Lands' End, Inc.

And welcome to today's Land's End first quarter earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. You may withdraw yourself from the queue by pressing star and 2. Please note this call may be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Bernie McCracken, Interim Chief Financial Officer.

Good morning, and thank you for joining the Lands End Earnings Call for a discussion of our first quarter 2023 results, which we released this morning and can be found on our website, landsend.com. I'm Bernie McCracken, interim chief financial officer, and I'm pleased to join you today with Andrew McLean, our chief executive officer. After the 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. 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 Andrew.

Thank you, Bernie. Good morning, and thank you for joining us today. I'm pleased with our results for the first quarter, which demonstrate the strength of the Land's End brand and deep customer affinity, the value of our core offerings, and our company-wide focus on stellar execution. We generated revenues of $310 million at the high end of our expectations. and adjusted EBITDA of $19.5 million, well exceeding our guidance. I'll provide more commentary on our strong first quarter in a moment. But first, I want to focus on the progress we're seeing from our strategic initiatives that I shared with you last quarter and the work we continue to do to enhance value for our customers, employees, and shareholders. As you know, I believe Land's End has a tremendous opportunity ahead, and we are well positioned to generate value for all our stakeholders. To achieve that value creation, we are taking a page from our iconic brand's 60-year history, deepening our customer focus and ensuring that we're providing our customers and partners with the high-quality products they are looking for. In just a few short months, We're seeing progress as our renewed focus on our customers and prioritization of core products is driving tangible results. To be clear, we shared last quarter that Swim was performing well and that it is a priority for us alongside its natural vacation adjacencies like totes, towels, and cover-ups. Year over year, our swim business is up high single digits, and the MPD scores we're seeing in our women's swim business show that we have the leading brand in the swim category and are a top gainer of market share. What's exciting for us and gives us confidence in the path we're pursuing is that customers are responding well to newness. We've taken steps to right-size our inventory, which enables us to run more targeted promotions and leverage cost tailwinds that support our gross margin expansion. With SWIM and vacation as our template, informed by insights from our buyer file and broader consumer trends, we believe we can replicate this strategy in other categories and, in particular, those categories that our customers are looking for and that drive outsized value creation. The key attributes of SWIM include fit, performance, and functionality are also present in other categories like bottoms and outerwear, which each have franchise items and where we have authority in the marketplace. Underpinning this strategy is bringing innovation back to land's end. Innovation in how we more deeply engage with our customers, innovation in how we look critically at our product strategy, and innovation in how we better execute. While innovation is a key value driver for us, we will do so consistent with our 60-year legacy, which is appreciated by customers across the country and around the world. At its core, Land's End is a solutions company. We're in the business of providing products that solve life's issues. By obsessing about our customers' needs, we can better plan for, anticipate, and prepare for the many avenues where we can serve them. We can and will continue to execute from a position of strength, knowing that we are uniquely positioned to deliver consumers and our partners high-quality products they're looking for for themselves, their families, and their businesses and associates. We also believe there's an opportunity to create value by pursuing a licensing strategy that enables Land's End to do what we do best, bringing in partners that can leverage their own strengths. Since our last call, we have brought on a new partner to supply Land's End products to Costco, and we are actively considering category, channel, and geographic licenses with others. The potential for us to utilize this asset-like model enables us to free up our resources and better focus on our solution-driven authority in areas that are significant value drivers for Land's End. Between asset-like balance sheet gains, royalties, and increased brand visibility from multichannel distribution, we see the potential for a significant source of incremental profitability coupled with an improvement in operating margins. On our last quarterly call, we spoke to you about the work we're doing to better leverage our strong buyer file and the proprietary data it provides us that we can use to inform our decision-making. For the quarter, our U.S. buyer file stabilized with flat growth and we saw strength in the rebuy rates of our active customers. We're continuing to conduct qualitative and quantitative reviews of our data to refine our strategy so that we can better reach and cater to the needs of our existing customers and expand our customer base over time. We've already started rolling out the learnings of this work and are seeing positive results. For example, We're weighing our marketing of the swim and vacation stories more heavily on Instagram, where we can broaden our customer base and reach a younger audience that recognizes Land's End as an authority in the category. We'll continue to roll out additional updates to our strategy and marketing as that process continues. We're also working. to further improve our operations and better leverage our data to enhance efficiency through greater