Lands’ End, Inc. (NASDAQ:LE) Q4 2022 Earnings Call Transcript

Lands’ End, Inc. (NASDAQ:LE) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Good day, and welcome to Lands’ End’s Fourth Quarter and Full-Year Fiscal 2022 Results Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session, and instructions will be given at that time. As a reminder, this call may be recorded. I would now like to turn the call over to Bernie McCracken, Interim Chief Financial Officer. You may begin.

Bernie McCracken: Good morning, and thank you for joining the Lands’ End earnings call for a discussion of our fourth quarter and full-year fiscal 2022 results, which we released this morning and can be found on our website, Lands’ End.com. I’m Bernie McCracken, Interim Chief Financial, 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 are 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 Lands’ End.com. With that, I will turn the call over to Andrew.

Andrew McLean: Thank you, Bernie. Good morning, and thank you for joining us today. On today’s call, we’ll discuss Lands’ End’s fourth quarter and full-year 2022 results. We’ll also discuss our strategy and the work we’re doing to ensure Lands’ End effectively serves all of our stakeholders in the years ahead. I’ll begin by saying just how excited I am to have joined Lands’ End and for the opportunity to lead this iconic American brand. Lands’ End has a fantastic 60-year history, and thanks to the hard work of our talented and dedicated team with a strong platform for continued growth and profitability. We’ll speak to our performance in the fourth quarter in a moment, but as this is my first earnings call addressing you as CEO, I want to provide my perspective on the business and how we plan to build on all the progress made by Jerome Griffith and the entire Lands’ End team over the past several years.

At our core, Lands’ End is in the business of providing products that solve life’s issues. We deliver consumers the high quality products they’re looking for, for themselves and their families. We plan to continue focusing on our successful franchises and product strengths, while driving innovation across the enterprise, and as always, placing the customer at the center of our decisions. The leadership team and I have spent the last few months refining our strategy, thinking about how we can best leverage our strengths to execute, and I’m pleased to share some more details today. To be clear, the evolution of our strategic value drivers, builds on a strong foundation from which to drive enhanced growth and profitability, and we will prioritize execution and innovation to position Lands’ End for long-term success.

I mentioned it earlier, but it’s worth repeating. Lands’ End is in the business of providing products that solve life’s issues. Whether for individuals, families, schools, or businesses, we provide the high quality products they’re looking for, when they’re looking for them. By simplifying the interaction, we have with consumers, we can drive meaningful and sustainable value for all stakeholders. To continue to meet consumers’ needs, we need to innovate our product strategy and put greater focus towards the categories that they’re looking for most from us. Moving forward, we plan to sharpen our focus on the categories that drive outside value creation and bring customers back time and time again, including Swim and Outerwear, some of our top performers.

Within Swim, we’ll weight our marketing towards the vacation story, extending the reach of the category to include essentials such as totes, towels, coverups, sun protection, and footwear. Within Outerwear, we see great potential in layering, which endure throughout the seasons, and complement heavy Outerwear pieces for colder months. Through this product management strategy, we expect to drive sales and margin growth over the long-term. We’re confident this product focus will help us better serve the consumer by providing Lands’ End branded merchandise to consumers wherever they’re looking for it, including on our website and third-party websites, in our catalogs, and in our stores. It’s worth noting that while we seek to meet customers where they are, over 90% of our revenue comes from a click.

So, we will continue to emphasize digital channels for serving existing and new customers. At Lands’ End, we’re customer obsessed. The key to executing this product strategy is making sure we reach our customers in the right cadence with the right products at the right time, helping them to build their basket across categories. In essence, we’re going to take a page from our history and focus on engaging directly with our customers, while encouraging them to shop across the preferred channel. Lands’ End already has a robust buyer file, nearly 7 million strong, and we are going to double down on our approach to understanding our customers, both current and potential, and seek to grow our share of our addressable market by leveraging our proprietary data.

Our focus will be on deepening relationships with existing customers, while simultaneously bringing in new customers to the brand. This will involve qualitative and quantitative assessments that are just kicking off, which will provide us with an even better understanding of our customers, including how they view our brand, what other products and product adjacencies they may be looking for, and how we can best engage with them. We’ll also use our proprietary data to better understand our own operations, providing our product teams the tools they need to make better design, sourcing and buying decisions. We’ll work to better connect our merchants, planners, and data teams, to facilitate knowledge-sharing and ensure we’re always delivering what consumers want, when they want it.

