Lands' End, Inc.

Good day and welcome to the Land's End Third Quarter 2021 Earnings Conference Call. At this time, all participants are in list only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your touchtone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. As a reminder, this call is being recorded. I would now like to turn the call over to Bernie McCracken, Chief Accounting Officer, you may begin.

Good morning, and thank you for joining the Lands End earnings call for a discussion of our third quarter results, which we released this morning and can be found on our website, landsend.com. On the call today, you will hear from Jerome Griffin, 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 and quarterly reports on Form 10-Q. 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 can 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 LandZen.com. With that, I will turn the call over to Jerome Griffin.

Thank you, Bernie. Good morning, everyone, and thank you for joining us today for a discussion of our third quarter results. Our performance this quarter demonstrates the strength of our offering and distribution strategy that creates our dynamic operating model. The flexibility of our model enabled us to mitigate much of the macro challenges and achieve adjusted EBITDA at the high end of our guidance. Despite these headwinds, we delivered 4% top-line growth, contributing to our 22% growth year-to-date, and achieved 129% adjusted EBITDA expansion year-to-date. We're extremely proud and grateful for our team's ability to execute at an exceptional level as we navigate this challenging operating environment. We're very pleased with our sales over Cyber Week, where we saw strong online and in-store traffic. Sales during this period were up high single digits year over year as a result of strong demand and improvement in stock positions in time for early holiday shopping, as Jim will discuss shortly. We believe that the strong operating platform we established, combined with our ongoing progress across four strategic growth pillars, including product, digital, unit channel distribution, and infrastructure, set us up for long-term success. Our commitment to operating a digitally-led business is driving our customer growth, which we expect will expand by approximately 6% to an all-time high of over 7 million customers this year. And we still see a long runway ahead. We are optimistic about our future and look forward to sharing updated long-term goals with you in January at the ICR conference. Now I will provide some brief highlights from the quarter before turning it over to Jim to discuss our performance in more detail. Starting with product, we remain focused on emphasizing our successful let's get comfy positioning as we continue to capitalize on the strong casualization trend even as people return to the office. Our one closet messaging, versatility of our product offering, as well as the consistency and inclusivity of our fit continue to resonate with our customers. According to TrueFit, Land's End is ranked as the number one favorite fit with customers ages 55 to 64 and is ranked number six in fit overall. For those of you who are not familiar with TrueFit, it is an industry-leading software service that decodes fit and size across retailers to help consumers identify correct sizings. We will continue to expand and amplify our messaging on our extensive fit capabilities, which is being met with strong response as part of our efforts to reach new customers. We saw strong customer demand across a number of key categories during the quarter. The hybrid in-office, at-home flexible work approach continues to support our comfort-first aesthetic, as demonstrated by the strength in our khakis and wovens categories. Transitional outerwear also outperformed, as customers favored lighter weight items with a warmer start to fall. Sleepwear remains strong this quarter, building on the momentum that we saw last year. We also saw better-than-expected results in swimwear, with the category extending beyond its historical selling season as we expanded our offering of more versatile products. Turning to marketing investments, we continue to drive customer engagement through social media channels, refining search, and improving the effectiveness of our catalog. Year-to-date, our new customers increased 11% and our total global customers expanded 7%, putting us on pace to deliver a record customer database, as I just mentioned. During the third quarter, our global new customers were comparable to 2020 and increased approximately 50% from 2019, demonstrating the success, the strategies we've deployed over the last few years. Marketing remains a key investment in building our brand and business. Both our paid social media and search engine optimization are highly productive marketing vehicles. and we will continue to leverage our data analytics to evolve our strategies. Turning now to our third-party partnerships, our performance at Kohl's remains strong again this quarter, and we continue to build on our early successes. We've built a solid foundation and are proud of our achievements over the past few years. We have a strong and flexible operating model and see significant opportunity for the long term. We're strategically positioned to deliver profitable growth, and we will continue to invest in our proven strategies to capitalize on the shift in consumer behavior to e-commerce. I will now turn the call over to Jim.

