Lands' End Inc (LE) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lands' End second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference call over to Bernie McCracken, Chief Accounting Officer. Please go ahead, sir.

Good morning. Thank you for joining the Lands' End earnings call for our fiscal second-quarter 2016 results. On the call today, you will hear from Frederica Marchionni, our President and Chief Executive Officer; and Jim Gooch, our Chief Operating Officer and Chief Financial Officer.

To begin our prepared remarks, Frederica will discuss the current state of the business and then Jim will provide details on our second-quarter performance. After the Company's prepared remarks, we will conduct a question-and-answer session with our covering analysts.

Please note that this morning, we released our fiscal second-quarter 2016 earnings results, which are now available on landsend.com. I would like to remind you that today's discussion will contain forward-looking statements related to future events and expectations. These statements are based on current expectations and the current economic environment or are based on potential opportunities.

Actual results may differ materially from those expressed or implied in the forward-looking statements. Factors that could cause the Company's actual results to differ materially from those discussed are posted in the Investors Information section of landsend.com and in our most recent SEC filings.

Our discussion will also include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures also can be found in the Investor Information section of landsend.com. Any reference in our discussion today to EBITDA means adjusted EBITDA, as defined in the earnings release.

Lastly, we assume no obligation to update the information presented on this call, except as required by law. I will now turn the call over to our Chief Executive Officer, Frederica Marchionni.

Good morning. Welcome to Lands' End second-quarter 2016 earnings conference call. I will begin with some highlights from the quarter and then focus on our progress across our key initiatives. Overall, we saw sequential improvement in the second quarter compared to the first quarter.

Sales totaled $292 million, down 6.5% compared to last year's second quarter. May and June were the best performing months with positive year-over-year performance in June. In July, our sales were impacted by a lower level of promotional activity as well as reduced level of markdown inventory compared to last year.

Gross margin expanded 30 basis points during the quarter. We also controlled expenses, which led to adjusted EBITDA for the quarter of $7.3 million. Jim will talk about this more in detail in his financial review.

During the quarter, we continued to make progress on enhancing our distribution channel to drive near-term and long-term performance. We were pleased with the performance of our May and June catalog, driven by our strong presentation of core products as well as our promotional and [pricing] presentation within the books. Strong sell-through of swim and shorts early in the quarter resulted in less markdowns inventory in July, as I mentioned earlier, which led to higher gross margins for the quarter.

We saw favorable results as we took learnings from the recent changes we have made to our catalog, which have allowed us to target our active customer as well as win back lapsed customers. They demonstrate that we have a competitive offer and that our customers, who have shopped with us in the past, are responding favorably to our enhanced products. As we look ahead, we will continue to enhance our product offerings, which remain our first priority, as well as refine our marketing initiatives, including elevating our product presentation and messaging.

On the commerce front, we have continued to roll out our multi-branded website shopping experience. In addition to an online segment dedicated to our Canvas by Lands' End brand, we recently launched additional segments dedicated to our Lands' End sports, school uniform, business outfitters and Lighthouse brands. These efforts are designed to expand brand awareness for Lands' End overall and broaden our customer base. We can now leverage this differentiated site to target the consumer with a more personalized experience with content that's relevant to their needs.

As we look to the holiday season, we are excited to launch our new mobile application, as well as an improved online shopping experience on our e-commerce site. In our retail location at Sears, we saw improved performance versus prior quarters, driven by our core products and enhanced inventory control. The Lighthouse by Lands' End retail comp sets continue to perform well in our tax locations.

Customers are responding favorably to both the new retail content as well as the new brand name and the product offering. We are working to increase our efficiencies across our Sears store base so that we can roll out Lighthouse by Lands' End to the current Lands' End base at Sears in a very successful way. We anticipate that the rollout will take place in the fall of FY17.

We are pleased to be partnering with Amazon to present our Lands' End sports, footwear and a native collection of Canvas by Lands' End beginning by the end of September. This provides an additional channel for us to introduce consumers to our new brand and expanded categories.

Our outfitter business was softer than expected during the quarter, mirroring our performance in the overall business. Outfitters faced a challenging July, which we believe is due to parents waiting to buy back-to-school items until closer to need or foregoing their purchases.

However, corporate remains strong. We are working hard to expand our current business and seek new partnerships, both with major corporations and schools.

Finally, while international is an important opportunity for the Company over the long term, the business was tough during the quarter, driven by lower consumer spending for our most recent catalog and promotional offerings. In addition, we saw consumer concerns, both leading up to and following the Brexit vote in the UK, which impacted our European business.