Photo by Steven Ungermann on Unsplash

The theme I hope you’re hearing is that we are going to be innovative in every aspect of our business, with decisions driven by our robust data and consumer demands. From how we engage with and deliver for our consumers, to the way we operate on a daily basis, innovation will come to the forefront, and we’re confident that this will help drive both top and bottom line growth over the long-term. We’ll share updates on our progress along the way, but let me just say that I am fully confident in our team’s ability to execute. We’ll strive to give our people the tools and structures to succeed, our customers the products they want, and our shareholders the growth and value they expect. Now, turning to our fourth quarter results, we executed well in the face of continued economic headwinds, which are beginning to moderate.

As we previewed on our last call, we entered the fourth quarter with a bit of carryover softness in consumer activity, which normalized as we worked through the quarter. We were pleased to see sequential improvement in each month in the quarter, including sales and margin performance. We are seeing some of those trends carry over into Q1, particularly in our core swim category. In the fourth quarter, our sales came in at the high end of our guidance range, with $530 million in revenue, down 5% year-over-year. While we’re pleased with the sales number, it’s worth noting that, like many other retailers, we introduced promotions earlier and ran them longer during the quarter. We previewed these promotions on our last call. And while strong consumer demand without promotions is always preferred, I’m proud of the way the team responded to ensure we were serving our customers’ needs throughout the all-important holiday season.

Regarding inventory, sales through the quarter, particularly in some of our high value categories, have helped us move closer to historical inventory levels. We expect to be back to normalized levels by the end of the first quarter. Consistent with our strategy, we’re working to better manage inventory in a way that’s consistent with the products our customers are looking for, when they’re looking for them. We’re confident that through our enhanced use of data and analytics, our teams will be better able to predict and manage appropriate inventory levels, reducing that expense, without impacting the customer experience. Similarly, global supply chains seem to be improving. So, while the efforts we took to ensure we had product for the 2022 holiday season were important, we expect to be more targeted moving forward.

To that end, we expect our cost of goods sold in 2023 will continue to improve as we have more stability and predictability in the global supply chain. Altogether, we expect our actions to better manage inventory, paired with more normalized supply chains, will lead to enhanced gross margin moving forward. Looking at the products our customers were shopping for, we saw greater demand for women’s swim and outerwear, with less demand for heavy outerwear as a result of the warmer than usual winter in the US and Europe. We continue to see challenges across a few categories, including kids and home, though promotions through the quarter helped us to reduce the inventory in these and other areas. Sleep, which was largely over-invested in by retailers industry-wide, performed below expectations in the quarter.

However, it continues to be a positive category for us and where we have carved a niche, with sales growing over 60% from 2019 to 2022. As we discussed last quarter, we believe the trends in casualization and demand for hybrid life are here to stay, and we’re well positioned in those areas. In line with the product strategy I discussed earlier, we’re going to leverage data to refine our assortment and make sure we’re making better product decisions based on what consumers are looking for. As it relates to our distribution channels, we saw strong engagement and performance from landsend.com, and continue to be pleased with our third-party online partnerships, including Kohl’s, and Target, Walmart, and Amazon. We’re in the process of launching with Macy’s, and expect that will fully launch by the end of Q2.

On marketing, we focused our efforts on engaging with our existing customer base, driven by our robust customer file, and we will continue to leverage a multi-platform approach for that engagement. Whether through email, search, or catalog, we’re working to convert sales and build further affinity for the brand. For example, our customers gravitate to our apparel collection, where they appreciate the look, fit, and price, and we’ll continue to factor those types of insights into our marketing. As I mentioned earlier, we’ll have a lot more to share on those efforts over the coming months as we take a fresh look at our data and ways to best engage with consumer journeys. With that, I will turn it over to Bernie, who has moved into the interim CFO role without missing a beat.

Bernie McCracken: Thank you, Andrew. For the fourth quarter, as Andrew mentioned, total revenue was at the high end of our guidance range at $530 million, a decrease of 5% compared to last year. Our global eCommerce sales decreased 6% from 2021, with our US eCommerce business decreasing 2% from 2021, and our international business decreasing 31% in the quarter. Our international business continued to be impacted by inflation and geopolitical turmoil in Europe, as well as the previously announced closure of the Japan eCommerce business. In our outfitters business, sales decreased 2%, mostly from timing differences due to last year’s supply chain disruption. In our business uniforms, we were favorable to last year for both the quarter and the full-year.