collaboration and faster decision-making. Our goal is to be the nimble problem solvers that our customers demand, and we're doing that by empowering our team with the information, tools, and processes to provide differentiated value for our customers, which should lead to improved operating results and enhance value creation for our shareholders. Now, turning back to our strong first quarter results, building on what we saw in the fourth quarter of 2022, consumer activity continued to progress during the quarter, resulting in strong momentum across the business. In the first quarter, our sales came in at the high end of our guidance range with $310 million in revenue, a 2% increase year over year. Importantly, we capitalized on supply chain cost improvements and utilized more targeted promotions which resulted in strong year-over-year margin performance. Regarding inventory, we continue to make progress and are pleased to report that as of the end of Q1, we have returned to normalized inventory levels consistent with what we said last quarter. As a result of our work to better match anticipated demand with supply, which is largely informed by our proprietary data, we expect that inventory levels will continue to come down and that, by the end of Q2, we will be at or below pre-pandemic levels, supporting our ability to lean into gross margin opportunities. Critical to our improved inventory levels is a focus on driving turns, increasing our freshness factor, and leveraging our vendor relationships. We did not and will not accept that a return to normalized supply chains is enough. Our go-forward stance is to reduce the time to market. Already for fall holiday inventories, we have removed as much as nine weeks from the calendar and implemented vendor-managed inventories on a handful of core NIC programs with a view to expanding that strategy. Next. Taking a look at our products and what our customers are responding to, the underlying theme is that the trends towards casualization and hybrid life appear to be sustaining. We, of course, reference swim as a leading category. We've surrounded that with other vacation essentials that our customers are responding exceptionally well to. We've also seen good momentum in linen and core knit tops, as well as seasonally appropriate attire like long-sleeved T-shirts and woven tops for both men and women. Bottoms for both men and women perform well, and in our experience, that bodes well for sales of tops. Lastly, and this is a critical point, as I mentioned earlier, customers are responding well to the overall newness in our assortment. As we move forward, we are committed to regularly injecting newness into our offerings throughout seasons and across categories. Turning to the outfitters business, as I've said before, this is a successful business with plenty of opportunity ahead. both on its own and as a potential customer acquisition engine for our consumer business. Recently, we signed a five-year extension with American Airlines, which takes that agreement to 2028. As we expected and reflected in the guidance we provided on our last quarterly call, we wrapped up our work with Delta during the quarter, resulting in some non-recurring revenue, which Bernie will detail shortly. In addition, we have hired a new leader for the Outfitters business, Jim O'Connor, He will be joining Land's End in June. Jim brings over 20 years of general management and sales leadership expertise in B2B and B2C businesses, including at Shoes to Cruise and Timberland. I'm confident Jim will be a great addition to our leadership team as we continue our focus on driving and expanding the Outfitters business. We are a digitally native business, serving our customers across a variety of online venues, from Land's End.com to Amazon to department store marketplaces. As over 90% of Land's End's purchases happen with a click, we're pleased with our online performance, and in particular, Land's End.com. Our land-bound fulfilled business, which enables us to sell through our partners' online marketplaces and deliver direct from our warehouse, provides a valuable opportunity to reach additional customers not engaging directly with our brand. This business continues to demonstrate growth and provide strong margins. We see significant opportunity in our newer partners, including Target and our most recent addition, Macy's, which we launched this quarter. Increasingly, we view this business as an integral part of our domestic B2C digital journey, which combined produce mid-single digit growth for the quarter. We'll continue to explore opportunities to leverage this proven platform with new and existing partners and speak increasingly about the growth of the consumer digital journey. Lastly, from my vantage point, our international business is an opportunity for us to grow demand and earnings faster than our core U.S. business. tapping a customer that is excited about the lifestyle we offer and the value we bring. We're exploring various opportunities to expose our products in new geographies, including through online expansion, distribution partners, and as I mentioned earlier, licensees. In our existing Europe business, we are reacting to ongoing lower levels of consumer demand in the region by applying much of the approach that has been critical to our success in the U.S., This includes a focus on key categories where we have authority in Europe, particularly linen and dresses, and incorporating newness in the assortment to which customers are responding positively. This approach, combined with a deep focus on cost control and more disciplined promotional activity, resulted in flat profitability year-on-year and gives us a platform for future growth and development. I'm proud of the way we executed throughout the quarter and the progress we've made on our strategic plans. There's more work ahead, and I look forward to sharing additional updates on our efforts in the coming quarters. With that, I will turn it over to Bernie.