As we look ahead, we remain focused on our key priorities, beginning with product. We continue to evolve our merchandise assortment, offering quality, value and style in products that appeal to our customers' lifestyles. Our focus is on increasing product relevance and reinvigorating the assortment with greater design appeal and innovation in our traditional styles.

We also remain excited about the opportunity in our new Canvas by Lands' End brand, which is targeting a more modern customer but still embodies the Lands' End DNA. We believe that there are areas of our core assortment that we can continue to enhance. One such opportunity is working to expand our core best seller, including outerwear, sweater and men's.

This will be key for us as we get into the back half of the year. Our focus in outerwear will highlight both value and function. Within sweaters, we will introduce updates to key items in new colorful styles at key price points.

On the men's side, we will be debuting a broader assortment of patterns and colors as well as an enhanced fit. For holiday, I'm very excited about the expanded gifting assortment that we'll be presenting, with everything from incredible clothing to beautiful tableware and even cheese from our home state of Wisconsin. This offering will set Lands' End apart and position us as a destination for holiday shopping.

To support this effort, we will be adding a catalog in the third quarter focused on gifting with the goal of attracting new and lapsed customers. In addition to focusing on our core offerings, we are also continuing to build the Canvas by Lands' End assortment, which we hope will serve to create a halo effect for the overall Lands' End brand. We are working on initiatives that will encourage cross-shopping for our Lands' End customer with the Canvas by Lands' End brand.

As we look ahead, we will present a fresh collection for the fall and holiday, featuring coats, sweaters and blouses in new silhouettes and beautiful fabrics. To garner excitement for our product offering and support the work we are doing to enhance our distribution channel, we have launched a number of marketing initiatives aimed at presenting our entire portfolio of products to the customers.

For Lands' End, to showcase our core product offering, we are using our greatest spokespeople, our Lands' End customer, to tell their stories. We recently launched the Top of Customer campaign, which put customer stories front and center to all communications.

While for our Canvas by Lands' End brand, we have recently debuted a new campaign which features actress Emma Roberts and was shot by famed photographer Mario Testino, showcasing our new products to the younger consumer. In addition, we are focusing on collaborating with social media influencers to increase visibility. We have also formed a digital media partnership to create a custom four-week social program to drive awareness and engagement with select publications, prioritizing historical best performance with social expansion capabilities.

We will continue to foster direct relationships with social media influencers to develop unique content and generate new followers, as we look to expand brand awareness for Lands' End. We successfully opened a pop-up store in South Hampton for August. We plan on opening an additional pop-up location in New York City's Soho neighborhood during Fashion Week, which will stay open through the holiday season.

In addition, we will be opening a new premium outlet store in Aurora, Illinois in October. We believe this new retail location will help drive traffic and awareness to our brands. I'm very pleased the products from our recently launched back-to-school campaign was featured on Good Morning America.

We saw positive response to the coverage from both our existing and new customers. We have also made good progress enhancing our supply chain and are working towards reducing our lead time to nine months on average and for certain items create a fast track with even shorter lead times. We are also making improvements that we believe will enhance service and quality, as well as ultimately lead to a reduction in product cost.

Overall, we have continued to make progress enhancing our product offering, elevating our marketing strategy and improving our distribution channels. While we have not yet achieved the turning point in terms of our financial results, I believe that we are moving the business in the right direction.

We are creating a culture of action within Lands' End and empowering our talented management team to execute our strategy. I'm very proud of the work that our team has done and continues to do as we work to position the business for profitable growth.

Thank you for your time this morning. With that, I'll turn it over to Jim to review our financial results for the quarter.

Thank you, Frederica. Good morning.

I'll start by walking you through our financial results for the quarter. Revenue for the second quarter was $292 million. That's down 6.5% compared to $312.4 million last year.

The sales decline was comprised of a 6.9% decrease in the direct segment with sales of $246.4 million, and a 4.3% decrease in the retail segment with sales of $45.5 million. The decrease in the direct segment was driven by the decline in both the US region and to a lesser extent international business.

The US business realized negative comparable sales in the second quarter. As Frederica discussed, May and June were significantly improved versus our prior trend, but that improvement was offset by a disappointing July. As a result of our strong performance in May and June, we entered July with a lower level and a higher quality of inventory.