Thank you, and good morning. We're pleased with our performance this quarter, despite the very difficult environment. We remain confident in the strength of our customer, as well as the long-term health of our business. There were supply chain challenges and labor constraints that we, along with the rest of the industry, faced this quarter, that were difficult to navigate. In light of these challenges, I would like to reiterate Jerome's comments and how proud we are of our team's ability to work through them. Similar to the last quarter, I'll make select comparisons to our third quarter of 2019 to help normalize for the impact COVID had on our business in Q3 of last year. For the third quarter, as compared to last year, total revenue increased 4.4% to $375.8 million and grew 10.5% from 2019. Revenue in the third quarter was impacted by inventory delays related to manufacturer challenges, particularly in Vietnam, and shipping issues resulting in lost sales and back orders. While we saw the impact of out of stocks in the third quarter, the actions we've taken to expedite shipments enabled us to recover inventory levels consistent with prior years going into Cyber Week. We believe we're currently positioned well for the remainder of this year and also as we head into 2022. Our global e-commerce sales decreased 6% from 2020, but still increased 9% from 2019. Within that, our U.S. e-commerce business decreased 3.5% from 2020, but still increased 6% from 2019, while our international business decreased 15.7% in the quarter, but still showed a very strong 27.6% increase from 2019. The challenges in both businesses compared to 2020 were largely due to inventory constraints and resulting lower in-stocks. Revenue for our third-party business continues to be very strong, increasing to $19.3 million, a $7.3 million improvement or 61% compared to last year. This increase was largely driven by strong performance at Kohl's and Amazon, particularly as we expanded our entire store assortment to an additional 150 Kohl's stores during the quarter. In our outfitters business, sales increased 39% driven by our national accounts, and school uniform businesses, both of which exceeded 2019 levels during the quarter. Demand in our travel-related national accounts continues to accelerate as leisure travel recovered and airlines have been hiring to meet this demand. Our school uniform business continues to experience strong customer demand despite extended fulfillment times, while small to medium-sized businesses continue to see a slower recovery We do remain confident that the strategies we're putting forth will drive improvement for this business over the long term. Moving to our retail business, during the quarter, we delivered revenue of $9.2 million, improving 12.2% from 2020. We're pleased with the performance of our same-store sales, increasing approximately 6% from the third quarter of 2020, as traffic continued to slowly improve while conversion remained strong. Gross margin in the third quarter decreased to 44.4%, approximately 100 basis point decline from 2020. The gross margin pressure was entirely a result of higher shipping costs, which we expect will accelerate in the fourth quarter. As a percentage of sales, SG&A improved to 36.6%. That's down approximately 90 basis points from 2020. The improvement was due to leverage on higher sales and continued expense controls. which were partially offset by higher digital marketing expenses. Our SG&A as a percentage of sales improved approximately 300 basis points compared to the third quarter of 2019, despite our higher marketing spend. Marketing remains a key component in building our brand awareness and helping drive our long-term growth. Our performance led to net income for the quarter of $7.4 million, or 22 cents per share, compared to net income of $7.2 million, or 22 cents per share, in 2020 and had income of 3.6 million or 11 cents per share in 2019. In addition to these gap measures, adjusted EBITDA is an important profit building measure that we use to manage our business internally. For the quarter adjusted EBITDA was 29.8 million, which despite the increased shipping costs was at the high end of our guidance. Year to date, we've delivered adjusted EBITDA of 93.6 million which is a $52.7 million or 129% increase compared to last year. Looking at the balance sheet, inventories at the end of the quarter were $479.8 million compared to $499.8 million a year ago. The decrease in inventory was the result of the shipping delays from the numerous supply chain challenges. Turn to our outlook for the fourth quarter. We expect net revenue to be between $560 and $575 million, This is an increase of approximately 4% to 7% versus last year. We expect net income of $9 to $12 million and diluted earnings per share to be between $0.27 and $0.36. We expect adjusted EBITDA to be in the range of $31 to $35 million. This revenue guidance represents softness early in the fourth quarter, mainly as a result of the lower end stocks more than offset by a strong holiday weekend as we improved our inventory positions. During Cyber Week, our overall revenue increased high single digits. Our guidance for the fourth quarter also reflects approximately $15 million in higher supply chain expense, including air freight and other higher inbound shipping costs, as well as higher seasonal hourly wages. As I mentioned earlier, the actions we've taken to expedite shipments positions us well for the remainder of this year and also as we head into 2022. For the full year, we expect net revenue of 1.64 to 1.655 billion. We expect net income of 35 to 38 million and diluted earnings per share to be between $1.04 and $1.13. We now expect adjusted EBITDA to be in the range of 124.5 to 128.5 million. With that, I'll turn the call back over to Jerome.

