Lands' End Inc (LE) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Lands' End Fourth Quarter and Fiscal 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded for replay purposes.

It is now my pleasure to hand the conference over to Mr. Bernie McCracken. Sir, you may begin.

Good morning, and thank you for joining the Lands' End earnings call for our fourth quarter and fiscal 2017 results, which we released this morning and can be found in 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 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 obligations 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 measure can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relations section of our website at landsend.com.

In addition, note that the fourth quarter of fiscal 2017 had 14 weeks compared to 13 weeks in fiscal 2016 and that fiscal 2017 had 53 weeks compared to 52 weeks in fiscal 2016. For the purposes of this call, management will refer to the extra week in both the quarterly and annual discussions as the 53rd week.

With that, I will turn the call over to Jerome Griffith.

Thank you, Bernie, and thank you, everyone, for joining us today. Overall, 2017 was a year of tremendous progress at Lands' End as we executed on numerous strategies to drive improved performance in our business. The fourth quarter represented the third consecutive quarter of sales growth following 11 consecutive quarters of sales declines.

Over the course of the year, we stabilized the brand by returning to our roots, growing our buyer file, reconnecting with our core customer, driving volume in key categories and delivering positive retail comps. We also secured contracts with 2 major airlines, which will create incremental revenue in 2018 and beyond. We have strengthened our market position by capitalizing on our authentic American heritage, establishing an effective marketing strategy that resonates with our customer and putting in place improved business processes that will enable us to operate more effectively and efficiently as an organization. We have great momentum behind the business as we head into the new year.

We experienced strong revenue growth in the fourth quarter, driven by our digital business and our stand-alone retail stores. We started the quarter with an exceptional November, a terrific Veterans Day weekend up through a record-setting Cyber Week and continued to see strong momentum throughout the holiday season. We delivered double-digit growth in our buyer file during the quarter with solid increases across new, existing and lapsed customers.

In terms of product, we have continued to focus on key items in iconic styles, which drove performance during the quarter. We saw strength in our outerwear and knits categories as well as accelerated momentum in our home, footwear and accessories businesses as customers looked for quality and value in gift giving. We're pleased with the continued progress we have seen as we remain focused on providing the great value proposition that Lands' End has always been known for while also getting back to the heart of our business with innovations that enhance our customers' lives.

We believe the foundation we built in 2017 positioned us to achieve our long-term goals. To reiterate the comments we made in early January, we have developed a long-term strategic plan with 5-year financial targets, including growing revenue to $1.8 billion to $2.0 billion and achieving EBITDA margins in the high single-digit range. To get there, we remain committed to executing on our 4 growth initiatives, which will enable us to further connect with our core customer and expand the business.

Product remains our #1 focus as we look to consistently provide customers with superb products that they have come to know and depend upon and that reflect our American heritage. Everything that we do is centered on our core values of providing our customers with remarkable quality, creating product with purpose, delivering trusted service and encompassing the family spirit.

We are leveraging our comprehensive customer data to drive decisions around our merchandise assortment. This includes focusing on key categories and streamlining our SKU counts so that we can put greater emphasis on essential items within each category. Ultimately, we want to do a few things really well and ensure that we are the destination for key items, such as our squall and expedition jackets, sport knit and Starfish pants, turtlenecks and chinos. We will focus on our customers' experience on these items and their related categories so that we clearly and consistently communicate our distinct and compelling offering as well as our value proposition to customers.

Our 4 major categories of focus, outerwear, swimwear, pants and knits, are all technically driven. Technology plays an important part in product with a purpose and can allow higher price points and higher margins. As I mentioned earlier, outerwear and knit tops outperformed other apparel categories in the fourth quarter. Key items were the driving factors in these categories with several of our franchise items selling out over the holiday season. Flannel shirts and flannel sleepwear also performed extremely well. As we look ahead, we will continue to focus on driving these key categories forward. Our storied expertise positions us well to capitalize on current trends, such as matching family Christmas pajamas.

For the spring season, we're particularly excited about our swimwear offering and have already seen strong performance in this category in the first quarter as customers are preparing for their spring vacations. Franchise items, like the tugless tank, the mix-and-match tankini and the slim tee, continue to outpace last year's volumes. In addition, new items in cover-ups and SwimMini skirts are adding even more revenue.

Turning to Lands' End Outfitters. We're excited about the opportunities we have in this business. We recently signed a contract with American Airlines for above-the-wing uniforms, including airport customer service, premium customer service and flight attendants. We look forward to working closely with the American Airlines team to design and develop product for these 51,000 employees. We expect to launch a test program in October 2018 and anticipate that the line will be fully rolled out to their employees in late 2019.

Late in the fourth quarter of 2017, we began delivery Delta uniforms, both above- and below-the-wing, and expect the bulk of this business to shift between now and the end of the second quarter. Jim will provide more detail on Delta later in the call. We're also very pleased with the buzz being generated by The Weather Channel. This is a partnership through which we can showcase our innovative and functional outerwear offering during the winter season. And we have been regularly featured on-air. We believe this relationship has already proven to be excellent for our brand awareness.

Turning to our school uniform business in Lands' End Outfitters. We remain focused on growing this area both organically and through potential acquisitions. The market is highly fragmented and schools are loyal to their uniform providers So we are pursuing dual strategies of attracting new customers with our superior quality, customer service and capabilities while also exploring opportunities to consolidate on terms that make sense for us.

Second, we're focused on being a digitally driven company to enhance the customer experience and drive sales. We have instilled a test-and-learn culture, ensuring that we are effectively and efficiently using our customer data to constantly improve the user experience every time they interact with our brand. As I mentioned, we were extremely pleased with our record performance during the Cyber Week period, where we outperformed the U.S. online retail industry from a year-over-year sales increase perspective and recorded record-high sales volumes for Lands' End.

