Lands' End, Inc. (LE) Q1 2023 Earnings Call Transcript

Good day, everyone, and welcome to Lands' End's First Quarter Earnings Call. At this time, all participants are in a listen-only mode. It is now my pleasure to turn the conference over to Bernie McCracken, Interim Chief Financial Officer.

Good morning, and thank you for joining the Lands' End earnings call for a discussion of our first quarter 2023 results, which we released this morning and can be found on our website, landsend.com. I'm Bernie McCracken, Interim Chief Financial Officer, and I'm pleased to join you today with Andrew McLean, our Chief Executive Officer. After the prepared remarks, we will conduct a question-and-answer session. Please also note that the information we're about to discuss includes forward-looking statements. Such statements involve risks and uncertainties. The company's actual results could differ materially from those discussed on this call. Factors that could contribute to such differences include, but are not limited to, those items noted and included in the company's SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking information that is provided by the company on this call represents the company's outlook as of today, and we do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company's outlook to change. During this call, we'll be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relations section of our website at landsend.com. With that, I will turn the call over to Andrew.

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

Thank you, Andrew. For the first quarter, as Andrew mentioned, total revenue performance was at the high end of our guidance range at $310 million, an increase of 2% compared to last year. Our U.S. e-commerce business, which represents our largest go-to-market segment, saw a sales increase of 2% from the first quarter of 2022, driven by targeted promotions within swim and adjacent product categories. Our Europe e-commerce business in the quarter was down 29%, reflecting the continued lower levels of consumer demand in Europe, as Andrew noted. Globally, e-commerce sales decreased 7% from 2022 or 4% when adjusting for Japan, which closed last year and accounted for $8.5 million of revenue in the first quarter of 2022. Results from our Lands' End Outfitters were strong year-over-year, with revenue up 37% over the first quarter of 2023, which was lifted by the inventory sales to Delta at the anticipated conclusion of their five-year contract in April. Excluding the $18 million difference in year-over-year revenue from Delta, the Lands' End Outfitters business was up 4%. We continue to be pleased with revenue for our third-party business, which increased 6% as compared to the first quarter of 2022, driven by growth in our partners’ online marketplaces. As noted, swim was a winning category for us, and that included selling swim inventory through these important partners. We launched our Macy's partnership in the quarter and expected it to contribute to the future strength of our third-party business. Moving to our retail stores, we delivered revenue of $10 million, with U.S. same-store sales increasing approximately 9.5% from the first quarter of 2022. Gross margin in the first quarter increased to 45%, approximately a 210-basis point improvement from 2022. The margin improvement was driven by leveraging our strength in owning the vacation and travel categories across our channels, as well as improvements in supply chain costs. As a percentage of sales, SG&A was 38%, approximately flat to 2022, driven by lower digital marketing spend offset by higher employee-related costs. Our performance led to a net loss for the quarter of $1.7 million or $0.05 per share compared to a net loss of $2.4 million or $0.07 per share in 2022. In addition to these GAAP measures, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA increased by 41% to $19.5 million, which exceeded the higher end of our expectations. Looking at the balance sheet, inventories at the end of the quarter were $376 million compared to $437 million a year ago. The 14% decrease in inventory was a result of the actions we took to leverage normalized supply chain and transit times to receive spring and summer inventory closer to the selling season and late receipts last year due to the supply chain challenges. Accordingly, net cash used in operations was $100 million less than last year due to the improved inventory flow. Regarding our debt, at the end of the first quarter, our term loan balance was $241 million, and our $275 million ABL had $100 million of borrowings outstanding, which was $25 million lower than last year. As part of our efforts to enhance shareholder value creation, we are continuing to explore opportunities to refinance our debt and are committed to doing so subject to market conditions. During the first quarter, we’ve repurchased $3.8 million worth of shares under the company's previously announced $50 million share repurchase authorization, bringing the balance of the remaining authorization to $38 million as of the end of the quarter. Turning to the second quarter, we expect net revenue to be between $320 million and $335 million. We expect a net loss of $4.5 million to $2 million and a diluted loss per share to be between $0.14 and $0.06. We expect adjusted EBITDA to be in the range of $15 million to $18 million. Based on our strong first quarter results, we are updating our full-year guidance and now expect net revenue of $1.56 billion to $1.62 billion. We expect net income to be in the range of a net loss of $4.5 million to net income of $2.5 million and diluted loss per share of $0.13 to earnings per share of $0.08. We expect adjusted EBITDA to be in the range of $75 million to $84 million. Our guidance for the full year incorporates approximately $35 million in capital expenditures. With that, I will turn the call back over to Andrew.

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

We'll take our first question from Dana Telsey with Telsey Advisory Group. Dana Telsey, your line is open. Please ask your question.

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

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

Thanks, Andrew. Yes. The transportation for our inbound inventory has stabilized, and we've made great use of this improvement. Our team has worked diligently to align inventory flows with our selling periods. As a result, we expect to maintain inventory levels down in the mid-double digits, around 15%, for the remainder of the year across the quarters. Regarding promotions, the market remains highly promotional. We’ve noticed that focusing on new products has been a strength for us. This will be our strategy to enhance our higher margin business, while we recognize that some products will need to be discounted to clear inventory, following industry trends. Overall, we are confident in our inventory levels and anticipate they will remain normalized for the rest of the year.

We are committed to driving a turnaround and maintaining freshness at a much higher level. Traditionally, our focus has been on cataloging, where we would bring in a large amount of inventory at the start of the season and allow it to deplete over time, which often leads to some items becoming stale toward the end of the season. Instead, we are now progressively bringing in inventory in smaller batches and aligning it more closely with our revenue. This approach is advantageous for cash flow, freshness, and markdowns. Moving forward, you will see our business operate in this manner, which will positively impact our margins and be evident in the ways we manage inventory in relation to our revenue profile.

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

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

One of the opportunities, Dana, as we speed our turn, it looks like we're sitting on less inventory program from last year at a higher cost. We see that as a tailwind that we can take forward for some considerable period of time.

Thank you.

And we'll take our next question from Alex Fuhrman with Craig-Hallum Capital Group.

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

Overall, it's been pretty steady. However, as you can imagine, things can be quite choppy. Each day varies, and we're focusing more on how to reach our customers across various channels including Macy's, Target, Amazon, and landsend.com, determining the best way to position ourselves for them. I believe we are improving as a company in addressing our customers through these channels. For instance, we're attracting a younger audience with our swim business through Instagram, where we've made our site shoppable, turning it into a viable spot for customer acquisition. We've noticed about a 10% increase in Instagram followers, which is a significant change and easy to track. We're being more intentional about the strategies we implement across our channels, treating them as a unified digital enterprise instead of separate parts. By rethinking our approach to Amazon, we’re connecting various elements and gaining leverage throughout the business. You should see more of that coming through, and along with what we've discussed with Dana, it provides us with room to maneuver as we move through the rest of the year.

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

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

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

Thank you, appreciated.

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