Within school uniforms, we’re pleased with our overall performance for the year, and maintained our overall share in the school segment. Revenue for our third-party business continues to be strong, increasing 8% as compared to the fourth quarter last year. This increase was largely driven by sales growth in the Kohl’s marketplace, particularly within fleece and outerwear, as well as growth in our other online marketplaces. Moving to our retail business, during the quarter, we delivered revenue of $15 million, with US same-store sales decreasing approximately 4% from the fourth quarter of 2021. Gross margin in the fourth quarter decreased to 33%, approximately a 340-basis point decline from 2021. The margin pressure was driven by increased industry-wide promotional activity, and a focused effort to move through less productive units, slightly offset by lower inbound transportation costs.

As a percentage of sales, SG&A was 28%, a decrease of approximately 260 basis points from 2021, driven by continued expense controls across the entire business, and lower digital marketing spend. Our performance led to a net loss for the quarter of $3.3 million or $0.10 per share, compared to net income of $7.1 million or $0.21 per share in 2021. In addition to these GAAP measures, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, we delivered adjusted EBITDA of $24.2 million, which was at the higher end of our expectations. Looking at the balance sheet, inventories at the end of the quarter were $426 million, compared to $384 million a year ago. The 11% increase in inventory was primarily driven by early receipts of swim product for the spring and summer selling seasons, as well as carryover full price swim product, driven by late receipts last year due to the supply chain challenges, and excess inventory in our kids’ category.

With reduced lead times, we’ve taken appropriate actions to execute more efficiently, which we expect will enable us to normalize our inventory level by the end of the first quarter. Regarding our debt, at the end of the fourth quarter, our term loan balance was $244 million, and our $275 million ABL, had $100 million of borrowings outstanding. To further drive shareholder value creation, we continue to explore opportunities to refinance our debt, and are committed to doing so subject to favorable market conditions. During the fourth quarter, we repurchased $3.2 million worth of shares under the board’s previously announced $50 million share repurchase authorization, bringing the balance of the remaining authorization to $41.5 million as of the end of the fiscal year.

Turning to our guidance for the first quarter, we expect net revenue to be between $295 million and $310 million. We expect a net loss of $5 million to $3 million, and diluted loss per share to be between $0.15 and $0.09. We expect adjusted EBITDA to be in the range of $13 million to $16 million. For the full-year, we expect net revenue of $1.56 billion to $1.62 billion. We expect a net loss of $6 million, to net income of $1 million, and diluted loss per share of $0.18, to earnings per share of $0.03. We expect adjusted EBITDA to be in a range of $72 million to $82 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.

Andrew McLean: Thank you, Bernie. As we close the book on 2022 and embark on the next phase of our strategy, I want to reiterate the confidence we have in our business. Lands’ End is an iconic 60-year old classic American lifestyle brand, and with the foundation that Jerome and the team put in place, we are well positioned to drive strong growth and profitability. This won’t all happen overnight. We are taking aggressive, achievable actions, to simplify and refocus our efforts to ensure we’re providing the high quality products our customers demand in the categories that they look for from us most, and that we’re engaging with them in whatever channel or venue they want. We’ve already announced a number of changes to our executive leadership team and how we organize internally, and those changes are already having a positive effect.

As a reminder, Peter Gray is now our Chief Commercial Officer. In this capacity, Peter is charged with driving revenue growth in existing businesses, and developing new income streams. He oversees our eCommerce, Outfitters, B2B, third-party, retail, and international businesses, and will have responsibility for the company’s license businesses and marketplace development. Angie Rieger is now our Chief Transformation Officer, where she’ll oversee the company’s brand management and inventory-planning functions. A longtime Lands’ End leader, Angie is critical to ensuring a consistent flow of information across our operating groups, making sure diverse constituents remain connected, and that we move as an organization on one calendar. Industry veteran Kym Maas recently joined the company as Senior Vice President, Product & Merchandising, reporting to Angie.

