Lands' End, Inc.

Good day, everyone, and welcome to the Lands End second 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 telephone keypad. You may withdraw yourself from the queue by pressing star 2. Please note this call will 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. Please go ahead.

Good morning, and thank you for joining the Lands End Earnings Call for a discussion of our second 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'll turn the call over to Andrew.

Thank you, Bernie. Good morning, and thank you for joining us today. Before I dive into a review of our second quarter performance, I wanted to take a moment to highlight a few key call-outs for the period. We successfully injected newness across our assortment. We gained market share in our solutions-based swim category. We strategically right-sized our inventory position, ending the quarter well below prior year levels and in a strengthened quality and content position, paving the way for greater levels of newness to come. Leveraging our buyer file, we have identified and are prioritizing two key high-value cohorts. We began executing on our expanded focus on licensing and and entered into a new licensing agreement for footwear, as well as the license for the Costco channel we mentioned in our last call. We developed a model to deliver a swim capsule for wholesale partners. In outfitters, our school uniform business performed well, and we began our work for a new partnership with Santander. In our third-party marketplace business, we took a conscious decision to curtail short-term discounted demand of calls in favor of long-term brand profits and positioning. And most important, we generated strong net cash from operations. Our results for the quarter reflect a considered approach to executing our strategic plan and delivering results that drive shareholder value. Our revenue of $323 million was and adjusted EBITDA of $16 million are within our guidance range and demonstrate the concerted effort we're taking to increase cash flow, reduce inventory, and lower our debt levels. Fundamental to these improvements was a focus on growing gross margin that saw us deliver a 220 basis point improvement from a combination of more valuable transactions and continued improvement in supply chain costs. Commercially, this quarter was characterized by our solutions-based customer focus that put a greater emphasis on driving quality sales over simply moving units and positioning our balance sheet for long-term success. As a result, our year-to-date net free cash flow was a record in the post-spin-off period. As I've discussed the last couple of quarters, The entire Land's End team has been focused on our strategic initiatives to enhance value for our customers, employees, and shareholders. We are taking actions to capitalize on our strengths as an iconic American lifestyle brand, simplify our approach, and drive improved profitability. This quarter, we made significant progress in these efforts. achieving key milestones while driving strong execution across the company. On the product side, our merchandising strategy, which is focused on growing gross margin and injecting newness across categories, is working extremely well. Our customers are responding positively to newness, providing our merchants with great insights into the products our customers are seeking and how to pace the introduction of that newness throughout the year. Land's End's competitive advantage is that we are a solutions company. Our customers look to us for products that solve life's issues. SWIM continued to perform well during the second quarter, building on the momentum of the first quarter, and we are confident that we're continuing to pick up market share. In particular, I would call out SWIM dresses as a high-performance silhouette during the quarter, We're pleased that Land's End continues to leverage our authority in SWIM to drive performance. SWIM is a top priority for us, not only because of the sales and margin it's generating, but because it also drives sales in its natural vacation adjacencies like totes, towels, and cover-ups. Women's woven tops and dresses and men's summer shirts and casual pants were also strong contributors to our vacation story during Q2. Linen continued to perform well in the U.S. and Europe following a strong Q1, and we achieved solid performance in our home division during the quarter. Consistent with swim, the newness we injected across these categories performed well. As an organization, we have spent considerable strategic energy on optimizing our inventory, delivering it at the right time and in quantities and qualities that place margin dollars ahead of demand dollars. As a company, we are increasingly committed to delivering higher gross margins in both rate and dollars. We moved swiftly in the quarter to reduce remaining pockets of lower value merchandise and position ourselves to drive a more appropriate level of turn and increase our freshness factor, ensuring we have the right products at the right time. We are pleased by the progress we've made in this effort, which, consistent with where we said we'd be last quarter, resulted in inventory below pre-pandemic levels. As a result of the team's strong work to drive inventory productivity and reduce markdowns, combined with more normalized supply chains, we're well positioned to bring ULIS to more of our assortment. As I mentioned at the top of the call, we grew our gross margin by 220 basis points over the prior year through a range of actions. This includes increasing the speed of throughput and positioning our tried and true fabrics while at the same time introducing new ones. Combined with improved cash flow from the increased terms of our inventory, we have greater flexibility to invest in our strategic initiatives to drive growth and value creations for all stakeholders. As a digitally native company, we're prioritizing our focus on innovation to improve execution across the enterprise, including taking advantage of emerging technologies like generative AI. Whether in customer service and engagement, data analytics, decision-making, or go-to-market strategies, our increasing use of these technologies is driving efficiency and effectiveness in our work. For example, we have developed an internal app for our merchants and designers that uses chat GPT, to analyze our customer data to identify gaps in our assortment to improve buying decisions. We also made progress this quarter on our efforts to place the customer at the center of our decisions. We recently launched a partnership with Happy Returns to offer a streamlined return process, allowing customers to drop their return at one of more than 9,000 return bars nationwide. In addition to improving the customer experience, the happy returns process is better for the environment and reduces the carbon footprint associated with shipping back individual return packages. Another aspect of our innovation focus is how we have begun to leverage the proprietary data from our