We remain focused on offering more pre-planned and targeted promotions and maintaining clean inventory levels. We made the strategic decision to be less promotional in July than last year. In addition, we believe we were also less promotional than the overall retail industry.

While this lower level of promotion impacted our sales performance, driving less markdown sales during July, it benefited our gross margin. I'll talk about that shortly. The decline in the retail segment reflected a 2.5% decrease in same store sales, combined with five fewer Sears locations.

We ended the quarter with 224 shops at Sears. Our retail performance was driven by a strong Memorial Day, favorable weather and targeted, more timely promotions. This was offset by continued traffic challenges within malls and specifically within our Sears locations.

As we've discussed in the past, currently our largest traffic driver is our catalogs. During our discussion last quarter, we outlined a number of changes that we're making to our catalogs including changes to both the product and promotional presentation as well as increasing our circulation. For the quarter, we were able to stabilize our active buyer file as well as improve our reactivation rates, turning lapsed buyers into active ones.

In May and June combined, we realized a significant improvement in trend in our customer metrics with a slight increase in active buyers and double-digit increase in reactivating lapsed buyers. We recognize that we still have a lot of work to do.

We'll continue to apply the learnings we obtained about our customers while we read and react to the overall market conditions. We expect to see sequential improvement throughout the remainder of the year. However, with the continued highly promotional competitive environment, we do anticipate results will remain under pressure.

Gross margin was the area of the business where we saw the most significant sequential improvement, with a 30 basis point year-over-year increase to 46.6%. Gross profit was $136.2 million compared to $144.5 million in the same period last year. The direct segment gross profit decreased 5.9%, while gross margin in this segment increased 50 basis points to 47.1%.

In the retail segment, gross profit decreased 5% and gross margin decreased by 20 basis points to 44.2%. Our gross margin rate reflects the impact of the revenue trend during the quarter.

Again, as a result of the strong performance in May and June, we operated during July with lower inventories, driving lower markdown sales and lower corresponding clearance markdowns. As I mentioned earlier, we made the strategic decision to be less promotional during July. This led to the improved margin rate year-over-year as well as the significant improvement in gross margin trend compared to the first quarter.

Looking at selling and administrative or S&A expenses for the quarter, it increased 3.2% to $128.9 million, compared to $124.9 million last year. Total S&A expenses as a percentage of revenue increased by 410 basis points to 44.1%. The higher costs this year were attributable to an increase in marketing expense during the quarter.

Specifically as we previously discussed, we increased catalog circulation during the quarter and also brand advertising, mainly to help introduce both Canvas by Lands' End and Lands' End sport brands. These higher marketing costs were partially offset by continued reduction in our variable expenses.

Operating income was $2.7 million compared to operating income of $17.9 million in the second quarter of 2015. Income tax benefit for the second quarter was $1 million, compared to income tax expense of $4.7 million for the same period last year. That results in a net loss for the second quarter of $2 million or a loss of $0.06 per share compared to net income of $7.5 million or $0.23 per share in the second quarter of last year.

In addition to the GAAP measures that we've outlined above, adjusted EBITDA is an important profit building measure that we use to manage our business internally. For the second quarter, adjusted EBITDA was $7.3 million and that compares to adjusted EBITDA of $19.6 million in the second quarter of 2015.

Now let's take a look at the balance sheet. Total cash and cash equivalents at the end of the quarter were $210.7 million, compared to $208.4 million last year. Inventory at the end of the quarter was $354.7 million, which is $13.1 million or 3.6% less than the second quarter last year.

As I've discussed, our strong performance in May and June left us not only with a lower level of inventory, but also a healthier overall inventory position. Long-term debt decreased to $491.9 million as compared to $495.7 million at this time last year, with the reduction mainly due to the quarterly principal payments. Looking at operating cash, year-to-date in 2016, it was $1.7 million, which compares to $3.4 million in 2015.

Before I open up the call for questions, I want to reiterate a few points that we discussed previously. First, we're continuing to maintain our prudent cash management while making strategic investments where we believe we can yield a positive return. Next, as I mentioned earlier, catalog circulation increased in the second quarter.

We plan to optimize our circulation, continuing to use our catalog over the remainder of the year to help rebuild our customer file, focusing on both our active and lapsed customer base. While our second quarter results didn't meet our expectations, we recognize that it may take some time to build back our lapsed customers and attract new ones. But we're encouraged by our initial results as they illustrate the improvements we made in how we communicate with our customers.

