this segment, given replenishment needs than in the large national accounts, which are driven by larger launches. To that end, we're taking steps to advance our position as the authority in branded apparel and hard goods for the small and medium-sized business segment. This initiative is underway with enhancements to our website to make it easier to find products and redesign logo renderings. We've also begun to evaluate our operational and supply chain capabilities. In the next phase, we will implement marketing and pricing strategies by employing a test and react approach. As we advance these capabilities, We believe that the small and medium-sized segment will grow to more than half of our outfitters' business over time. In our school uniform business, we also plan to study growth as schools reopen. Turning to our marketplace business, we're very pleased with the early reads on this initiative. Consistent with our past practice, we continuously look for new innovative ways to drive brand awareness and develop new revenue streams. As we learn from information derived from our search optimization tools, We recognized demand for products that were not core to the Land's End assortment. Through our marketplace strategy, we're addressing our consumers' needs with complementary product, and we'll continue to explore opportunities to welcome third-party brands to our site. In addition to marketplace opportunities, we're excited about the Draper James swimwear collection for the spring-summer season, and we see potential for additional collaborations with current as well as new partners. In addition to our growth strategies, we're maintaining our focus on profitability. We believe we can achieve high single-digit adjusted EBITDA margin through stable to slightly higher gross margin, stemming from continued improvements in dynamic promotions, inventory management, as well as product lifecycle and strategic sourcing initiatives. Before we turn it over to Q&A, I would like to share a brief update on our efforts towards diversity and sustainability. We spoke a bit about our actions around ensuring a diverse and inclusive environment on our last call. which introduced the establishment of our Diversity and Inclusion Council and business resource groups. Our D&I Council has established training modules, which are required of all employees, and launched a speaker series, which has been very well received. We're also doing our part to create a more sustainable future by minimizing our impact on the earth. Our focus will be on employing water saving techniques, obtaining polyester from recycled sources, sourcing cotton sustainably, and converting to 100% sustainable packaging and labeling by 2025. Lastly, we're extremely proud to be focusing on our philanthropy on the Lands End Comfort Fund in support of organizations that help fulfill the basic needs for human comfort, food, shelter, and safety. In conclusion, we could not be more pleased with how the year progressed given the difficult backdrop in the industry as well as the economy as a whole. We recognize that these challenges may extend for some time, and we're prepared to continue to manage the business effectively. Still, we're extremely confident that we will come out of this pandemic stronger on the other side. With a strong foundation largely in place, we believe Land's End will thrive in this digital-first environment. We look forward to updating you on our progress in future quarters, and with that, we'll open it up for questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. If your question has been answered or you wish to move yourself from the queue, please press the sound key. Our first question comes from Alex Furman with Craig Hellum Capital.

Great. Thanks very much for taking my question. You know, really impressive to see continued double-digit growth in the customer file. You know, is this a business that you think can continue to be a double-digit growth business for the next couple of years. Just curious how you think about translating that growth in customer file into your business over the next few years.

Well, Alex, we've had this as a strategy, I don't know, since the end of 2016 is to continue to grow a new customer acquisition. And we're very focused on growing it with lookalike customers. We think there's a big market out there several times where we are today. and that there's a lot of opportunity for us. So obviously in the last year with COVID and the shift to having more demand on online shopping, yes, this has been a trend. One of the things I think that's going to happen going forward is I think that trend is going to continue. I think that the trend of more and more people shopping online, loving the convenience of it, is not going to go away, and that's even in a post-COVID world. But I don't know that I would guarantee double-digit increases month in and month out. I think there will be some fluctuations in and out. But one of the things we are seeing is we're continually picking up market share domestically and internationally. We've seen that even at an advanced level of picking up market share against competitors.

One thing I'd add to that, Alex, if you look at our three-year numbers that we put out in January, we are projecting a top-line growth of 10% to 14%. So we do anticipate that being driven, you know, by continued strength in our buyer file.

Great. That's really helpful. Thank you. And then can you talk a little bit more about, you know, what you expect the outfitters business to look like on the other side of the pandemic? It sounds like you're really focusing on small and medium-sized businesses, whereas, you know, it seemed like over the last couple of years, There's maybe been a little bit more discussion around major customers like Delta and American Airlines. Can you talk about, you know, how it's kind of different going after companies of those sizes? Are the margins pretty similar? You know, do you have a pretty robust pipeline of customers you feel like to go after here, or is there going to be a big marketing effort? I would love to just hear more about that pivot.

