Lands' End Inc (LE) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lands' End Third Quarter Fiscal 2017 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. Bernard McCracken. Sir, you may begin.

Good morning, and thank you for joining the Lands' End earnings call for our third quarter fiscal 2017 results, which we released this morning and can be found on our website, landsend.com. On the call today, you will hear from Jerome Griffith, our Chief Executive Officer; and Jim Gooch, our Chief Operating Officer and Chief Financial Officer. After the company's prepared remarks, we will conduct a question-and-answer session with our covering analysts.

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 in our annual report on Form 10-K and quarterly reports on Form 10-Q.

The forward-looking information that is provided by the company in 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 the generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is contained herein or is contained with 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 Jerome Griffith.

Thank you, Bernie, and thank you, everyone, for joining us today. Overall, we are very pleased to see the continued momentum in the third quarter, which illustrates the strong progress we are making on improving our business performance. For the quarter, revenue grew 4.5% as compared to last year, led by our online business, and adjusted EBITDA was $12.9 million compared to $1.3 million in last year's third quarter.

In addition to delivering another quarter of improved financial results, we again drove double-digit growth in our buyer file, which has now increased for the third consecutive quarter across existing, lapsed and new customers. During the quarter, we saw strong performance in our outerwear, bottoms, men's knit tops, women's sweaters and home categories. We're also excited to see the momentum in our business continued through the Thanksgiving and Cyber Monday period.

Since I joined the company 9 months ago, we've made significant progress as an organization. We stabilized the business after several years of contracting sales and laid the foundation for growth in the years to come. Looking ahead, I believe that we are uniquely positioned as a highly recognized American heritage brand, operating in the heartland of the country, representing strong family values and offering a great value proposition.

I am more optimistic than ever about the opportunity ahead of us as we fully capitalize on Lands' End's strong heritage and leverage the excellent team that we have in place. We are committed to achieving consistent growth across the business by focusing on 4 main areas: product; digital; distribution channels; and business processes and infrastructure. Emphasizing our customer-centric orientation, our activities within each area will be guided by our customers' needs and preferences.

First and foremost is our product. Our priority is to make our customers' everyday life better by offering products with purpose, consistently communicating that we understand their needs and providing exceptional customer service. These attributes have been the foundation of Lands' End's 50-plus years of success and have earned the brand its loyal customer following.

To ensure that we continue to maintain our heritage, we are refining our product assortment with relevant and compelling styles as well as updating the quality and fit to ensure that our products reflect our strong brand heritage. We're doing this through several different avenues.

We're focusing on delivering key items that align with our customers' preference for timeless pieces and classic stylings that are well made and offer great value. This will primarily center around our core products, including outerwear, knits, pants and swimwear. Our merchandise and design teams are coordinating with our marketing group to ensure that we are building a strong story around these key items across all touch points of our business.

The products they buy have a purpose for their lifestyle, yet are innovative so that they continue to fulfill their everyday needs. They're not looking to climb a mountain. She comes to Lands' End for a jacket that's warm and moves with her while she's ice-skating with her family, a swimsuit that's flattering and functional at the beach or an outfit that makes her feel comfortable and well put together at a holiday gathering. Knowing this, we're focused on further enhancing our merchandise offering through continued product innovation, better inventory management in terms of content and flow, and increased speed to market.

As we focus on our core product offerings, we're also looking for ways to further our brand awareness. A great example of this is our exciting new partnership with The Weather Channel, which will feature Lands' End as part of all live, out-of-studio reporting. As The Weather Channel's official outfitter, this is also an incredible opportunity to showcase our apparel, highlighting our iconic outerwear, a category in which we will continue to leverage our core competency.

We also plan to selectively broaden our product offerings where it makes sense for the brand. We have increased our focus on the home category, where we see a meaningful opportunity to expand the business as we better align the product assortment with the needs of our customer, guided by data analytics on purchasing preferences.

We will also focus on growing our outfitters business going forward, with our innovative products that meet the needs of our partners. This includes our anticipated launch of the new Delta Air Lines program in the fourth quarter.

Our second area of focus is on becoming a more digitally led company. We see great opportunities to leverage data analytics in order to better tailor and personalize the shopping experience for each customer. We know that they want to accomplish 4 things when they shop Lands' End: to find what they're looking for quickly and easily; to ensure that it will fit right; to discover new products; and to receive their order when they need it.

