Lands' End, Inc.

Good morning and welcome to the Lands' End Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's prepared remarks, there will be a question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. You may remove yourself at any time 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 call over to Tom Althaus, Senior Director, Financial Planning and Analysis. Please go ahead. Good morning, and thank you for joining the Land's End Earnings Call for a discussion of our second quarter 2024 results, which we released this morning and can be found on our website, landsend.com. I'm Tom Althaus, Land's End Senior Director of Financial Planning and Analysis, And I'm pleased to join you today with Andrew McLean, our Chief Executive Officer, and Bernie McCracken, our Chief Financial 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 risk 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 will 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 the earnings release issued earlier today, a copy of which is posted in the investor relations section of our website at lanzen.com. With that, I will turn the call over to Andrew.

Thank you, Tom. Good morning, and thank you for joining us today. We delivered robust second quarter 2024 results, reflecting the continued execution of our solutions-based strategy. Our focus on innovation across our business is involving the Land's End brand and assortment, attracting new customers, and further improving our supply chain and inventory position. These achievements are driving increased gross margin and gross profit dollars. Let me provide a few highlights. We delivered net revenue of $317 million at the top end of our guidance range, adjusted EBITDA of $17 million, a year-over-year increase of 8% also at the high end of our guidance range, and GMV up mid-single-digit percentage growth. Innovation is the keystone of our strategy. By bringing fresh thinking and new approaches across our business, we're driving more profitable sales. As a result, we are confident that we position Land's End well for a strong back half of the year and beyond. Our continued efforts to prioritize newness and speed to market in our assortment resulted in a 21% year-over-year improvement in our inventory position and a 15% increase in our churn rate. We remain nimble in managing our inventory as we take a deliberate approach to our assortment, staying on top of trends and introducing fresh styles, fabrics, and colors that fit the moment, are consistent with our brand, and, most importantly, that customers love. We also made strides in our efforts to redefine and elevate our brand across our digital channels in the second quarter. The progress we've made is showcasing Land's End as a quality brand that appeals to a wide range of consumers. Year-to-date, we've seen mid-single-digit growth in our new-to-file customers, and importantly, these new-to-file customers are on average 10 years younger. All told, our marketing investments are reinvigorating both our brand, driving more traffic to our own channels, translating to greater new customer conversion, and more full-price sales. we're generating today, we are laying the groundwork for sustained long-term growth tomorrow. From a product perspective, responded throughout the quarter, resulting in gross margin and profit meaningfully higher than the same period last year. Our speed to market initiatives to facilitate our where now approach to our assortment. Customers responded incredibly well to newness driven by new products at the highest levels we've seen in five years. Newness in woven dresses and tops and denim performed especially well. Despite the warmer weather, the strength of our layering products showed through in the second quarter, with summer sweaters and this, in particular, seeing higher sales volume and demand. The standout category for the whole of spring-summer has been women's apparel. From our new denim silhouette, we have seen huge success. The drifter sweater has rapidly become one of our leading items and is now expanding. As we turn our attention to fall holiday, we are well positioned to transition our assortment towards our weatherproof outerwear, including the Wonderweight franchise and our Any Weather fleece, both of which are trending strongly thus far in the third quarter, capitalizing on trends On SWIM, we're pleased with our performance across our SWIM and vacation categories. Like I mentioned earlier, we products throughout the quarter, and we're proud to have filed another patent in our SWIM lineup during the quarter for next season. There's one for future. Innovation remains a continued theme across our entire business as we listen carefully to our customers, build products, and brings speed to market. That's exactly what this new patented technology in our swim business does. And we're thrilled to have for our customers. Turning to the performance of our various businesses, we are continuing to prepare to evolve the way we talk about our business to be more consistent with the evolution of our brand. Specifically, we plan to discuss our business in terms of B2C and B2B. beginning