Lands' End, Inc.

Good day, everyone, and welcome to the Land's End Third Quarter Earnings Conference 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 star and 1 on your telephone keypad. You may remove yourself by pressing star 2. Please note today's call will be recorded, and I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Bernie McCracken, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining the Lands End Earnings Call for a discussion of our third quarter 2023 results, which were released this morning and can be found on our website, landsend.com. I'm Bernie McCracken. Lance Enns, Chief Financial Officer, and I'm pleased to join you today with Andrew McClain, 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. Before I turn to our Q3 results, I'd like to congratulate Bernie on his appointment to Chief Financial Officer, which we announced in September after having served as our interim CFO since January. I couldn't be more pleased to continue working with Bernie, and I'm more than confident that he will continue to lead our financial organization with excellence. With that, I'll turn to our Q3 performance. Our results were characterized by strong execution of our solutions-based strategy to deliver quality for our customers and value to our shareholders. We built on our momentum from Q2, further improved our inventory position, injected units across our assortment, and continued to prioritize gross margin improvement to drive incremental gross profit dollars. Our deliberate strategy to improve the relevance of our solution-driven products generated more profitable sales, resulting in gross margin and profit expansion, and adjusted EBITDA of $17 million. end of our guidance range. As I've previously noted, we're executing a deliberate strategy to drive higher quality sales with a larger portion of our sales occurring with no or lower levels of promotion rather than simply prioritizing moving units so we can enhance gross margin and deliver improved cash flows. Paired with our work to further improve our inventory position, it's clear this strategy is working. Q3 marked our third successive quarter of significant inventory and margin improvement with a 25% reduction and 700 basis points of improvement respectively. We're confident that we have found a winning formula increasing turns of merchandise while maintaining lower, more efficient inventory geared to our targeted customer cohorts. We're taking advantage of the flexibility that our lower inventory levels provide to continuously refresh our are responding exceptionally well to this approach. As we introduced last quarter, we've transitioned from a demographic focus to a behavioral focus when it comes to our customers. We're zeroing in on two key high-value customer cohorts, which we call our resolvers and our evolvers, and leveraging our proprietary data to better understand their shopping behaviors. As a reminder, resolvers are the largest cohort of our existing base, They're solutions-oriented dressers that prefer classic styles and value quality over trends and shop primarily on necessity two to three times a year. Evolvers are our second largest cohort and an opportunity for growth. They're discovering and refining their style on an ongoing journey, wearing what fits their current learning. They generally have more buying potential and spend more than resolvers. As part of our identity as a solutions company, we're changing the way we think about our assortment and marketing strategies and aligning them more closely to how our key cohorts shop. We're creating more compelling customer journeys that provide a more holistic look and feel for Land's End's iconic American brand and the way we design, present, and sell our products. We're taking a more outfit-centric approach to our assortment and go-to-market strategy, designing and prioritizing products across categories that feature significantly more productive inventory and facilitate sales across natural adjacencies. You can see this in how we are showing up in digital and with the look and feel of our website and marketing. As a digitally-native company, we're using this new approach alongside our investments to drive more robust engagement with our key We're continuing to improve our site experience through more targeted marketing to present our customers with relevant and engaging content to drive quality sales. As a result, we have seen increased traffic and engagement from social media, and with repeat exposure, we expect our social media prospects to continue growing nicely. On the heels of strategic infrastructure enhancements we've made to improve our internal efficiency, we've begun pivoting our IT focus to enhance our customer-facing processes. We recently welcomed a new technology leader who will spearhead these efforts and work with me to roadmap our strategy and identify leading partners to drive innovation consistent with our asset-light model. Our authority in outerwear solutions was a key driver of our strong performance this quarter, both in the U.S. and internationally. We drove sales in key adjacencies, especially bottoms and sweaters, where new styles in key fabrics like corduroy, denim, and velvet and new colors contributed to the strong performance. Of note, demand in nearly all our women's categories were up double digits in our U.S. e-commerce business. Our swim solutions finished the summer strong in August, and we are looking forward to building on that success with the introduction of our upcoming spring swim assortment, which includes a recommitment to the one-piece category with the creation of a product family centered around our classic tubular solution and the enhancement of control-based technology, including a shaping technology that we have protected via a patent application. Swim remains. to borrow and develop. Building on the theme we've discussed before, our customers are responding positively to freshness across categories. It is contributing to strong performance in our layering products and traditional answerware solutions, which gives us confidence that we'll be able to continue this trajectory more consistently in the months and years ahead. Our U.S. e-commerce business, our largest direct-to-consumer channel, will limit us management. When we offer our customers the solutions they need in a relevant presentation with attractive applications, color, and