We're, therefore, embarking on a number of initiatives to become a quicker and more nimble digital company to create a better customer experience across touch points. These activities are centered on improving and optimizing the user experience across multiple device platforms, offering personalized messaging, product presentation and suggestions each time they visit our site, leveraging data to make better decisions and improving our speed to market and speed to customer.

Our third area of focus is on our distribution channels in this competitive retail landscape that is key to our success to create an excellent customer experience in not only how we sell, but where we sell our products. We are testing and implementing our strategy for standalone Lands' End stores so that we can create the optimal environment for the bricks-and-mortar shopping experience.

We are learning both from the marketplace and from our customers as we create a store strategy that embodies our brand, resonates well with our customers and offers a seamless multichannel experience. As part of our retail strategy, we're using customer analytics to help inform our decisions, such as what's important to our customer in a Lands' End store and what geographic locations make the most sense for us.

We expect our first location to open in the first half of 2018, and we plan to open a handful of locations throughout the year as we test our concept. We're also exploring opportunities to utilize third-party B2C digital channels, both domestically and internationally, in order to expand the universe of Lands' End customers and increase brand awareness and exposure.

In addition, we continue to focus on the B2B marketplace through our Outfitters business. We're excited about the Delta launch and see additional opportunities across regional and national accounts over time.

Overall, we believe that we have an opportunity to optimize our distribution channels by leveraging a combination of digital, retail, third-party and international channels. We plan to execute on this initiative as we test and learn over the coming years.

The fourth area of focus is our business process and infrastructure. As you know, we have invested in a new ERP system over the past several years, with an emphasis on process standardization and efficiency in order to reduce manual tasks and improve how we collect, store and use information.

We are already benefiting from the finance and merchandising operation system that we put in place earlier this year and that are in the process of implementing additional capabilities in those areas as well as improved inventory planning processes. These will pave the way to roll out more strategic competencies as we work to grow the business and operate as a global multichannel player.

As we look to the future, we will turn our attention to systems for improving our order management and warehouse management as well as optimizing our logistics and transportation, which will further enable us to operate with speed. We believe that we are well under way in having the data, the processes and the talent in place to capitalize on our brand's heritage and interact with our customers in a highly selective personalized way based on their experiences and lifestyles.

In fact, we recently announced the appointment of Gill Hong as Executive Vice President, Chief Merchandising Officer and Head of International, and Sarah Rasmusen as Senior Vice President of E-commerce. They both have exceptional experience in helping us execute in these 2 critical areas of our business.

Essentially, it's up to us to put the customer front and center, meet them where they're going and anticipate their needs. This will be done across the board, from our product assortments, technology choices, distribution channels and infrastructure backbone. Ultimately, our customer wants to feel connected with the brand and be taken cared of with products that are great quality, a good value and fulfill a need that they have in their lives.

In conclusion, we've laid the foundation for growth, and we are now focused on finalizing our strategic plan to drive consistent long-term performance over the next several years. While I will provide more detail in January at the ICR Conference, I will share that our initiatives are rooted in driving growth across the business as a customer-centric multichannel online organization. This means we will provide customers with better and faster access to the products they want across channels, evolve our product offering to continually have a purpose for our customer and be innovators in our digital and marketing programs to enhance our customer connection.

We will also focus on growing our retail presence to ensure our customers have access to products whenever and wherever they want to shop. We're excited about the momentum in the business and believe that we're now well positioned to capitalize on the opportunities ahead for Lands' End. I look forward to providing you with more details of our go-forward plan in January.

With that, I'll turn it over to Jim to review our financial performance.

Thank you, Jerome, and good morning. We're very pleased with the continued progress that we made in the third quarter. We drove revenue growth and gross margin rate improvement and reduced expenses, which resulted in a significant increase in profitability.

For the third quarter, revenue increased 4.5% to $325.5 million compared to $311.5 million last year. Our overall revenue grew 6.1% after adjusting for the Sears store closures, which accounted for approximately $5 million of revenue in the prior year. Sales in our direct segment grew 6.7% to $290.3 million, while retail sales decreased 10.8% to $35.1 million, largely resulting from the Sears closures.

In terms of product, within outerwear, we saw a positive response to our new, more robust traditional offering, specifically in fleece and lighter-weight down. Bottoms showed improved performance with the introduction of women's pencil pants and men's Knockabout Chino, and within home, solid performance driven by basic Supima towels and bedding.