Jerome Adams Thanks, Jim. We remain committed to building upon our strategic pillars. which have allowed us to create a strong and resilient foundation from which we expect to continue driving long-term profitable growth. As we look ahead, we are particularly excited about the significant opportunities we see in further growing our third-party partnerships, expanding our marketplace, and increasing our collaborations. These initiatives remain in their early stages, and we have a long runway ahead. We believe the shift in consumer behavior to online shopping is here to stay and expect comfort to remain a key attribute for our customers. The increased willingness of U.S. households within our demographic to shop online, which accounts for over 95% of our business, has meaningfully expanded our addressable market. We plan to capitalize on this by building our brand awareness and bringing more consumers to Land's End as we see compelling growth opportunities with new customers. As such, we will continue to prioritize spending in our marketing initiatives to expand brand awareness and drive customer growth. Our digital strategy is an important focus and represents roughly half of our overall marketing spend. We're testing new strategies in social media, where we have accelerated our investments this past year, as well as refining our search engine optimization. We're also improving our catalog spending efficiency to drive profitability. Turning to product, we will continue to lead with our effective let's get comfy positioning, emphasizing our comfort, versatility, and great fit. This messaging leverages the strong casualization trend, as well as the surge and return to office comfort fashion. We will continue to emphasize messaging around our one closet offering and extensive fit capabilities as we introduce seasonal colors and outerwear for the holiday. As always, we will use our data analytics capabilities to inform our product assortment, which we will continue to evolve for our customers' ever-changing needs. We're excited about our Kohl's partnership and the compelling growth opportunity ahead. We expanded our broader assortment to an additional 150 Kohl's stores during the quarter, bringing our total to 300 doors. And we continue to offer our full assortment on Kohl's.com. Our product offering is resonating with the Kohl's consumer, and we are offering our best sellers to its large customer base. We look forward to growing this successful partnership with Kohl's. These partnerships are an important component of our long-term growth, and we expect to increase partnerships and distribution expansion opportunities. Moving to Land's End Marketplace, our marketplace remains in the very early stages of growth. We are pleased with our performance and see significant opportunity to expand this strategy based on the early success. Our customers are now looking to us to expand our offering and provide complementary product that addresses additional needs. We will continue to evaluate third parties who share similar brand aesthetics and messaging as we build our offering and enhance our assortment. Turning to our Outfitters business, performance exceeded our expectations during the quarter, driven by strength across our national accounts and school uniform businesses. Sales in our school uniform business exceeded 2019 levels, as normal back-to-school shopping patterns returned. We expect trends in both businesses to remain strong. As expected, our small and medium-sized accounts continue to see a slower pace of recovery, but we're confident that they will recover over time. The steps we are taking to enhance our website and processes, as well as our test and react approach to marketing and pricing, are designed to contribute to our long-term growth. In conclusion, we remain confident in our dynamic, digitally-led operating model. We will continue to invest in our four strategic pillars and and see a meaningful runway for profitable growth and long-term shareholder value driven by our solid foundation, compelling consumer base, and expanding third-party partnerships. We're excited for the opportunities ahead, and we look forward to providing you with our updated long-term outlook at the ICR conference in January. With that, we will open it up for questions.

As a reminder, to ask a question, please press star, then 1. If your question hasn't answered and you'd like to remove yourself from the queue, Press the pound key. Our first question comes from Steve Marotta with CL King. Your line is open.

Good morning, Jerome and Jim. Just to put a fine point on the fourth quarter sales expectations, am I correct in thinking that the delta between what was previously expected and what's now expected is the lost sales in the month of November associated with supply chain disruptions and that and that the inventory that you got in just prior to Cyber Week is more where you would have otherwise expected to be for the entire quarter. Is that accurate?

I think you're pretty accurate, and I'd say overall, if you look at our prior guidance, there's two factors that are impacting it. There's the lack of in-stock, especially early in the quarter, and then from a profitability perspective, there's an incremental $15 million that we highlighted that relates to inbound freight.

Right, exactly. Okay, that's great. You know, one overarching question and something that I think is a little bit different this year than in previous years is that there could be winter items like boots and outerwear, fleece, that sell more closely to full price in January than ever before. In other words, considering that consumer demand is so elevated that inventory, general inventory levels are still very constrained. There could be winter items that would have otherwise been marked down significantly on December 26th and beyond that might not be this year. And the volume of those items actually even higher, ironically, because of supply chain constraints. Am I thinking about that right?

Yeah, Steve, I would say you are. First of all, our inventory levels today and for Cyber Week are pretty much in line with where we were last year. So we're feeling much better about that. Secondly, since we sell a very large percentage of basics or seasonal basics, you're exactly right. Those are going to have a much longer lifetime this year.

Yeah, I would think so. And could provide upside to the fourth quarter in sales and earnings if that dynamic happens this year relative to previous years? Is that accurate?

If you look at customer traffic and you look at demand, it's still there. I mean, it's just the availability of product. I think that's been holding people back. And when we went through Cyber Week last week, we were pretty pleased with what the outcome was, the number of customers that came to the site, who was buying, what they were buying. and how. So we think that there is a potential upside towards the back part of the quarter.