value, they are responding and not necessarily waiting for discounts at the level we've had in recent years. We're also continuing our efforts to maximize key events and holidays to drive demand with our customers responding well. This more targeted promotional strategy, which complements our broader strategy to minimize markdowns and show conviction in our solutions-based category, has led to improved margins. Turning to our international business, as with our U.S. business, our strong performance is driven by our authority in transitional outerwear solutions. Thanks to prioritizing units and improved inventory management, we've delivered margins that were in line with our U.S. business, gross margin in Europe grew nicely by approximately 1,000 basis points year-over-year. During the third quarter, we continued executing on our licensing strategy, which adds royalty guarantees and new income streams, allowing us to continue to focus on our core capabilities, recently we entered into a licensing agreement for all kids categories and we're continuing to ramp up activities under our existing agreements for costco and as i mentioned on our last call for footwear we expect beginning income from these three licenses in 2024 moving forward we expect to maintain our expanded focus on licensing and are continuing to build a robust pipeline of potential partners Turning to the outfitters business, we're making headway in our efforts to enhance performance and ensure this critical business achieves the results we're confident it can. To be clear, we see great opportunity to profitably grow our share of the market-serving businesses and schools and fuel our B2C customer acquisition engine. Our partnership with American Airlines and the upcoming launch of our partnership with Santander are great examples of our work to earn the business of large accounts. In addition, we will launch a new partnership with Healthcare Corporation of America in the first quarter of 2024, outfitting 3,500 managers and frontline employees in their parallel divisions. Similarly, We're expanding on the progress we made last quarter in our school uniform business through new relationships with large school districts that will ramp up in 2024. We continue to see schools as a key pipeline for our Outfitters business, and having achieved a 92% satisfaction rate among our existing school partners this season, we believe we're well positioned to capture additional market share. for driving innovation in our business with a planned introduction of integrated sizing technology for select B2B customers and schools with plans to roll it out more broadly. This tool, provided by Sizer, allows the purchaser to scan their body with their phone and get fitted with a 97% accuracy rate, driving both customer satisfaction and an expected reduction in returns and exchanges. This technology which takes into consideration personal privacy and information security, also has applications to our B2B business, and we're actively exploring ways to integrate it with the consumer experience. We're taking steps to drive efficiency across our B2B business. We're in the process of reorganizing and revamping the organizational structure of our visitors division to expand our reach and capture greater market share. We recently hired a new B2B business development leader with over 20 years of experience who is focused on building out a pipeline of mid-market and enterprise opportunities. We also restructured our portfolio management team from a regional focus to a business segment-oriented structure that will enable our team to hyper-focus on the unique needs of each customer group. We're working with our partners at Salesforce to enable a stronger data-driven sales process and also implementing marketing automation technology to improve customer communication, create better defined customer journeys from outreach and lead generation, and more effectively engage with existing and prospective customers. Moving to our third-party business, we saw a nice improvement approach we took to better tailor our assortment to each marketplace and lean into successful categories with a focus on quality of sale, improving gross margin, better inventory return, and freshness. The results were productive with Macy's, Target, and Amazon performing consistently well with women's underwear and swim driving demand across each of these marketplaces. With the holiday season underway, Land's End has launched an exclusive women's swim collection at Target. In select warm weather doors beginning November 26, we'll roll out 200 total doors by early January 2024. The new swim collection includes nearly 70 pieces of our iconic swimwear in new fabrics, prints, and colors, including accessories. We're very excited to be partnering with Target to make our leading product category available to Target customers. Bernie will now discuss our third quarter performance as well as our fourth quarter outlook. Following that discussion, we'll share what we've seen so far in the holiday season before taking your questions. Thank you, Andrew. For the third quarter, total revenue performance came in slightly below our guidance range at $325 million. a decrease of 12.5% compared to last year, or 9% when adjusting for our Japan e-commerce business, which closed in 2022 and accounted for $10 million of revenue in the third quarter of last year, and excluding the $4 million difference in year-over-year revenue from Delta. As Andrew noted, we delivered adjusted EBITDA of $17 million, up 4% year-over-year. which exceeded the high end of our guidance range. Fundamental to these results is our conscious decision to focus on profitability and balance sheet efficiency versus solely on revenue, which has improved our growth profit dollars and margins. The margin in the third quarter was 47%, an approximately 700 basis point improvement from the third quarter of 2022. The margin improvement was primarily driven by new products across the brand, strength in transitional outerwear and adjacent product categories, reduction in sales and clearance inventory, and improvements in supply chain costs. While we are pleased with our gross margin improvements, we are focused on driving additional supply chain cost savings through product cost reductions and improved seasonal inventory management. While our U.S. e-commerce business saw a