Thank you, Andrew. For the first quarter, as Andrew mentioned, total revenue performance was at the high end of our guidance range, at $310 million, an increase of 2% compared to last year. Our U.S. e-commerce business, which represents our largest go-to-market segment, saw a sales increase of 2% from the first quarter of 2022, driven by targeted promotions within SWIM and adjacent product categories. Our Europe e-commerce business in the quarter was down 29%, reflecting the continued lower levels of consumer demand in Europe, as Andrew noted. Globally, e-commerce sales decreased 7% from 2022, or 4% when adjusting for Japan, which closed last year and accounted for $8.5 million of revenue in first quarter 2022. Results from our lands and outfitters were strong year over year, with revenue up 37% over the first quarter of 2023, which was lifted by the inventory sales to Delta at the anticipated conclusion of their five-year contract in April Excluding the $18 million difference in year-over-year revenue from Delta, the Lands End Outfitters business was up 4%. We continue to be pleased with revenue for our third-party business, which increased 6% as compared to the first quarter of 2022. Driven by growth in our partners' online marketplaces, as noted, SWIM was a winning category for us, and that included selling SWIM inventory through these important partners. We launched our Macy's partnership in the quarter and expected to contribute to the future strength of our third-party business. Moving to our retail stores, we delivered revenue of $10 million, with U.S. same-store sales increasing approximately 9.5% from the first quarter of 2022. Gross margin in the first quarter increased to 45%, approximately a 210 basis point improvement from 2022. The margin improvement was driven by leveraging our strength in owning the vacation and travel across our channels, as well as improvements in supply chain costs. As a percentage of sales, SG&A was 38%, approximately flat to 2022, driven by lower digital marketing spend, offset by higher employee-related costs. Our performance led to a net loss for the quarter of $1.7 million, or 5 cents per share. compared to a net loss of $2.4 million, or $0.07 per share, in 2022. 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 increased by 41% to $19.5 million, which exceeded the higher end of our expectations. Looking at the balance sheet, inventories at the end of the quarter were $376 million compared to $437 million a year ago. The 14% decrease in inventory was a result of the actions we took to leverage normalized supply chain and transit times to receive spring and summer inventory closer to the selling season and late receipts last year due to the supply chain challenges. Accordingly, net cash used in operations was $100 million less than last year due to the improved inventory flow. Regarding our debt, at the end of the first quarter, our term loan balance was $241 million, and our $275 million ABL had $100 million of borrowings outstanding, which was $25 million lower than last year. As part of our efforts to enhance shareholder value creation, we are continuing to explore opportunities to refinance our debt and are committed to doing so subject to market conditions. During the first quarter, we repurchased $3.8 million worth of shares under the company's previously announced $50 million share repurchase authorization, bringing the balance of the remaining authorization to $38 million as of the end of the quarter. Turning to the second quarter, we expect net revenue to be between $320 million and $335 million. We expect a net loss of $4.5 million to $2 million and diluted loss per share to be between $0.14 and $0.06. We expect adjusted EBITDA to be in the range of $15 million to $18 million. Based on our strong first quarter results, we are updating our full year guidance and now expect net revenue of $1.56 billion to $1.62 billion. We expect net income to be in the range of a net loss of $4.5 million to net income of $2.5 million and diluted loss per share of $0.13 to earnings per share of $0.08. We expect adjusted EBITDA to be in a range of $75 million to $84 million and Our guidance for the full year incorporates approximately $35 million in capital expenditures. With that, I will turn the call back over to Andrew.

Thank you, Bernie. As you've heard me say before, we're taking aggressive, achievable actions to improve the business today to drive growth and profitability over time. And our strong first quarter results give us confidence in the strategy we're pursuing. The swim and vacation as our template will continue innovating our product strategy, customer engagement, and internal approach to ensure we're building on and staying true to Land's End's history and brand. We also continue to make key hires that are further rounding out our leadership team. In addition to Jim O'Connor joining us as Senior Vice President and General Manager of Land's End Outfitters, Stuart Hogue joined Land's End as SVP U.S. E-Commerce in April, Stuart is a digitally savvy leader with more than 20 years of industry experience. He enjoyed a successful career at Nike and joined us from McKinsey, where he advised clients on digital, omnichannel retail, and marketing transformation initiatives. With the strength and growth potential for our profitable U.S. direct business, we're pleased to have such a strong leader in Stuart as part of our team. As we execute our strategy and bring innovation across the business, We'll continue to provide updates about how our work is delivering for our customers, employees, and shareholders. With that, we look forward to your questions.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We'll take our first question from Dana Telsey with Telsey Advisory Group. Dana Telsey, your line is open. Please ask your question. And once again, Dana, Telsey, if you would like to ask your question, please speak now. Your line is open.