Great. Last question. It pertains to the supply chain expectations for the first half of next year and into the second half of next year. Not asking for guidance, of course, just how much do you think, how much oil will be placed into the gears that drive the supply chain for deliveries that are expected in, say, March, April, May, June, that kind of timeframe?

You know, I think there's no question it's going to continue to be challenging. I think the thing that we've done internally is we have adjusted some of our lead times to account for the factors that we know about. Now, unfortunately, there have been several things that are outside of our control, but we are hopeful that we'll certainly be in a better position than what we were in the back half, but we still are anticipating challenges, at least going through the first half of next year.

Totally understand. I'll take my balance of questions offline. Thank you. Thanks, Steve.

Our next question comes from Alex Furman with Craig Hallam Capital. Your line is open.

Great. Thanks very much for taking my question. I was wondering if you can talk a little bit more about the $15 million of supply chain costs that you're expecting here in the fourth quarter. Can you unpack that a little bit more about what those dollars were, and then, you know, if you think about the, you know, you mentioned potential pressure extending into the first half of next year, you know, how many of those initiatives do you see extending into the first half of the year? Just anything you can give us to kind of try to size that up would be helpful.

Yeah, the two biggest components were the inbound cargo freight rates. that were up dramatically year over year. And then the second is that we did air more product than what we would normally do. Just some of our key items that we're worried about, even if we expedited things on boats and trucks, it wasn't going to get here on time. So as we go into next year, we're anticipating that some of those inbound cargo freight rates will continue to be higher than what they were year over year. But as I mentioned to Steve earlier, Alex, I think some of the things we've done with adjusting our lead times should hopefully make it so we don't have to err to the level that we did in the fourth quarter of this year.

Yeah. No, that makes a lot of sense. I mean, if costs remain elevated for the foreseeable future, is there a point in time next year where you would either becoming less promotional or raising more ticket prices on your goods? How should you think about that? Or are you kind of waiting to see what happens in the spring?

No, we've already gone back and we looked at pricing for next year for spring and for fall. And obviously, there's going to have to be price increases to make up for the increase in costs. Though I would say we think that while the cost probably will not make it down to last year's level, we don't think it's going to continue at this year's level either as you go through the back half of next year.

I think the other thing on that too, Alex, is you've heard us talk on prior calls about our dynamic promotion tool. So that's really allowed us to be more effective from a promotional productivity perspective. So we think that'll be a great tool going into next year to impact pricing.

Okay, that's really helpful, guys. Thank you very much.

Our next question comes from Dana Telsey with Telsey Advisors Group. Your line is open.

Good morning, everyone, and nice to see the progress. Jerome, you've talked a lot about the future initiatives expanding the reach and presence of the brand. What do you see as the opportunity for the TAM of Land's End, given the different verticals, and the long-term growth? Where does it grow, and what do you see that being as we move forward into 2022 and beyond? Thank you.

Thanks, Dan. A couple of things. First off, due to what's happened over the last couple of years, and the proliferation of more people shopping online and being comfortable shopping online, we believe that the customers that are online shopping now, more than where they were a couple years ago, are really our demographic. You've seen it in the longer term, new customer acquisition numbers, and we're starting to see it again in December of this year. The ability for us to reach more customers through just organic growth with our global website, is a big foundation for us and we see that continuing to grow. Second thing is getting our brand name in front of so many other consumers with third-party marketplaces like an Amazon, like a Kohl's, like a John Lewis, like a Zalando are all working for us. And we believe that there's a very long runway there also. And with the numbers that we've been seeing from those marketplaces, it's all new customers, 70% anyway. The largest share of the customers that are coming to us have not shopped with Land's End before and are discovering the brand. So with those two initiatives, plus what we're doing in Outfitters with the upgrade on the website, we see very good long-term runway for us. And short-term issues like what we're seeing today really don't faze us because you can very clearly see where you're going to be going over the next few years.

Got it. And the partnerships business or what you have with Kohl's, are there more opportunities like those ahead and how big do you expect the partnership business to get over the next year or two?

We haven't shared numbers yet on the size of the partnership business, though we will talk about it in January when we lay out our long-term goals. But we see it as extremely significant, and I'd rank them. I think our organic growth is probably going to be our number one growth factor over the course of the next year. five years, but right behind it is going to be those third-party marketplaces because we've got so much opportunity. When new customers experience the brand, we have a very large percentage of them that turn into active customers. And you know from previous discussions that our active customers stay with us, are extremely loyal, and stay with us for approximately 17 years. So it's a very long-term relationship with them.

Thank you.

There are no further questions at this time. This does include the program. You may now disconnect. Everyone have a great day.