We're also very pleased with the continued positive momentum in our buyer file as we further refine our product assortment and value proposition, optimize our marketing efforts and enhance our customer experience. These efforts drove double-digit growth in our customer file, with increases in both new and existing customers as well as reactivation of lapsed customers.

We continued to see improvements in both traffic and conversion. We fine-tuned our marketing spend, focusing on our most effective media channels, specifically digital and our catalog. We remain committed to taking a disciplined, strategic view of our promotions, utilizing a test, learn and react approach, which is driving improved promotional productivity and profitability. In addition, further refinements to our catalog include focusing on key item selling and enhanced product presentation as well as improved predictive modeling around consumer buying behavior.

We saw a slight decline in our outfitter business during the quarter, mainly driven by national accounts. This was partially offset by an increase in revenue from our school uniforms business during the back-to-school season. We expect to see improvements in this business as the new Delta account launches at the end of the fourth quarter and beginning of the first quarter of 2018.

Turning to our retail business, same-store sales were a negative 2.1% in Sears locations and a positive 3.3% in our standalone stores, which combined resulted in a comp store sales decrease of 1.3%. We were negatively impacted by the closing of 31 Sears locations since the third quarter of last year, and we ended the quarter with 188 Shops at Sears.

As we previously discussed, the leases for our remaining Sears locations expire over the next 26 months. In January of 2018, 49 of these leases are scheduled to expire. We currently plan to exit 14 of these locations or are in the process of negotiating more favorable lease terms on the remaining 35 locations, which include both direct reductions and a shorter renewal term of only 12 months. We expect the revised terms will help us yield a positive EBITDA in these stores and enable us to retain existing Lands' End customers that shop us at Sears.

Gross margin increased 70 basis points year-over-year to 43.6%, and gross profit increased $8.3 million or 6%, from $133.7 million last year to $142 million this year. Overall, we believe our initiatives enhance our promotional productivity and rationalize our offers and driving improved product margin compared to prior year.

The direct segment gross profit increased 11.3%, and gross margin increased 190 basis points to 44.8%. The increase was largely driven by actions taken relating to offers in pricing as well as a write-down of underperforming inventory, primarily Canvas, which occurred in last year's third quarter and did not repeat this year. In the Retail segment, gross margin decreased to 34.1%, mainly driven by shrink and a shift of liquidation events between quarters.

Selling and administrative expense decreased 2.5% to $129.1 million. Despite our increased sales, we were able to reduce our costs and realize more than a 250-basis-point improvement in expenses as a percent of sales. The $3.2 million decline in SG&A was primarily the result of lower marketing and other variable expenses, partially offset by $7 million in higher incentive accrual.

Even though we still anticipate our annual marketing expense to be slightly down versus last year, we've shifted dollars out of the third quarter into the fourth quarter, where we believe the spend will be more productive. Furthermore, assuming a continued strong performance in the business, we expect another increase in incentive accrual in the fourth quarter. As a reminder, in the prior year, there was no incentive accrual in the second half of the year due to the performance of the business.

Finally, SG&A in the fourth quarter will also be impacted by costs related to the Delta launch, with the corresponding revenue recognition just beginning at the tail end of the fourth quarter and into the beginning of 2018.

Depreciation increased by $1.6 million to $6.3 million, largely due to our multiyear ERP implementation. This program will involve multiple asset go-live dates as we move forward into 2018 with corresponding increases in depreciation.

Operating income increased $9.3 million to $5.9 million compared to an operating loss of $3.4 million in the third quarter of 2016. And finally, net income for the quarter was $0.2 million or $0.01 per share compared to a net loss of $7.2 million or $0.23 per share last year.

In addition to the GAAP measures that we outlined above, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was $12.9 million. That's an $11.6 million increase compared to $1.3 million last year.

Now let's take a look at the balance sheet. Total cash at the end of the quarter was $92.9 million compared to $131.5 million last year. Inventory at the end of the quarter was $423.5 million, which was down $2 million compared to last year. Even though our inventory was fairly flat, our accounts payable balance decreased $20 million versus prior year as we improved inventory flow to help drive the business during the quarter. This resulted in a negative timing-related impact to our cash balance.

Overall, we believe the health of our inventory continues to improve our inventory as pressure, it's more current with less aged product, and we remain very confident with both the quality and content of our inventory investment.

