Lands' End Q3 2024 Earnings Call Transcript

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Provided by Quartr
December 5, 2023

There are 4 speakers on the call.

Operator

Good day, everyone, and welcome to the Lands' 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. 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.

Speaker 1

Good morning, and thank you for joining the Lands' End Earnings Call for a discussion of our Q3 2023 results, which we released this morning and can be found on our website landsend.com. I'm Bernie McCracken, Lands' End's 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.

Speaker 1

Factors that could contribute to such This includes, but are not limited to, those items noted and included in the company's SEC filings, including our annual report on Form 10 ks 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.

Speaker 1

A reconciliation of non GAAP financial measures Investor Relations section of our website at landden.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.

Speaker 1

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 Axovis. 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 continue to prioritize gross margin improvement to provide 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 $17,000,000 above the high end of our guidance range. As I've previously noted, we're executing a similar strategy to drive higher quality sales with a larger portion of our sales occurring with low or lower levels of promotions rather than simply prioritizing moving units so we can enhance gross margin and deliver increased cash flows.

Speaker 1

Paired with our work to further improve our inventory position, it's clear this strategy is working. Q3 marked our 3rd successive quarter of significant inventory and margin improvement with a 25% reduction and 700 basis points of improvement respectively. We are confident that we have found a winning formula increasing churn of merchandise flexibility that our lower inventory levels provide to continuously refresh our assortment with new styles, colors and fabrics more frequently throughout the year. Our customers are responding exceptionally well to this approach. As we introduced last quarter, we transitioned from a demographic focus to a behavioral focus when it comes to our customers.

Speaker 1

We're 0ing in on 2 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. There are solutions for instant dressers that prefer classic styles and value quality over trends and shop primarily on necessity 2 to 3 times a year. Evolve groups are our 2nd largest cohort and an opportunity for growth. They are discovering and refining their style in an ongoing journey, Knowing what fits their current mode, they generally have more buying potential and spend more than resolvers.

Speaker 1

As part of our identity as a solutions company, we're changing the way we think about our assortment and marketing strategy and allowing them more closely To have our key cohorts shut, we're creating more compelling customer journeys that provide a more holistic look and feel for Lands' 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 Web As a digitally native company, we're using this new approach alongside our investments to drive more robust engagement with our key cohorts. We are continuing to improve our site experience with more targeted marketing to present our customers with relevant and engaging content to drive quality sales. As a result, we achieved increased traffic and engagement from social media And with repeat exposure, we expect our social media prospects to continue growing nicely.

Speaker 1

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 We recently welcomed a new technology leader who will spearhead these efforts and work with me So we'll map 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.

Speaker 1

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 1 piece category with the creation of a product And centered around our classic togglers solution and the enhancement from control based technologies, including a shaping technology We have protected via our patent application. SWIM remains an incredibly innovative space for Van Zand to grow and develop. Building on the theme we've discussed before, our customers are responding positively to freshness across categories.

Speaker 1

This is contributing to strong performance in our layering products and traditional outerwear solutions, which gives us confidence that we will 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, delivered a second consecutive quarter of great margin performance due to our more targeted approach to promotions and improved inventory 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 Cisco at the level we've had in recent years. We're also continuing our efforts to maximize Key events consolidate to drive demand with our customers responding well.

Speaker 1

This more targeted promotional strategy This complements our broader strategy to minimize markdowns and show conviction in our solutions based categories has led to improved margins. Turning to our international business. As with our U. S. Business, our strong performance is driven by our authorities in transitional outerwear solutions.

Speaker 1

Thanks. To prioritizing newness and improved inventory management, we 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.

Speaker 1

During the Q3, 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 to Costco. And as I mentioned on our last call for footwear, We expect to gain some income from 3 3 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 efforts to enhance performance and ensure this critical business achieves the results we're confident it can.

Speaker 1

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 Q1 of 2024, outfitting 3,500 managers and frontline employees in the Power Log division. 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. We're driving innovation in our business with a planned introduction of integrated sizing technology for select B2B customers and schools We have plans to roll it out more broadly.

Speaker 1

This tool provided by Sysir allows the purchaser to scan their bodies with their phone And get this is 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 B2C 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 business 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 Pipeline of mid market and enterprise opportunities.

Speaker 1

We also restructured our portfolio management team from a regional focus So business segment oriented structure that will enable our team to hyper focus on 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 Moving to our 3rd party business, we saw a nice improvement in the quality of the demand And the deliberate approach we took to better tailor our assortment to each marketplace and lead into successful categories with a focus on quality of sales, Improving gross margin, better inventory turn and freshness. The results were picked up with Macy's, Target and Amazon performing consistently well with women's outerwear and swim driving demand across each of these marketplaces. With the holiday season underway, The Lands' End has launched its exclusive women's swim collection at Target in Select warm weather doors beginning November 26th, we will 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.