bar file to better understand our customers. Rather than focus on demographics, we're instead zeroing in on the behaviors of our key customer cohorts. We have prioritized two high-value customer cohorts to target, each defined by a unique set of characteristics. We have defined them as resolvers and evolvers. Resolvers are the largest cohort of our existing base. This customer is a solutions-oriented dresser that prefers classic styles and values quality over trends. They shop primarily on necessity two to three times a year. Envolvers are the second largest cohort and a potential area for growth. This customer is discovering and refining their style as an ongoing journey, and they dress what fits their current moment in life. When compared to resolvers, they gravitate towards trend and quality, have buying potential, and spend more. This evolved approach of keying on behaviors enables us to define, prioritize, reach, and cater to the customers that matter to Land's End most, while also focusing on expanding our customer base over time. With those strategic drivers in mind, I want to spend a minute speaking to our second quarter performance. Our US e-commerce business, our largest direct-to-consumer channel, delivered strong margin performance in the quarter, on slightly lower demand it is pleasing to note that for the period our customer file remains flat while our rebuy rate improved both of these metrics build against the client's experience from late 2021 through all of 2022 we are seeing early success as we transform our go-to-market strategy with more focused promotions around key holidays and market events like Memorial Day, like July the 4th, and like Amazon Prime Day. For the quarter and go forward, we made a conscious decision to avoid prior levels of discounting to drive market share, preferring to show conviction in our solutions-based categories, leading to improved margins. During the quarter, we continued executing on our licensing strategy, which adds minimum royalty guarantees and new income streams, allowing us to continue to focus on our core capabilities. In addition to licensing the Costco channel, which I mentioned on our last call, we have entered into a new multi-year, multi-geography footwear license. Footwear continues to be an important category for us, and we chose a partner that best fits with the ethos of Land's End and our evolving focus on solutions that address customers' needs. We expect to begin seeing results in 2024, from these two licenses and anticipate adding additional licenses as appropriate and consistent with our strategy. In addition, we developed a turnkey solution with one of our vendors to deliver a Land's End design swim capsule to new distribution channels and expect to announce a launch later this year. This model allows us to avoid the distraction of maintaining a wholesale calendar, limits our inventory ownership to a pass-through, and can be leveraged across multiple retailers and geographies. Turning to the outfitters business, we are pleased to note that revenue increased year-on-year net of the delta relationship We made good progress with our school uniform business, seeing a 20-plus point increase in customer satisfaction over the prior year as we focused on long-term relationship reinforcement and retention following pandemic-related fulfillment challenges. These efforts around time to ship, in stock, of what matters, and customer service response times delighted our customers and augur well for long-term growth. We now see opportunity to build next year while showing margin improvement. Overall, we are confident in the opportunity that the Outfitters business presents, both on its own and as a potential customer acquisition engine for our consumer business. An example of this opportunity is our recent five-year extension with American Airlines and our recent agreement with Santander Bank for their U.S. business. which is expected to launch in December and will outfit nearly 3,000 of their branch network employees. As we noted during our last call, Jim O'Connor joined Land's End to lead the Outfitters business and help enhance performance over the long term. Jim has hit the ground running and is working on a number of initiatives to ensure we're taking advantage of all opportunities to serve business and school customers and generate growth. These include implementation of better tools and processes for reaching new and prospective customers, more targeted outreach to convert pipeline to sales, and enhanced use of data and analytics to ensure our engagement is the most effective it can be. More on this work to come. Moving to our third-party business, which remains an important growth avenue. The top-line results for our third-party business are not where we want them to be, but consistent with our B2C strategy, we focused our online marketplace offering during the quarter on quality of sales, improving gross margin, and better inventory turn and freshness. The results were productive with targeted Macy's throughout the quarter. Demand at Coles changed mid-quarter, transitioning from strong performance to a significant decline during the final weeks. In conversation with Coles, we choose to stick with our plan and protect our focus on gross margin. Our marketplace strategy provides strong sales and margin opportunities, and we plan to strategically grow these existing partnerships and explore new opportunities to expand our brand reach. Lastly, I'll touch on our international business. In a number of ways, we have been using the business to test strategies that have been both discussed and implemented in the U.S. business, namely tighter inventory control, driving freshness, and higher gross margins. The results, coupled with expense management, have allowed us to deliver profitability consistent with prior years but with smaller demand and revenues. We have eliminated poor selling items and focused on what we were good at, prioritizing key items like linen and dresses and incorporating units into the assortment. Gross margin in Europe this quarter grew nicely by approximately 190 basis points year over year. We have also focused on owning the vacation in Europe with swim and linen as strong opportunities to capture market share in that segment as we look forward. Before turning the call over to Bernie, I want to spend a moment talking about something that I referenced earlier. As we continue the successful execution of our strategy and generate strong operating cash flow from increased turns of merchandise and lower inventory carrying costs, we have the flexibility to invest more cash in the business to drive sustainable value creation. We're being deliberate with these investments, targeting areas where we can inject newness into the brand to serve new and existing customers with the solutions they're looking for while operating and executing more efficiently. More on that to come, but for now, I'll turn the call over to Bernie to discuss our second quarter performance and third quarter outlook.