sales decrease of 10% compared to the third quarter of 2022, we generated an increase in gross profit dollars of 7%, driven by our concerted effort to reduce promotions within key categories, especially our malware solutions, new products across the brand, and improved inventory management. Sales in our Europe e-commerce business in the quarter were down 8% year over year, reflecting continued macroeconomic challenges. But again, increased gross profit dollars by 18%, driven by promotional effectiveness and improved inventory management. Globally, e-commerce sales decreased 13% from last year, or 10% when adjusting for Japan. Sales from Land's End Outfitters were down 8% from the third quarter of 2022. Excluding the $4 million difference in year-over-year revenue from Delta, the Outfitters business was down 3%, primarily driven by high single-digit growth in both our national accounts and mid-sized customers, more than offset by school uniform due to timing shifts in back-to-school deliveries last year related to supply chain disruptions from the second quarter to the third quarter. Revenue for our third-party business was down 22% compared to the prior year, primarily driven by weaker performance at Kohl's, partially offset by strong performance at Macy's and Target. Our partnership with Macy's, which launched this year, is performing very well, driven by strong sales in women's swim and apparel. SG&A expenses increased $3 million compared to last year. As a percentage of sales, SG&A was 42%, which was an increase of 590 basis points compared to 2022, primarily due to approximately 400 basis points of deleverage from lower revenues and 145 basis points due to higher incentive-based personnel costs, partially offset by lower marketing and continued cost controls. We're continuing to look for ways to improve SG&A and we'll be taking action to drive savings as we continue to evolve our digitally native business. During the third quarter, we took $107 million impairment of goodwill due to the decline of our stock price and the resulting market capitalization, which led to a net loss for the quarter of $112 million, or $3.52 per share, compared to a net loss of $5 million, or 14 cents per share, in 2022. Excluding the non-cash goodwill impairment, our adjusted net loss was $4 million, or 11 cents per share. Moving to our balance sheet, inventories at the end of the third quarter were $422 million compared to $565 million a year ago. The 25% improvement in our inventory position was a result of the actions the company has taken to improve inventory efficiency by reducing inventory purchases and capitalizing on speech market initiatives. The year-to-date net cash provided by operations was $163 million greater than last year, primarily due to this improved inventory productivity. In terms of our debt, at the end of the third quarter, our term loan balance was $234 million, and our $275 million ABL had 110 million of borrowings outstanding, which was $50 million lower than the third quarter last year. Despite lower borrowing's outstanding on the ABL, we continue to have elevated interest expense driven by higher market rates. We're continuing to explore opportunities to refinance our debt and are committed to doing so subject to favorable market conditions. In the third quarter, we purchased $3 million worth of shares under the company's previously announced $50 million share repurchase authorization, bringing the balance of the remaining authorization to $32 million as of the end of the quarter. Now moving to guidance, building on our prior discussion, we are continuing to prioritize high-quality sales and improved cash flows, which we expect to drive continued growth, profit, and margin expansion during the holiday season. In the fourth quarter, we expect net revenue to be between $490 million and $520 million. We expect adjusted net income of $8 million to $11 million and adjusted diluted earnings per share to be between $0.25 and $0.34. We expect adjusted EBITDA to be in the range of $217.5 million to $31.5 million, which takes into account SG&A impacts related to normalized compensation accruals. Based on our third quarter results, and fourth quarter guidance, we're updating our full year guidance and now expect net revenue of $1.45 billion to $1.48 billion. We expect adjusted net income to be in the range of a net loss of $5 million to $2 million. An adjusted diluted loss per share of 16 cents to 7 cents. We expect adjusted EBITDA to be in a range of $80 million to $84 million. Our guidance for the full year incorporates approximately $35 million in capital expenditures. As we have discussed, our improved inventory management will enable us to maintain inventory at normalized levels and bolster our work to further expand gross margin moving forward. With that, I will turn the call back over to Andrew. Thank you, Courtney. Before we wrap up, I'd like to briefly touch on our holiday sales trends. Like other retailers, we introduced Black Friday promotions earlier this year and began to see traffic ramp up as we progressed through November. holiday season, we are better engaging with our customers through our improved brand focus to provide higher quality sales, further supporting our enhanced inventory position as we approach the end of our fiscal year. Like other retailers, holiday promotions are higher from across the balance of the year. However, we continue to scale those promotions back versus prior holiday periods and remain committed to our strategy of driving increased gross margin in both dollars and rates. We will remain competitive with our pricing and be smart about how we target the different segments of our customer file to drive profitable demand throughout the holiday season. However, we remain cautious given the weeks ahead and the additional weekends between Black Friday and Christmas, which could push some business later and beyond our shipping cut-offs. As I mentioned earlier, we're competitive. a better understanding of our customers' shopping behavior, and faster moving inventory. Our customer-centric strategy is working, and I am pleased with the progress our team has made. As we continue to play to our strengths and improve operational efficiencies across the business, we're well positioned to finish strong through the year. That concludes our prepared remarks. We look forward to your questions.