Speaker 1

We're very excited to be partnering with Target to make our leading product category available to Target customers. Bernie will now discuss our 3rd quarter performance as well as our 4th quarter outlook. Following that discussion, We will share what we've seen so far in the holiday season before taking your questions. Thank you, Andrew. For the Q3, total revenue performance came in slightly below our guidance range at $325,000,000 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 $10,000,000 of revenue in the Q3 of last year.

Speaker 1

And excluding the $4,000,000 difference in year over year revenue from Delta, as Andrew noted, we delivered adjusted EBITDA of $17,000,000 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 gross profit dollars and margins. Gross margin in the Q3 was 47%, an approximately 700 basis point improvement from the Q3 of 2022. Margin improvement was primarily driven by new products across the brand. Strength in transitional outerwear and adjacent product categories, Reduction in sales of clearance inventory and improvements in supply chain costs.

Speaker 1

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 Q3 of 2022, We generated an increase in gross profit dollars of 7%, driven by our concerted effort to reduce promotions within seed categories, especially our outerwear 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.

Speaker 1

Globally, e commerce sales decreased 13% from last year or 10% when adjusting for Japan. Sales from Lands' End Outfitters were down 8% from the Q3 of 2022. Excluding the $4,000,000 difference in year over year revenue Delta, the outfit business was down 3%, primarily driven by high single digit growth in both our national accounts And midsize 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 Q2 to the Q3. Revenue for our 3rd 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.

Speaker 1

SG and A expenses increased $3,000,000 compared to last year. As a percentage of sales, SG and A was 42%, which was an increase of 5.90 basis points compared to 2022, primarily due to approximately 400 basis deleverage from lower revenues at 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 G and A and we'll be taking action to drive savings as we continue to evolve our digitally native business. During the Q3, we took 100 and $7,000,000 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 $112,000,000 or $3.52 per share compared to a net loss of 5,000,000 dollars or $0.14 per share in 2022. Excluding the non cash goodwill impairment, our adjusted net loss was $4,000,000 or $0.11 per share.

Speaker 1

Moving to our balance sheet, inventories at the end of the 3rd quarter were $422,000,000 compared to 5 and $65,000,000 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 those feed to market initiatives, Year to date net cash provided by operations was $163,000,000 greater than last year, primarily due to this improved inventory productivity. In terms of our debt, at the end of the Q3, our term loan balance was $234,000,000 and our $275,000,000 ABL had $110,000,000 of borrowings Outstanding, which was $50,000,000 lower than the Q3 last year. Despite lower borrowings outstanding on the ABL, We continue to have elevated interest expense driven by higher market rates. We're continuing to explore opportunities to finance our debt and are committed to doing so subject to favorable market conditions.

Speaker 1

During the Q3, we repurchased $3,000,000 worth of shares under the company's previously announced $50,000,000 share repurchase authorization, bringing the balance of the remaining authorization to $32,000,000 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 which we expect to drive continued gross profit and margin expansion during the holiday season. In the 4th quarter, we expect net revenue to be between $490,000,000 $520,000,000 We expect adjusted net income of $8,000,000 to $11,000,000 and adjusted diluted earnings per share to be between $0.25 We expect adjusted EBITDA to be in the range of $217,500,000 to $31,500,000 which takes into account SG and A impacts related to normalized compensation, of course. Based on our 3rd quarter results And 4th quarter guidance, we're updating our full year guidance and now expect net revenue of $1,450,000,000 To $1,480,000,000 we expect adjusted net income to be in the range of a net loss of $5,000,000 to $2,000,000 and adjusted diluted loss per share of $0.16 to 0 point 0 $7 We expect adjusted EBITDA to be in a range of $80,000,000 to $84,000,000 Our guidance for the full year incorporates Approximately $35,000,000 in capital expenditures.

Speaker 1

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. And with that, I will turn the call back over to Andrew. Thank you, Jeremy. 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 progress through November With significantly stronger traffic and increased gross profit dollars across our channels on Black Friday and over the weekend heading into Cyber Week.

Speaker 1

This holiday season, we are better engaging with our customers through our improved brand focus to drive 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 than across 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 weekend between Black Friday and Christmas, which could push some business later and beyond our shipping cutoffs. As I mentioned earlier, we're confident that we have found a winning formula to achieve more productive sales by focusing on a Our customer centric strategy is working and I am pleased With the progress our team has made, as we continue to play to our strength and improve operational efficiencies across the business, we're well positioned to finish strong through the year.

Speaker 1

That concludes our prepared remarks. We look forward to your questions. At this time, we will open the floor for questions.

Operator

We'll take our first question from Dana Telsey with Telsey Advisory Group, please go ahead.

Speaker 2

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?

Speaker 2

And then on 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, where what is the opportunity for the gross margin going forward? Thank you.

Speaker 1

Hey, Dana. How's it going?

Speaker 2

Good. How are you?