Kym is responsible for developing and implementing growth strategies in merchandising and brand management for the company, as well as testing new strategies and concepts for future growth. Sarah Rasmusen has taken on the newly created role of Chief Innovation Officer, and will be responsible for driving our innovation efforts across the enterprise, while ensuring the customer is at the center of all decisions. Sarah’s charge is to deliver innovative, customer-centric connections, leveraging our data, and driving it across the organization in ways that prioritize activities to grow our digitally-native company. I’m confident these organizational changes better position us to be more product-driven and nimble as we deliver on our strategies.

We’ll look forward to providing additional updates on our strategy as we continue to make progress on our initiatives. In the meantime, my mantra is execute, execute, execute, and we’ll continue working to do that so we can deliver for our customers, employees, and shareholders. With that, we look forward to your questions.

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Q&A Session

A – Andrew McLean: I think we have a question from Dana Telsey.

Bernie McCracken: Alex, are you available to ask a question? Operator, are you able to start the Q&A session, please? Please hold on for one second. We have a technical issue. Alex, you have a question?

Alex Fuhrman: I sure do. Can you guys hear me?

Bernie McCracken: We can hear you.

Alex Fuhrman: All right. That’s terrific. Well, congratulations, guys on a strong finish to the year and what sounds like a pretty good start to 2023. I wanted to ask about gross margins. It sounds like you’re looking for that to be up nicely in €˜23. Can you give us a sense of how much of that is coming from lower costs that you have good visibility into, and what your expectation is for promotions compared to last year, which sounds like was a little bit more than usual?

Bernie McCracken: Sure, Alex, I’ll take the cost. We are already experiencing lower inbound transportation costs year-on-year, which we expect to continue throughout the year. And then from a promotional activity, we finished 2022 by getting our inventory in a very healthy position, which is going to allow us to optimize our promotional and markdown activity into 2023. And Andrew, did you want to add to that?

Andrew McLean: Yes, I mean, I think, I mean, just picking up on what Bernie said, we feel really good about the inventories and cleaning those up. That was important to us to get ourselves so that we had seasonally-appropriate merchandise that we could lean into for the customer. As we look at it, and I think for those of you, and I know you do watch the site, we saw that by starting to win early, we were able to build momentum with the customer in January, and really use that as a springboard into the first quarter, and we’ll do that through the year as we make that business into a year-round event. I think I’d also say on this as we look at the three pockets of margin out there, obviously we’re going after the cost of the goods, and we’re working with our vendors on that.

Bernie mentioned that the transportation costs have fallen, and then just having better merchandise is going to let us reduce the markdown levels that we’re experiencing. So, I think if you put all that together, there’s a good margin tailwind here that we can get behind for this year and start to look to get ourselves back to more historical levels (indiscernible).

Alex Fuhrman: Okay, that’s really helpful. Thanks. And then it sounds like you had a lot of swim inventory at the beginning of the quarter here, and expect to have that worked down throughout the quarter. Is it fair to assume that the early reads on your swim through season are pretty strong then?

Andrew McLean: Yes, I would say that we’re having a good start to swim. We decided to engage with it in December. It’s not something that we’ve necessarily done in the business before, but we felt like it’s a year-round business, our data, and we have immeasurable troves of data here, I said that at ICR, I still continued to be astonished by, was telling us about the customer – certain customer cohorts were leaning in heavily to swim, and we followed that through. I talked to ICR about owning the vacation. That’s not changed. It’s not just about selling swim. It’s about the merchandise that we’ve gathered around it. So, we’re selling from slides, slides on her feet to the hat on her head, and that’s working strongly for us. Having that inventory, which arrived late last year and was not saleable at the time we got it available to go, has really helped to fuel us with that early start, and we’re going to build into it.

So, we’re already getting into a situation where we’re having to chase some swim because we’re working through the inventory so quickly.

Alex Fuhrman: Wow. That’s exciting. Thank you for that. And then, kids, sounds like kids have been down for you lately. That historically, has been a pretty strong category for Lands’ End. Do you have a sense of why that business has been weak, and are you expecting any improvement this year?

Andrew McLean: I think we’ve seen this weakness in the business because we’ve been in and out of it in a way. We had tried to license it going into the pandemic. We pulled that license back. We tried to run it ourselves, and we’ve under-resourced it. And I think for us, it’s a strategic decision about how we resource that appropriately going forward. We’ve talked about various ways to execute that business. We’re not going to walk away from kids, should be the takeaway in this, but we will look for ways to improve it, make sure it’s appropriately resourced and find its place in the family variety of Lands’ End.