At this time, we will open the floor for questions. If you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself at any time by pressing star 2. Again, that's star 1 to ask a question. We'll take our first question from Dana Telsey with Telsey Advisory Group. Please go ahead.

Hi. Good morning, everyone, and nice to see the progress on the profitability. The continuation of the lower inventories, I think, down 30% in the second quarter, down 25% now in the third quarter. Where do you see what the normalized rate of inventory levels should be? How are you planning that going forward? And then it's nice to see scaling back on the promotions that you're seeing, especially post the Black Friday time period. What are you seeing in terms of categories, outerwear? How are you planning? How are AURs? And then on the margin focus, what are you seeing in terms of under the hood on the margins, whether it's freight or whether it's AUC? What is the opportunity for the gross margin going forward? Thank you.

Hey, Dana. How's it going?

Good. How are you?

I'm good. Leading into the question, it's like we continue to see opportunity with inventory and pulling that back. We're trying to work the business more to a turn and see an opportunity to move the business between three and four turns. I mean, obviously, it gets harder as the turns increase. um where you're looking but it's a function of the speed that we're putting into our supply chain so you know we've talked a lot and this is going to be related to your aur comment your aur comments as well um we talked a lot about getting speed in and having more freshness more consistently in the business month after month after month versus that more traditional model of buying twice a year and that in of itself will give us more opportunity to increase returns going into next year And it will give us opportunity to show off and maintain the average in the retail. I'm going to talk to scaling back promotions. We scale back promotions even through Black Friday and Cyber Monday. I just want to emphasize that point in the script. We did come into it early. One of the things I've noticed about Land's End, and it's probably more to do with our cataloging history than anything else. We really kick off holiday in October. October tends to be a bigger month for us than August, and that's different than I've experienced in my career. And it's really, it's the start of the holiday shopping period. And holiday for us is really all about a successful October and November and then that last couple of weeks after Cyber Monday. So what you saw is that it really begins to market Black Friday in October consistent with our starting holiday. And that's what's new in there. In terms of the overall level of promotion, they were falling and they were falling consistently. And, you know, instead of seeing a lot of box-off offers that we've traditionally done, you would see us going up to 70%. I don't like being in an up to 70% world. I thought we were up to 40% off, but, you know, that's where we started as we sort of pulled the needle out in terms of where the promos are at. We saw that the customer came with us on the journey, particularly when we offered newness in there. We noted in the call in Q3, and it's been something we've seen all year, that the women's categories were all posting double-digit contracts. comps and close margin comps. And it would be fair to say that we've seen that continue. We've seen very successful acceptance of our product in those categories. Answering your question about categories, you know, I was sort of worried. But not worried. We made some changes in how we approached outerwear. Coming through last year, it was clear we were taking really our best stuff, our down parkas. We were discounting them as gift screens for Black Friday or Cyber Monday. And it was just too much discount to be given. And I felt we needed to take a different direction on that. In addition to that, it's not a political statement. Winters are getting warmer. And they happen later. So we had changed the weighting of the fabrics and the product that we brought in really for the early part of holiday. So it was less about that heavy outerwear. I will tell you, you certainly need it in the Midwest today as we sit here in the snow. But, you know, for the first five, six weeks, we really got behind other programs. We brought in a non-down, I call it a gilet, but it's a vest. program that's been very successful. It gave us a price point at a margin and it actually fit with where the climate was at. In addition to that, we brought in a new middleweight jacket. We've introduced a new program, Wonderweight. And one is downfield, but it's pack and pull down. And it's been a very successful sort of entry price point into heavier outerwear for us. So very pleased with how outerwear has performed. Pleased with how women's has performed. And actually, you know, we showed that we brought categories alongside that along for the ride. We saw good performance in men's and actually even products like home. Last year, and I remember this very clearly, we were discounting home very heavily. We haven't needed to do that. And actually on the one offer we gave, which was a $10 soupy Mattel, I mean, we just sold a lot of towels that day. There was a pent-up demand waiting for it. Last part of it, as we think about... the AUC at the margin conversation. We've got a lot of our gains in Q3 from actually lower discount rates. The real benefit of the average unit cost work that we did is still to come to us. If you remember, we made the arrangement and made the changes in our sourcing organization to move to lean fund. That was a Q2 event. And we really, even with the speed of our supply chain, we won't feel the full effect of that given inventory turns. until middle to back half of next year. So we still think that the best is to come in terms of continued margin upside from AUC. And the discounting, we started with women's. And it's like women's is where we've seen the most progress. As we expand that thinking now to other categories, we see that we will be able to continue that momentum as well. And it's the story we stuck to, Dana. We've stayed with it pretty consistently since. And this is a really great margin story that we have in Land's End at the moment and really a re-elevation of our product. And then, Dana, I'll just add for the inventories for perspective that you can use pre-pandemic levels as a guide to what our future levels will be and the timing of the inventory levels. And then you also receive benefit, as you heard on the announcement, that we also announced another license with kids. Our licensing arrangements will also have a benefit to reducing our inventories.