Net long-term debt decreased to $487.2 million compared to $491 million at this time last year, with the reduction due to the quarterly principal payments. We also recently announced the closing of a new $175 million ABL revolving credit facility, which matures in November of 2022.

The new facility refinances the existing $175 million facility with similar terms, but with lower borrowing and unused fees. While there is no current intention to utilize this facility, we are pleased that it provides us with continued access to liquidity reserves at a more favorable cost structure as we execute on our short- and long-term strategic initiatives.

Looking ahead, we continue to expect CapEx to be approximately $35 million to $40 million in 2017. The majority of this spend is associated with the ERP and other information technology investments.

With that, we'll open up the call for questions.

(Operator Instructions) And our first question comes from the line of Alex Fuhrman with Craig-Hallum Capital.

I wanted to ask about the retail business. And if I'm doing the math right here, it sounds like there's a number of your stores that you're going to be looking to close here in the spring and then sign a bunch of 12-year leases perhaps on the remainder. If I'm thinking about this correctly, I believe that would mean that substantially all or most of your leases would then come due next -- the following year in the spring, in 2019. What would your plans be at that point? Or are you still looking to see maybe how the next year performs before you kind of have that larger decision to make in the spring of 2019?

Well, a couple of things, Alex. I think you meant to say 12-month leases instead of 12-year leases but...

I Yes, I meant to say that.

Yes, all of the leases, as we said, come due in the next 26 months. A majority of them come through every January. So we have a tranche this January, a tranche next January and then the remaining, the following January. And so we'll go through a similar process that we went through this year. We'll take a look at them, look at the profitability, look at what our top line sales are, look at the customer retention, have conversations with Sears about what our go-forward is, and we'll be able to make the decisions store by store at that point. With this group, as we said, we decided to keep 35 of them for 12 more months. We were able to negotiate favorable terms, not only on the lease term, but also on the rent and then the remaining 14 that we either felt wouldn't be profitable or we weren't able to reach appropriate terms, we decided to close. So I'd anticipate a similar process over the next 26 months.

Okay then. And I guess what I'm getting at is I imagine all the stores when you're talking about profitability here, you're talking about on a 4-wall basis.

4-wall, yes.

And I'd love to just try to get a better or sense of understanding how much fixed expense is there with the retail business that's at stake as you look into 2019. I mean, are we talking -- just trying to get a better sense of how much of that fixed expense could be trimmed as you close -- as you reduce the number of stores versus how much is just that kind of baseline that as long as you have any stores, there's going to be that certain component of expense.

It's not a tremendously fixed intensive business. It's a combination, just like any retailer would be. You have a significant amount of store expenses that's more variable related to each store, but then you do have a fixed component that relates to the management of that business. And so a lot of that will come in a step function, too. If we ended up closing a significant amount of them, we look to take out a portion of those fixed expenses. For instance, if you close all the stores out of one district, you'd be able to eliminate any expenses related to that district. So we're looking at that as we manage through this next 26 months. And I think you'll see us manage it appropriately.

That's helpful. And then looking into Q4, I mean, it sounds like Thanksgiving weekend was very strong for the company. Can you give us a sense of how your more seasonal, cold-weather items have performed so far? And as you look to the month of December, how your inventory sits? And if you're expecting seasonal to be a major component or -- more or less than last year for December?

The seasonal product actually performed relatively well even as we started off into fall, even though it's not really a cold fall. Outerwear was performing pretty well. Cold weather accessories has performed well. Flannel shirts have been phenomenal, turtlenecks have been phenomenal, sweaters have been very good, and so we're pretty pleased with the selling that we've seen to date. I think in some cases, as you can see in our inventory, the inventory's getting quite clean. We're looking quite good from an investment standpoint on product. We're feeling good about the transition into spring coming up. Having said that, we're not even halfway through quarter 4 yet. We've still got a long way to go. There's still Christmas business to do, and then we have the launch of Delta in January. And there will be some good, some stuff that will go out the door in January and a lot that will go out going into quarter 1 of next year as well. Since this is our biggest launch, we feel like quarter 4 started off well. But we'll see how it performs throughout the rest of the season. But as far as cold-weather gear is concerned, we feel great. The product looks good. It has sold really well. And this morning, it was like 19 degrees when I woke up here, and I think it's going to get cold in the East Coast. So it's all looking good.

And I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.