Finally, we plan to continue our capital investment for our ERP system, where our initial focus is on our finance functions, merchandising operations and our inventory planning systems.

Now, we'll open up the call for questions.

(Operator Instructions)

Our first question comes from Steve Marotta, with CL King & Associates. Your line is open.

Just a follow-up on your last commentary regarding circulation. I'm trying to understand if circulation -- if the intent of circulation in the third quarter and the fourth quarter will increase in a similar fashion as it did in the second quarter?

Yes, I think what we said on last call, it's still consistent, Steve. If you go back, we had the decrease in the first quarter, we saw an increase in the second quarter. We anticipate a similar increase in the third quarter. Then the fourth quarter, it should stabilize and be relatively flat. So for the overall year, we're still anticipating the catalog spend to be relatively flat for the year.

Okay. Then the current inventory composition, given the fact that -- the good news is that May and June were relatively promotional from an environment standpoint. You may not have participated as much in it, which is a really good thing. Your sell-through, based on the products in May and June, was quite strong.

Given the commentary for the balance of the year, it is true that I would also expect the promotional environment would be similarly heightened from an environment standpoint. But can you talk a little bit about your intent and current inventory composition as a result? Could we see the same dynamic occur in the back half of this year as occurred in May and June?

Well, a few parts maybe to your question there. First, from an inventory composition, as I said in my comments, we're very pleased with our overall composition of inventory. During May and June, we did have increased circulation. We did participate from a promotional perspective in May and June.

Our reductions in promotion I would say were more heavy in July, where last year we were probably over-promoted. Last year, we entered July with excess inventory and we had to be extremely promotional in order to liquidate the inventory. Fortunately, this year we didn't have that issue, better overall inventory management throughout the first quarter into the second quarter.

We had made the decision going in that we weren't going to be promotional. Then with the lift and the strong performance in May and June, we did have some out-of-stocks when you look at SKU and color and, therefore, we did not increase our promotional cadence in July. As we go into the back half, you're going to see an increased circulation in the third quarter, so I would say that we will be appropriately promotional in the third quarter.

In the fourth quarter of last year, we had very little promotions in the first part of the quarter. We were very heavily promoted in December. I think this year, they'll be more timely. They'll be better pre-planned and more thoughtful and more consistent across the quarter.

Okay. That's helpful. Frederica, you mentioned one of the focus is on sizing, I believe. Can you talk a little bit about your SKU management overlaid with that commentary? How can we feel confident that if you add extra sizing that you're not adding extra SKUs, which could cause inventory risk going forward? Thank you.

Good morning, Steven. As I said, since the shareholder meeting, the first one, streamlined merchandising is a key element of the strategy. So we need to reduce every inefficiency in inventory. I think that we're doing a good job in that, in eliminating everything that is not productive, so that our SKU level will maintain the same level that we used to have, so we know that we can manage that.

So I think this is what we are doing. We're very pleased so far that we could be able to launch new lines, focus more on footwear, launching the Canvas by Lands' End line, the Lands' End sport, and still maintaining the same level, lowering inventory and SKUs.

That's very helpful. And I have one more question. Frederica, you mentioned that you currently are targeting a nine-month lead time for a product. Can you talk about what it is right now and when you expect it to get to the nine-month level? Thank you.

We are already in the nine months, but it was a huge effort to get into that for the season, for the spring 2017 season. So we need to do a better job in making sure that all the pieces, that all the departments are working towards developing and producing the product will be able to have enough time to create the best possible offer. Because sometimes trends, and we want to be on trend for part of the collection, sometimes those trends are just last minute. So we need to be able to capture them. That's why we are creating a fast track, which is a little lower than the nine months, but of course it's for a tiny part of the business. But it's very customary, let's say, in the industry for companies that also have not just the timeless products but also products that are on trend.

That's great. You've spurred one more question. Considering that you have a nine-month lead time for the spring of 2017, have you targeted reducing that for your fall 2017 collection? If so, where do you think you'll be in fall of 2017?

We are not a fast fashion. So I think nine months is a good target. As I said, the point is to give enough time to the different parts of the pieces, the supply chain, to get into the nine months. Then if, and I don't think that it's our case, we will monitor if the part of the trend collection will be more substantial, then we need to reduce also that lead time. But at the moment, we don't anticipate that that will happen in a major way.

Ladies and gentlemen, that does conclude today's question-and-answer session. Thank you for participating in today's conference call. This concludes the program. You may all disconnect. Everyone, have a great day.