Got it. Thank you very much.

Thank you, Dana. Thank you. Our next question will come from Alex Furman with Craig Hallam Capital Group. Please go ahead.

Hey, guys. Thanks very much for taking my question. So clearly the focus on prioritizing profitability over revenue is producing some nice results here. I'm curious how much more room you think there is to pull back on unprofitable sales. Could there be another leg down of revenue as you identify more promotions or clearance activity that you want to pull back on? And then looking out over the next couple of years, you know, as you add more high margin revenue, presumably from growing the licensing business on, you know, can you continue to grow EBITDA without necessarily a big increase in revenue? Can this be $100 million EBITDA business on the current $1.5 billion revenue base as you start to grow some of those other areas like licensing?

Yeah, Alex, I'm not sure you've been sitting in some of our strategy meetings, but yeah, I think what really is important for us when we talk about licensing, that's one of the strategies that will reduce our clearance sales. When we get out of the products we're not as focused on that we don't have authority on, we'll be able to drive, without a top line, we'll be able to drive a better profit, a better net income number from a licensing arrangement than selling a lot of product at clearance that we tended to do in the past. So I think you definitely hit on that we expect to be able to drive 100 million in a $1.5 billion revenue company. In saying that, Alex, as we look further out, there's a point where we have the customer reeducated. That's what's happening right now. I mean, we have... customer decile, and our lowest decile is the one that we have probably hemorrhaged the most customers out of. They lost the brand. They're committed to the brand. You know that if customers come, then they stay with Land's End for 17, 18, 19 years. what they're not what what they're struggling most to respond to is that they traditionally use it a little bit like a such auction which is like you know they put products in their basket and they wait until they get the price they want and then they'll buy it we're moving towards customers who will buy the product now or it won't be there it's you know we're not going to discount our product we're going to stand on our brand we're going to stand on what we believe are the key attributes of the land and solution company that we have built and we're going to drive that. And I think what you will see, and we're seeing it ourselves in our internal discussions is, you know, we're shifting from a sort of relatively simple, decile-based model that looks at all customers the same, and we're moving towards a more thoughtful, psychographic model that looks at customers in cohorts, and the two cohorts that we've identified are resolvers and evolvers, and it would be fair to say that we've used the fourth quarter to start repositioning some of the thinking around them and how we go to market to them, how we sell to them uh more uniquely versus more generically and how we attract them um part of what we've been doing in q4 the part of what we use black friday and cyber monday for was to go out and and find new customers new customers that we like which is why and i know it's just some throwaway comments in the script but it's why we talk so much about social media we really like the customer we're finding from that they fit our revolver platform and it's like they are much less inclined to buy at a discount. So we're doing the hard work right now. The commitment you're getting from me, the commitment you're getting from this management team is that we're going to deliver gross margin comps in dollars. This isn't just about getting ranked and declaring victory. We understand We're here to drive either that and ultimately earnings per share, and we are very focused on that. So we're constantly evaluating that and threading that needle every day, be that Black Friday, Cyber Monday, or just like casual Tuesday in January.

Okay, that's really helpful. Thank you. I appreciate your insights, and congratulations again on the strong third quarter results.

Thank you. Thank you, Alex.

Thank you. This does conclude today's Land's End third quarter earnings call. You may all disconnect at this time and have a wonderful day.