Hi, can you hear me okay?

Yeah, we can hear you fine.

Oh, good. Sorry about that. It was a little confusing. So congratulations on the nice progress. As you think of the swim and vacation-related apparel, how do you see this expanding beyond the purview during the remainder of the year beyond summer? Secondly, on the marketplace initiative that you have, where are you seeing the greatest growth from and how are the margins there? And also on the inventory levels, which are brought in nicely, how do you see that going through the rest of the year and what are you seeing in the promotional landscape? Thank you.

Okay. Thank you, Dana. Talking to swim and vacation, I mean, we – We took a view coming into the quarter that we had a leading market share. And the best thing to do with a leading market share is rather than defend, is attack. And we went out and we actually found that we took market share by starting earlier and running longer. and then being able to get ourselves into trend faster by being able to pull product through our supply chain faster. So we've been able to react to trends. We used our data to give us a good insight into where the trends were going to go. And we expect that market now will continue to be something that prolongs into the back half traditionally. We've wrapped up SWIM in a June-July timeframe. We now expect to see that continue on into late summer and to all intents and purposes be part of a year-round business for us. particularly given what we saw in the fourth quarter with some of our swim sales. Where vacation goes is we're going to continue to evolve it. So vacation for us will evolve into the back half of the year, and it will pick up outs of wear. We have a strong market share position in outs of wear, and largely our intention is to do with outs of wear what we've done with swim, and we feel really strong about the product that we've put behind that. What we're seeing is that it expands, you know, having vacation and having this ownership and having these solutions, we're able to expand beyond that. So we've seen ownership in our bottoms business, which we called out on the call, been really strong. And we're seeing trends, you know, particularly wide leg, particularly knits. that are like lasting and enduring for us. You know, we knew early it wasn't going to be a denim cycle. We actively managed our inventory around that. And, you know, we're able to like lean into knit bottoms. We've made them part of the vacation solutions for us. Vacation could be walking the dog. It can be a staycation. It can be, you know, it's about your lifestyle. It's about a state of mind. And so it's about evolving those categories to have authority and like really back up what we're doing in that marketplace. Yeah. I'll take marketplace as the next question, and then I'm going to let Bernie answer on inventory. We're really very happy with where we're going with the marketplaces. I said it on the call. I view that as just part of our domestic consumer digital journey. And if I look at, you know, Land's End fulfilled product for the marketplaces along with Land's End and along with Amazon, you know, that was a mid-single-digit growth for us. And when you put it all together and we see consistency in the journey, but we see opportunities. So I actually like that. lost my words for a minute. We actually see opportunities to stratify product strategies against the Target, against the Macy's, against an Amazon. So Amazon, for example, would be more about basics. And then I think as we build it out from there, we're finding a new customer. And by offering them a certain profile on that marketplace and then being able to expand the offering With LandZen.com, we bring them from the marketplace to the main site, and it's like we see the growth, and it helps us to pick up customers. I would say that the margins for the LandZen fulfilled business continue to please us, and it's the side of the business that we feel strongest about versus the wholesale doors. It just leverages the inventory that we own. We're not buying specifically for it and becomes a merchandising strategy that allows us to leverage a single inventory.

turning to inventory like bernie thanks andrew um yeah so inventory you know that we the the uh the uh transportation uh has stabilized for us on the inbound and we've really taken advantage of that the teams worked very hard to get our inventory flows aligned with with our selling periods and we are now um going to be able to keep our inventories um down mid double digits um in that 15% range for the rest of the year on the quarters. We are, as far as the promotional business, it is definitely a very promotional market still. Where we found strength is in newness, as Andrew has noted, and that is where we are going to lean in and try to drive our higher margin business. and know that there's other products, we will have to join the rest of the promotional industry and have to go into a discount to liquidate that inventory. But from a total inventory standpoint, we feel very good about our inventory levels and we'll be at normalized levels for the rest of the year.