Alex Fuhrman: Okay, that’s really helpful. Thank you very much.

Operator: Thank you. One moment for our next question, and that will be coming from the line of Dana Telsey with Telsey Group. Your line is open.

Dana Telsey: Hi. Hope you can hear me now.

Andrew McLean: Yes, we can hear you now, Dana.

Dana Telsey: Oh, great. Hi, Andrew. Hi, Bernie. Great to hear from you. So, Andrew, you mentioned throughout the call the focus on data, and it seems like that’s one of the key elements that you are bringing to the Lands’ End brands. As you think about the different channels, you also mentioned the additional marketplaces. How do you see – whether it’s outfitters, whether it’s eCommerce, how do you see the channels penetration differing as you move forward, and what could that mean for margins? And then just in the near-term with the promotional environment, how are you planning in terms of margins to manage the promotional environment, whether by channel, whether by category? And then lastly on cotton costs and raw material costs, what does that mean for your cost of goods as we move through the year? And one more thing, retail. I think you had thought about retail as being a potential opportunity. Is it? Thank you.

Andrew McLean: All right. Thanks for the point. Let’s see. I’ll start with retail. It’s one of a list of things that we are evaluating, Dana, and it’s – I would say this, as we continue to refine and look at the ROI of retail, we think there is other priorities that are going to be ahead of it. So, I don’t see it being this year part of the strategy. You may see some experiments from us, but we’re not going to lean into that specifically. Coming back to it, we do see a lot of data. We have an amazing amount of data and the data – we stopped looking at the customer just in terms of a demographic, and we started looking at behavioral cohorts. And as we got further into those behavioral cohorts, we’ve seen that there are patterns in the customer that we can use to help them connect the dots across our categories.

So, whereas we have had cohorts for the customer tend to just shop one item, outer wear, that might be the shop that they are, swim, that might be the shop that they are, we will look for ways to connect them across our categories. The best example I can give you is the mom who’s shopping for a school uniform for her kids. It’s a great school uniform business for us. We see that she was leaning into our swim, and by encouraging her, by advertising to her directly, marketing to her with our catalogs, we’ve been able to engage her with our swim product. Once you get her into the swim product, we see that the collection of goods that sit around that, as I mentioned earlier, which is going to move from slides on her feet, hats on her head, and swim dresses in between.

And I do want to call that out because I look at a business like swim dresses, which is a nice business for us, but the opportunity to store into it as we see this patent and how the customer shops and how we push to them, has become really important to us, and it actually helps in how we manage those promotions. We moved in the fourth quarter to an AI integrated system for email. And within that system, we’re able to look at these customer cohorts and look at the behaviors that they exhibit, and market more specifically against them. So, we’re guessing less and being more specific and accurate and thoughtful going forward. And that’s a big effort for us as we sort of bring that into the business in general from how we approach search in the future, to how we think about alternate digital channels.

That’s going to remain really important to us. Now, I want to get back to your next question, which was around the wholesalers. We largely de-risked ourselves from any wholesale ups and downs. Over 70% of what we do in the wholesale channel with our marketplaces, is digital. It’s done with a click. So, I come back to the comments I made, that over 90% of what we do is done with a click, and we focus greatly on making sure that business is optimized and that’s – they’ll lean in for us. So, we only have a small exposure to inventory within the doors of these wholesalers, and we see tremendous energy. I could talk about some of them, like Target has come online and has been a phenomenal start. I think Macy’s is going to go down the same path. That leans into our wheelhouse, and we’re able to connect the dots with that data.

We see a new customer coming in, and we’re picking up low teens crossover – we’re picking up new customers from those orders to the tune of low teens. So, I think there’s an opportunity to continue to grow that and refine that with the data we’re bringing to bear. The last question you had was around cotton prices, and I’ll let Bernie take that.

Bernie McCracken: Yes, I’ll take that, Dana. We will experience some headwinds in the first half around fabric costs, but we expect that to dissipate in the back half. And then when you talked about the promotional environment, each month in the fourth quarter, we got sequentially better, and we’ve seen that progress into the first quarter this year, an improvement, but it is still a promotional environment at this time.

Dana Telsey: Thank you.

Operator: And thank you all. I’m showing no further questions at this time. Thank you for participating. This concludes today’s program. You may now disconnect.