Speaker 1

Doing good. Leading into the question, in fact, we continue to see opportunity with inventory and pulling that back, We're going to work the business more to a turn and see an opportunity to move in the business between 3 4 turns. I mean, obviously, it gets harder as the turns increase Where you're looking, but it's a function of the speed that we're putting into our supply chain. So we've talked a lot and this is going to be related to your AUR comments Well, we talked a lot about getting speed in and having more freshness, more consistently in the business month after month after month That's about more traditional model of not buying twice a year and that in and of itself will give us more opportunity to increase returns going into next year And it will give us opportunity to show up and maintain the average of the retail. I'm going to talk to scaling back promotions.

Speaker 1

We scaled back promotions even through Black Friday and Cyber Monday. I just want to emphasize that point in the script. We We've come into it early. One of the things I've noticed about Lands' End is that it's probably more to do with our cataloging history than anything else. We really kick off holiday in October.

Speaker 1

October tends to be a bigger month for us than August, but 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 November and then that last couple of weeks after Cyber Monday. So what you saw is that really begin 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 it does take a lot of box office that we've traditionally done.

Speaker 1

You would see it going Up to 70%, they don't want being in an up to 70% world. I thought that we were up to 40% loss, but 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 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 comps and post margin comps. And I would it would be fair to say that we've seen that continue. We've seen very Accessible acceptance of our product in those categories.

Speaker 1

Answering your question about categories, I'm sorry, I'm worried, but not worried. We took some we made some changes in how we approached the outerwear. Coming through last year, it was clear we were taking really our best stop, our diamond carcass. We were discounting them as It's a gift 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.

Speaker 1

In addition to that, not a political statement, winters are getting warmer and they happen later. So we had changed the weighting The fabrics and the products 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 for the 1st of 5, 6 weeks, we really got behind other programs. We brought in a None done, it's not a issue, but it's the best program that's been very successful.

Speaker 1

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 once it's done, it feels that it's packed and cooled down and it's been a very successful So entry price point into heavier outerwear for us. So very pleased with how outerwear has performed, pleased with how women's has performed.

Speaker 1

And actually, 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 sold a lot of towels that day. There was a pent up demand waiting for it.

Speaker 1

Last part of it, as we think about the AUC and the margin conversations, we've got A lot of our gains in Q3 from actually lower discount rates. The real benefit at the average and the 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 lead and 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. And so we don't have to back off of next 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.

Speaker 1

That is like women's is where we've seen the most progress. As we expand that thinking there to other categories, we see that we will be able to continue that momentum as well. And the story was up today, and we stayed with it pretty consistently since I took over. I'm absolutely committed to it. I believe we'll get this done.

Speaker 1

And this is a really great margin story that we have in Lands' End at the moment and really a re elevation of our product. And then Dana, I'll just add to 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 have saw currently announcement that we also announced another license with kids, our licensing arrangements will also have a benefit to reducing our

Speaker 2

Got it. Thank you very much.

Speaker 1

Thank you, David.

Operator

Our next question will come from Alex Fuhrman with Craig Hallum Capital Group.

Speaker 3

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, as you add more high margin Revenue presumably from growing the licensing business, can you continue to grow EBITDA without necessarily a big increase in revenue? Can this The $100,000,000 EBITDA business on the current $1,500,000,000 revenue base as you start to grow some of those other areas like licensing?

Speaker 1

Yes, Alex, I'm not sure you've been sitting in some of our strategy meetings. But yes, 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 To be able to drive $100,000,000 in a $1,500,000,000 revenue company. In saying that, Alex, as we look further out, There is a point where we have the customer reeducated.

Speaker 1

That's what's happening right now. I mean, we have That's our customer decile and our lowest decile is the one that we have probably hemorrhaged the most customers. They love the brand. They are committed to the brand. You know, customers come and they stay with Lands' End for 17, 18, 19 years.

Speaker 1

What they're not what they're struggling most to respond to is that they traditionally use it a little bit like a Which is like they put a product 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. We're not going to discount our product. We're going to And on our brand, we're going to stand on what we believe are the key attributes of the land to end 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 we're shifting from a sort of Practically simple decile based model that looks at all customers the same and we're moving towards a more thoughtful It's like a graphic model that looks at customers in cohorts and the 2 cohorts that we've identified are resolvers and evolvers.

Speaker 1

And It would be fair to say that we've used the Q4 to start repositioning some of the thinking around them and how we go to market to them, how we sell to them More uniquely versus more generically and how we attract them, part of what we've been doing in Q4 Part of what we used Black Friday and Cyber Monday for was to go out 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 nice. They are much less inclined to buy at a discount. So we're doing the hard work right now.

Speaker 1

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 This isn't just about getting right and declaring victory. We understand that we're here to drive EBITDA and ultimately earnings And it's like we are fairly focused on that. So we're constantly evaluating that and spreading that needle every day, Be that Black Friday, Cyber Monday or just like casual Tuesday in January.

Speaker 3

Okay, that's really helpful. Thank you. I appreciate your insights and

Operator

Thank you. This does conclude today's Lands' End 3rd quarter earnings call. You may all disconnect at this time and have a wonderful day.

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