Lands' End, Inc. Q2 FY2024 Earnings Call

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 speakers' prepared remarks, there will be a 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 call over to Tom Altholz, Senior Director, Financial Planning and Analysis. Please go ahead.

Good morning and thank you for joining the Lands' 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 Altholz, Lands' End Senior Director of Financial Planning and Analysis, and I'm pleased to join you today with Andrew McLean, our Chief Executive Officer, and Bernard 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 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 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 landsend.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 evolving the Lands' 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 Lands' 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 Lands' 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. Since we're generating today, we are laying the groundwork for sustained long-term growth tomorrow. From a product perspective, throughout the quarter, we achieved gross margin and profit meaningfully higher than the same period last year. Our speed-to-market initiatives facilitate our 'wear now' approach to our assortment. Customers responded incredibly well to newness driven by new product at the highest levels we've seen in five years. Newness in woven dresses and tops and denim performed strongly despite the warmer weather. The strength of our layering products showed through in the second quarter with summer sweaters 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 line, we have seen huge success. The drifter sweater has rapidly become one of our leading items and is expanding. As we turn our attention to fall and holiday, we are well positioned to transition our assortment towards our weatherproof outerwear, the Wanderweight franchise, and our Anyweather Fleece, both of which are trending strongly thus far in the third quarter. In swim, we are pleased with our performance across our swim and vacation categories. As mentioned earlier, we improved our products throughout the quarter and we're proud to have filed another patent in our swim lineup during the quarter for next season. Future innovation remains a continued theme across our entire business as we listen carefully to our customers, build unique styles, and bring speed-to-market. That's exactly what this new patented technology in our swim business does, and we're thrilled to have it 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 US eCommerce 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, resulting in quality sales, new-to-file customer growth, and improved inventory management. We continue to maximize key events to drive demand. Our European business has come full circle with growth in revenue and profitability during the quarter. The team in Europe continues to innovate and serve customers well. Europe has proven to be a great test market for the rest of our business.

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 2% 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 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 US eCommerce 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 licensed model, our US eCommerce 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 eCommerce business increased gross profit dollars by 26% compared to the second quarter of 2023 with sales increasing 1% year-over-year. Sales from Lands' 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 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 continued 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 $0.17 per share. We had an adjusted net loss of $0.7 million, or $0.2 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 ABL 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 million 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 billion 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 $0.29 to $0.48. 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.

Thanks, Bernie. We have made significant progress in the second quarter against our strategic goals to expand our operational efficiency and our entire go-to-market philosophy. I'd like to thank our employees for their continued efforts to build an innovative customer-first brand. Innovation has been the keystone of our success over the last 61 years, and the can-do culture of Lands' End is well suited to continue to drive that success. To that end, over the next 12 months to 24 months, we will implement a new ERP that will increase collaboration and planning across the business. Crucially, it will enable us to build a more authentic and innovative Lands' End digital experience with improvements in speed, personalization, loyalty, promotions, and merchandising. We really are evolving into a world-class brand and doing so in a way that's consistent with Lands' End's commitment to delivering the best possible customer experience. Lands' End has always had the potential to be larger than its digital engine, and while that will remain core to our success, we are well positioned to accelerate our momentum and drive brand growth via multiple avenues. We look forward to your questions.

Our first question will come from Dana Telsey with Telsey Advisory Group. Please go ahead.

Good morning, everyone, and nice to see the progress. New customer file up mid-single digits is impressive. Anything that you're noticing about the demographics of that customer base versus your core, given what you've mentioned about younger customers, and then also what resonated throughout with the gross margin is lower promotions, what are you seeing in each of the channels with pricing and promotion? And can you just also talk about the cadence in the quarter and how the exit rate is into the third quarter? Thank you.

Morning, Dana. Nice to hear from you. Great questions as always. I'm just writing them down, so I don't miss any part of it. I know Bernie is doing the same. Dana, I think there's some noise on the line. It's really about the consumer health with the new customer file and from my perspective, it's a great measure of consumer health. We saw that mid-single-digit positive, and it lined up with the growth in our overall GMV and specifically the US eCommerce business. So they were both mid-single-digit positive as well. We saw patterns in the business that spoke to health in the consumer. I've talked in the past without having multiple paths to our plan. And in particular, we talked about product and distribution. But it's equally important to recognize that the customers weigh on that. So it was pleasing that the customers we added were in our high growth category. They were our revolvers, and on average, they were 10 years younger. What I would add to your question about where we saw them, if that was consistent across the channels that we could measure, we were reaching a younger consumer everywhere. The average reduction ranged from about eight years in some channels to 12 years in others. So it was pretty tight in terms of what we saw, and it very much fit that evolver, which is powerful for us because we see them leaning into a broader range of categories. And it continued to bolster our database. We saw increases in ARB and increases in AUR, which underpinned the margin conversation. Summing it up, I mean, I would view that as a trend that we've continued to see from Q2 into Q3. If I look at the weekend, we just went through with the Labor Day holiday, we had a lot of new customer activity. There's a lot of intrigue with what we're seeing. Some of our classes, I think, about dresses are performing particularly well. We're seeing that customer might really come in and there's no price resistance to it. I'll let Bernie chime in with part of it, but we drove the lowest promotion rates that we've seen in the company in a number of years. I look back all the way through to 2014 in the IPO, and we saw a promotion rate fall. We see that as an avenue forward, continually updating our product, moving with speed, and reacting to the customer more. It's very virtuous having that model and how it pushes us forward.