Well, I think you've got a few different things in there. As we've discussed before, the outfitter business is really made up of three different components, and they were impacted at different rates during COVID, and we do anticipate the recovery being different coming out. School was definitely the quickest recovery. You saw signs of that over the last couple of quarters, and we talked about that business stabilizing. We anticipate that going into this year. If kids are back in-person learning, we anticipate a fairly quick recovery and future growth in that business. The SMB, the small and mid-sized businesses, we talked about and Jerome mentioned that we could see that growing to be half of this business, where historically they've been roughly one-third, one-third, one-third. There will be some marketing against that, but you'll see us treating that a little bit more. You should think of that a little bit more like a direct-to-consumer business, where historically we had treated it a little bit more like a B2B business, and so a much improved, I think, experience on our site with our SMB business coming later this year. And then the final piece is the national business, and we've talked about this before. It tends to be very choppy with new accounts and new launches. That will continue to be the same going forward. That's probably going to be the longest recovery because I'll remind you again that over half of that business is travel-related, but we do anticipate that business recovering with the industry.

Great. That's really helpful. Thank you very much.

Our next question comes from Steve Marotta with CL King & Associates.

Good morning, Jerome, and Jim, congratulations on a nice fourth quarter, and Jim, congratulations on the promotion. Jerome, can you please provide your thought process on reopening product categories, which you'll invest in? You mentioned that comfort will be a little bit more sustainable, even as social distancing guidelines are reduced. Do you think there will be a tad bit more for lack of a better phrase, dress embedded in there, or from a men's standpoint, maybe more khakis, you know, something that's a little bit more presentable than just outdoor sweatpants. And if so, how do you think about investing within those categories as social distancing guidelines are reduced?

Well, a couple of things with that. We think that from a return to the office standpoint, it's not going to be the same as what it was before pandemics. I think the Monday through Friday 9 to 5 workdays are gone. I think that most companies that I've talked to, quite honestly, are thinking some sort of a hybrid model. And we believe that customers are not going to want to give up the comfort factor. Now, we've invested in several things that we've done well in. Our swim business is quite strong. Knitwear has been really good for us across the board in both men's and women's. Loungewear, athletic wear, sleepwear have all been strong categories and we believe those trends aren't really going to discontinue. I think when you look at like the more dressy part of our assortment, which would be, you know, no iron khaki pants, button down shirts, dresses for women, people will start to look at that again but in a different way. So as an example, We've taken one of our best-selling fabrics, which is sport knit in women's, and we've moved that over to men's and put that into dress pants. Lo and behold, we did a test this spring, blew out. So we think that people are still going to love that comfy feeling and going to want to feel comfortable and casual at the workplace. And that won't go away.

I get that, and I agree for what it's worth. Can you talk a little bit about Europe being up 38% During the quarter, obviously, you're optimistic about some of the initiatives there. Could you be specific about what those initiatives are? I'm assuming that there's an attractive tail on that, at least 12 to 24 months of what would be at least above average growth. Talk a little bit about, again, specific initiatives around European growth.

Sure. We changed management there a couple of years ago, and again, their new strategy had really been to get everything aligned globally. And what I mean by that is, you know, we had done a lot of special product for our European and our Asian markets, which we thought, you know, it's just going too far away from what the brand is. And as we continued to hone the brand message in the U.S., we said, you know, let's make this a global message. And that's resounded very well with customers around the world. We thought that there was an opportunity in Europe in particular to continue to grow market share. What we've done is basically implemented a lot of the same marketing techniques and product messages that we use in the U.S. And surprise, they worked. And they didn't just work, they worked really well. So we've continued to double down on a very clear global message and making sure that we're buying into the same things, that we're marketing the same way. and that we're putting dollars behind the same types of marketing, similar to what we're doing in the U.S., and it's working extremely well for us.

That's very helpful. Jim, when will the warehouse management system be fully operational?

Well, it's going to be a multi-year implementation. We talked about the first phase. That should be up and going by the end of this year, but the entire thing is going to take over the next two years.

Excellent. Okay, thank you. I'll take the rest of my questions offline. Thank you.

Thanks, Steve. Ladies and gentlemen, this concludes the Q&A portion of today's conference and also concludes the program. You may now disconnect and have a wonderful day.