You know, Dana, just to add to that, it's like we want the, you know, we're determined to drive the turn up and keep that freshness factor much higher. I think that traditionally we've got a cataloging background. We were one of the original catalogers and it's like we would bring in a lot of inventory, set it at the beginning of the season and let it run down. So it starts to get a little stale as you get towards the end of the season. We're going to and are progressively bringing in the inventory in shots and matching it better against the revenue. It's better for cash flow. It's better for freshness. It's better for markdowns. There's just a whole lot of advantages to it. As we move forward, you'll see the business run that way, and it will come through materially in margins for us, and you'll see it reflected in terms as well as we're able to keep that inventory better matched to the revenue profile.

Got it. And just one follow-up. With the better-than-expected adjusted EBITDA uptick from the prior guidance, the main driver of that is that on the gross margin side, the SG&A side, how do we unpack that in terms of the levers? Thank you.

Yeah, it's driven by gross margin. And our improvements in, as you've heard from most of our industry, transportation costs are down, and we're benefiting from that. And we also see continued improvement in our average unit cost of our product coming in, and we see real tailwinds in our lower costs. and our ability to drive those lower costs through, as Andrew said, the timing and have it at the right times.

Yeah, I mean, one of the opportunities, Dana, is as we speed our turn, it's like we're sitting on less inventory progressively from last year at a higher cost. And so, you know, we see that as a tailwind that we can take forward for some considerable period of time.

Thank you.

And we'll take our next question from Alex Furman with Craig Hellam Capital Group.

Hey, guys. Nice to speak with you. Congratulations on a really nice start to the year here. Let's see. Dana didn't leave a whole lot to ask about, but maybe just to start from a high level here, a lot of other retailers have been talking about just seeing demand soften over the last month or two. Obviously, it doesn't sound like You're seeing that, you know, with the really strong guidance for the year. Is there anything you have noticed lately in terms of maybe basket size or customer acquisition costs, you know, that would, you know, kind of be indicative of that? Or has it really just been kind of steady as she goes here for your customer over since the last update?

Overall, Alex, it's been pretty steady. As you can imagine, and I know you're a key watcher of our site, it's choppy. Every day is a little different. We think a lot more about how to reach our customers across the various channels from Macy's to Target to Amazon to LandZen.com and how we're best going to position for them. I think that know we're doing a better job as a company working out how to address our customers in those channels so for example we're we're reaching a much younger consumer with our swim business and we're able to do that via instagram i don't know if you noticed but we made the instagram site shoppable and that's become that's become a viable place to acquire new customers and you know we've seen about a 10 lift in the number of followers that we're getting off instagram And I just call that as an example because it's one that's probably shown the most change and it's probably the easiest to track. So we're being more thoughtful about the levers that we pull within the channels that we operate and viewing them as one digital enterprise rather than a series of silos where we think about Macy's differently or we think about Amazon differently. We actually connected the dots between them all. and are able to amplify that and get leverage across the business. So I think you're seeing more of that coming through. And that, along with everything we talked today about, gives us some running room as we get through the rest of the year.

Okay, that's really helpful. And then, Andrew, I thought it was interesting, the commentary about licensing. I feel like that's something we've seen, kind of some efforts that never really got off the ground several CEOs ago in that area. Can you give us a little bit more insight into how those talks have progressed and what categories you might be looking to license?

So, yeah, sure. It's a good question. For us, it's very important that we maintain a stance as a family variety retailer. We've always been that. It's been our heritage. We're going to stay with that. At $1.6 billion, we can't be putting all of our eggs in one basket. We've got this resource that we're spreading across a lot of categories and a you know, we view licensing as an opportunity to still remain really competitive in categories or channels or geographies that we wouldn't otherwise be able to show up in a way that we were completely proud of. And at the same time, it allows us to take that resource and position it behind things where we know we can really, really set ourselves apart, like swim or like bottoms or like outerwear. You know, so it's more about It's more about where we want to invest our next dollar ourselves and then look for partners to really support the growth of the business. And I would say to you, it's going to be the lesser categories or the non-core categories and geographies and channels that we haven't necessarily got to. We're in conversations geographically to take the business into places like Latin America or into the Middle East. We couldn't possibly go in there ourselves. We don't have that expertise to get in there, but we recognize from our digital sales that there's demand that we can capture. And so having that partner in place really helps us. And, you know, again, I mean, you can do the math on it. It really is a great opportunity for us to build our margins and build our expansion and demand much quicker than we could sort of organically just given some of the constraints we face.

Okay, that's really helpful. Thanks again, and congratulations again on the great start to the year.

Oh, yeah, thank you. Appreciate it. Thanks, Alex.

And there are no more questions at this time. That concludes today's teleconference. Thank you for your participation. You may now disconnect.