I would just add, Dana, these customers, the new customers we found, actually a portion of them are returning quicker than we have seen in the past and buying within a month or two again. To reiterate the strength of our customer file, once we have tagged on and have a customer, they have an average tenure of 18 years, and we convert at twice the industry average with those customers. As to your question about the flow of the quarter, it was fairly even for us through the quarter. One benefit from having multiple businesses is that our Equipeters business had a strong second quarter, offsetting some of the other business where we're not as big a back-to-school business in our US business. But in our school business, that carries July and August for us, and they had a very strong second quarter and into August.

Thank you for that. Regarding inventory levels, they remain very manageable. Could you share how you plan to handle inventories moving forward? Additionally, what are you observing concerning freight charges, lead times for product delivery, and your expectations for the holiday season? Thank you.

Yes. As we reported, we have a 470-basis point improvement in gross margin. We expect to continue to see those types of improvements through the back half of the year. They do account for any challenges in our freight and transportation. Our transportation team has done a fantastic job of being proactive to any of the issues that we've seen, and we've been able to mitigate those costs and delays up to this point. They've done an excellent job. We expect our inventories to stay at historical lows, as Andrew has implemented an initiative around speed and will be bringing in products more frequently and closer to our shores.

Yeah, and I think I'd just add to that, Dana. We're not just reducing SKU count. We're getting speed from being closer to the customer, and we've moved a material amount of our business, and it will continue to grow during the back half into the western hemisphere. We don't really experience the transportation issues with that. It's three days from Central America to Port Houston, so we get speed there, and there is a lot of capacity in that lane, and we don't expect that to change. So we see the whole package really coming together as we get nearer to the customer and being able to control more of the variables related to supply chain.

Thank you.

Thank you. Our next question will come from Eric Beder with SCC Research. Please go ahead.

Good morning.

Good morning, Eric.

Congratulations on adding Nordstrom to the digital marketplace mix. You now have a pretty wide range of customers now in the digital marketplace, from Kohl's, Target, Nordstrom, and Macy's. Are you actively looking for even further partners here? Is there ability maybe to do that internationally? And where should we see that evolving now that you've added all these players to the mix in terms of digital marketplaces?

Yeah. Morning, Eric. It's a great question. I mean, I think what you're continuing to see as we put more energy into it is that we've got a very good spread. If you think about the merchandising pyramid, good, better, best, we've got some good players in there. We've got some better players in there. And we now have a best layer in there with Nordstrom. It's more about how we evolve our product architecture on those sites. If you look at what we've done with Nordstrom, one of the areas we really leaned into was around school and school uniforms. We don't have that really as part of our merchandising strategy for the others. This was a first for Nordstrom. As we lean in, we can have deeper strategic conversations with our marketplace partners and tailor that assortment. I think it's worth noting that Costco and Sam's see a third of the US shopping at Costco in any given year, and they are $100,000+ income customers typically in their 30s, 40s, and 50s. The ability to harvest from them is up to us to put great products in front of them. You get a narrow assortment there, but they buy one to two orders of magnitude bigger than we would ever have on our website. It distributes it widely, and we see that customer back into our core landsend.com business. I can't underestimate the power of that. If it's driving a big piece of the business, we're happy with that. But I think Bernie's points are valid: there's plenty of places where the GMV is coming from, and it's great to see us growing market share in this new business model.

Great. That's really helpful. Thanks. And then just lastly for me, Andrew, you mentioned new customers coming in have been about ten years younger than the average customer in your file. How should we think about that? Is that more or less consistent with what you need to maintain a steady age profile as the rest of your customers get older? Or is this really a conscious effort to try to attract younger customers and move the brand a little bit younger?

It's a great question, Alex. It's a little bit from column A, it's a little bit from column B. You're always managing to a particular point. Some seasons it's going to be more about managing the yield of your existing customers. Some seasons it's going to be about bringing in a new customer who's 10 years younger. The customer has been aging in our file for the last few years, and this is the first time when that customer has stopped aging. As we looked at it at the end of the second quarter, it was the same age as last year, and that is a great thing to see. If we can now start to back that up, it bodes well for years of growth in this brand.

Great. That's really helpful. Thank you so much.

Thank you. Our next question will come from Steve Silver with Argus Research. Please go ahead.

Thanks, operator. And congratulations on the quarter as well. My question is, given the fact that a really big part of the growth proposition for Lands' End is being able to sell products with minimal discounting, I'm curious as to how that's playing into the SG&A cost expansion we saw in Q2 to acquire new customers, and just if you're utilizing more aggressive discounting in conjunction with customer acquisitions for first-time visits to the website and such.

Yeah, Steve, thanks. When you look at our growth of 470 basis points of gross margin, close to two-thirds of that was driven from a higher average unit retail out the door. We're actually discounting less as a whole as a company, that's heavily driven by our product solutions and the newness that we're constantly bringing into the business. And then the new customer acquisition is more in areas like social and new areas for us. That's why that customer is 10 years younger and they're actually buying at a higher average unit retail than our normal customer. We are acquiring those customers at a higher margin.

Great. And one follow-up if I can. You talked about the new patent being filed in the swim category. I'm curious as to whether the company maintains a pipeline of patent-eligible products in development and maybe if so, how that tracks compared to just a couple of years ago.

It tracks differently from a couple of years ago in that we had not been doing this a couple of years ago, and one of the things I noticed about Lands' End was that it was, in its earlier years, incredibly innovative. I have an aspiration for the company to innovate along those avenues. I want to see innovation from everyone. It should be part of everyone's job, but I want to see the culture of the company be more innovative. As I've come in, it became clear to me that I wanted to really open the floodgates. We should continuously innovate. And there is a pipeline that's coming along. Thank you for letting me get on my soapbox for that question.

Okay. Thanks for all the additional color. Appreciate it.

Thank you.

Thank you. At this time, there are no further questions in queue. This will conclude the Lands' End second quarter earnings call. You may disconnect your line at this time and have a wonderful day.