with our B2C activities. Our U.S. e-commerce business is our largest direct-to-consumer channel. The business delivered its sixth consecutive quarter of great margin performance with an increase of over 700 basis points due to our more targeted approach to promotions and refined marketing strategy with quality sales, new to file customer growth, and improved inventory management. We continue to maximize key events such as to drive demand. Combined with our targeted promotion and marketing strategies, these key events enable us to showcase our profit-centric assortment across owned and organic channels to drive more traffic and ultimately more higher margin sales. that our European business has come full circle with growth in revenue and profitability during the quarter. The team in Europe continues to innovate and customers well. Europe has proven to be a great test market for the rest of our business. Turning to third party, we in our strategy to focus on assortments tailored to individual marketplaces and work with partners that share our vision for customer-focused solutions. We're pleased to announce that we recently launched on Nordstrom's online marketplace, presenting a terrific opportunity to further elevate our brand. In partnership, we're broadening the availability and visibility of Land's End merchandise while reaching new customers who can find their way to Land's End. Now on to licensing, which provides asset-like recurring income streams while allowing us to concentrate on... Licensing continued to grow in the quarter, and we are pleased to announce that we have entered into a license to distribute Land's End apparel out to wholesale accounts. This will further the visibility and reach of our brand among a broader consumer base while creating a... ...stations of Land's End. Our clubs channel performed well in the second quarter. We remain bullish on clubs as a powerful part of... and strategy by providing access to an attractive customer who may be familiar with land's end or maybe meeting us for the first time while we and fulfillment fees on our p l the gmv associated with our licensed business allowed us to drive overall brand growth and turning now to our b2b outfitters business we made solid progress during the second quarter to reap around its core strengths that are hallmarks of our brand particularly high quality durable relevant personalized and customized backed by outstanding customer service our site catalogs and marketing were all relaunched the more contemporary feel to better purchasing managers more interested in product that fits the work and home life of a dynamic us employee base we are also opening a which we expect will enable our outfitter sales and merchandise teams to better attract and serve customers through our expertly crafted branded apparel solutions. Additionally, during this period, we made the decision to exit the low-profit and commoditized promotional products category, allowing us to focus on serving our customers from a point of strength. We've developed strong capabilities to serve customers in the financial services industry and are targeting growth in that sector, as companies increasingly recognize the economic and professional benefits of branded workforce apparel. For example, we have partnered with a major client, Wells Fargo, entering into a multi-year agreement to launch the career apparel program. Beginning this month, Land's End will outfit approximately 35,000 employees across over 4,000 branches. In the school channel, even with a later back to school season, we saw outstanding results in the second quarter that have continued into August with our first half revenue up low single digits and gross margin expanding by over 500 basis points. Our commitment last year to deliver great product on time earned us high marks with our PTAs, and we were able to add and service new schools this year with a strong pipeline for 2025. It's worth mentioning that our Wisconsin-based embroidery centers make us the largest and arguably most nimble domestic provider in this channel. Before handing it over to Bernie, I want to spend a moment elaborating on the fantastic progress that we've made to improve our inventory position and how the concept of speed is so critical to our strategy. It is worth noting that during the quarter, we achieved the lowest second quarter inventory levels this decade, coupled with the lowest discount rate and one of the fastest turning inventory levels since our public listing in 2014. Speed is a watchword for our teams. Over the last year, we have significantly increased speed across our supply chain, shifting production to the Western Hemisphere, lowering SKU counts, creating chase capabilities for new and existing products, and leaving inventory open well into each season as we deliver freshness to the customer every single month. We look forward to accelerating our speed to market initiatives, which create more opportunities for inventory reductions, drive margin, and ultimately let us better serve our customers. I'll now turn it over to Bernie to discuss our second quarter performance in more detail.

Thank you, Andrew. For the second quarter, total revenue performance came in at the high end of our guidance range at $317 million. a decrease of two percent compared to last year gmv increased mid-single digits for the second quarter of 2024 which was in line with our guidance as a reminder we believe gmv which accounts for the total order value of all merchandise sold to customers through b2c and b2b channels as well as the retail value of the merchandise sold through third-party channels is an important indicator of the performance of the comparable growth of our brand. As Andrew noted, we delivered adjusted EBITDA of $17 million in the second quarter, which came in at the high end of our guidance range and a year-over-year increase of 8%. These results reflect our continued efforts to prioritize profitability and balance sheet efficiency versus solely sales. We continue to improve profit margin across our business units, which has allowed us to reinvest in the business, especially in new customer acquisition. Gross profit increased by 9% compared to last year, driven by our sixth straight quarter of gross margin expansion. Gross margin in the second quarter was 48%, an approximately 470 basis point improvement from the second quarter of 2023. The margin improvement was driven by product solutions and newness across the assortment, lower promotional activity, reduction in sales of clearance inventory, and improved supply chain costs. Our U.S. e-commerce business saw a sales decrease of 4% compared to the second quarter of 2023, excluding the impact of transitioning kids and footwear products from a direct, to a license model, our U.S. e-commerce sales would have increased mid-single digits. We generated a 14% increase in gross profit dollars driven by continued efforts to prioritize higher quality sales. Our European e-commerce business increased gross profit dollars by 26% compared to the second quarter of 2023 with sales increasing 1% year over year. Sales from Land's End Outfitters were down 7% from the second quarter of 2023. We were pleased with the strong start to the back-to-school season as our school uniform revenue increased by mid-single digits compared to last year. Our business uniform channel decreased year-over-year primarily due to the timing changes with certain national accounts and some pricing resistance from smaller accounts as a result of macroeconomic challenges. We continue to work to offset these challenges through margin and branding initiatives. Our third-party business increased gross profit dollars by over 30% compared to the second quarter of 2023, with revenue increasing by over 23% year over year. The increase was primarily due to revenue generated from licensing and wholesale arrangements. Licensing and our expansion to Nordstrom's marketplace continue to help the business diversify and reduce risk to any one individual partner. As a percentage of sales, SG&A was 43%, which was an increase of approximately 440 basis points compared to 2023, primarily driven by reinvesting in the business through higher digital marketing spend focused on new customer acquisition, third-party professional services, and higher incentive-related personnel costs. For the second quarter, we had a net loss of $5.3 million, or 17 cents per share. We had an adjusted net loss of $0.7 million, or 2 cents per share, which exceeded our guidance range. Moving to our balance sheet, inventories at the end of the second quarter were $312 million compared to $396 million a year ago. The 21% improvement in our inventory position benefited from our supply chain team's ongoing efforts to drive efficiencies, paired with our deliberate strategy to increase terms of our assortment. In terms of our debt, at the end of the second quarter, our term loan balance was $254 million, and our AVL had $20 million of borrowings outstanding, which was $50 million lower than the second quarter last year. During the second quarter, we repurchased $4 million worth of shares under our $25 million share repurchase authorization announced in March, bringing the balance of the remaining authorization to $20 million as of the end of the quarter. Now moving to guidance. We are continuing to prioritize high-quality sales and improved cash flows, which we expect to drive continued gross profit and margin expansion during the fall and holiday selling season. In the third quarter, we expect net revenue to be between $300 million and $340 million, with gross merchandise value, or GMV, expected to be mid to high single-digit growth. We expect an adjusted net income of $0 to $3 million and adjusted diluted earnings per share to be between $0 and $0.10. We expect adjusted EBITDA to be in the range of $19 million to $23 million. For the full year, we have raised our profit guidance. We now expect net revenue to be between $1.35 to $1.43 billion, while GMV is expected to be mid to high single-digit growth. We now expect adjusted net income of $9 million to $15 million and adjusted diluted earnings per share of 29 cents to 48 cents. We now expect our adjusted EBITDA to be in the range of $90 million to $98 million. Our guidance for the full year incorporates approximately $35 million in capital expenditures. As we have discussed, we expect our improved inventory management to 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.