Throughout the quarter, we continued to test personalized promotional offers and marketing strategies in both off and online channels. Both of which translated into an improved conversion, particularly in our mobile business, where we experienced double-digit conversion growth. The Lands' End customer is adapting to shopping on a smartphone.

Mobile sales demand grew 3x faster than our desktop business. We're pleased to see the average order value on mobile increase, leading to a much more profitable transaction from these devices. As we look ahead, we will elevate our smartphone shopping experience as we continue to optimize landsend.com for both on-site and external search as we know this is the preferred shopping path on that device.

As product remains our #1 focus, we must also focus on enhancing the home of these products, the product detail pages, to ensure we provide excellent, relevant content and a superior shopping experience. We know our customer is increasingly viewing our products on a smartphone. And they get there by search. The tight integration of product, smartphone and search gives the team clear focus on what to improve in 2018 because it's what the data that Lands' End customers tell us they want.

In terms of our digital marketing priorities, we're focused on continuing to grow our buyers. Our total file increased by double digits in the fourth quarter with new customers up over 30%. As we expand our audience, we will continue to increase the use of personalization. Digital testing has quickly become a means to improve our personalization efforts and began to pay off in the fourth quarter. We have lean and traditional testing and are implementing easy experience improvements to better time our holiday promotions and clearly articulate our price value equation to our shoppers.

Our third focus is on leveraging on our customer data to drive our distribution strategy both online and in retail stores. We continue to test and implement our strategy for stand-alone Lands' End stores. We know that we have a customer that likes to be able to shop in stores, to see and touch the merchandise before buying. They also like to return or exchange products in the store, and we want to make sure that we can continue to serve them in this way. We will put our retail destiny firmly in our own hands as Sears continues to close locations.

We are looking forward to the opening of our first location in the Chicago area in the second quarter and plan to open 4 to 6 stores over the course of the year. As we open stores throughout the year, we will leverage our customer data and analytics to ensure that our locations are ideal for the brand and our customer base. Ultimately, we plan to open 40 to 60 locations over the next 5 years. Our real estate team is exploring opportunities in locations where we have strong brand recognition, focusing on high-traffic areas and convenience.

In addition, we're focused on enhancing our partnerships with third-party marketplaces. We're now up and running on Amazon, and we plan to reallocate some of our marketing spend as we test this third-party channel. While it's still very early, we're pleased with the initial response and we'll focus on learning and making necessary adjustments, invest in strategic marketing and maximize Amazon and other third-party opportunities.

Our final focus is on improving our business processes and infrastructure, which will enable us to continue building our strategic competencies across the business. We will kick off the implementation of the single-order management system in 2018. And we expect to complete our ERP implementation in early 2019. As I've mentioned before, we're working to drive efficiency across the business. This includes making enhancements to our foundational systems as well as to our enterprise IT, digital and analytics organizations. This will enable us to further enhance speed, efficiency, decision-making and customer personalization.

In conclusion, we're well positioned to drive consistent, long-term performance across the business over the next several years. In fiscal 2017, we drove significant improvement of our financial results and built strong momentum behind the business with a strategic plan that we will continue to capitalize on in 2018. We remain committed to driving forward our 4 key business initiatives of delivering product with purpose at great value; being a digitally driven organization; leveraging our customer data to drive our distribution strategy both online and in retail stores; and improving our business processes and infrastructure. Overall, our entire team is excited about our path forward. And together, we're focused on working diligently to meet the goals that we have set out for ourselves.

With that, I will turn it over to Jim to review our financials in more detail.

Thank you, Jerome, and good morning. As Jerome noted, we are pleased with the continued progress that we made in the business in the fourth quarter with strong revenue growth and gross margin expansion, which drove solid profitability increases. Importantly, we ended the year on a strong note and are well positioned heading into 2018.

For the fourth quarter, revenue increased 11.3% to $510.6 million compared to $458.8 million last year. Sales in our Direct segment grew 14.3% to $455.6 million and Retail sales decreased 8.7% to $55.1 million. After you exclude both the 53rd week and the 42 Sears store closures since the end of last year, total revenue would have increased 8% for the quarter with Direct growing 8.2% and Retail increasing 5%.

In terms of product, we continue to see strong response as we focus on our key items within our iconic categories. Growth for the quarter was led by strength in outerwear, specifically down, fleece and our squall, bottoms for Starfish, women's corduroy and men's chino, knitwear and home with Supima towels and flannel sheets. We also continue to see positive momentum in our buyer file with strong growth in active, lapsed and new buyers, resulting in double-digit growth in the overall file for the quarter.

Customers are responding well to our refined product assortment and value proposition as well as our enhanced marketing efforts, helping to drive strong conversion rates throughout the quarter. The Direct segment also benefited from the launch of Delta in our outfitter business. Approximately 25% of the expected launch was recorded in the fourth quarter. And we anticipate the remainder will be shipped in the first half of 2018.

Turning to our Retail business. Same-store sales increased 5% driven by growth in our stand-alone stores, up 13%. As expected, our Retail segment continued to be negatively impacted by Sears closings with 42 fewer locations compared to last year. We ended the year with 174 shops at Sears. As we've discussed previously, the leases for our remaining Sears locations expire over the next 22 months with 94 of them expiring in January of 2019 and the remainder in January of 2020. This past January, 49 leases expired, and we exited 14 of these locations and renegotiated more favorable leases with rent reductions and reduced 12-month terms for the remaining 35 locations.

Gross margin increased 30 basis points year-over-year to 38.9% and gross profit increased to $198.4 million. We believe that our focus on enhancing our promotional productivity and rationalizing our offers continues to drive improved product margin compared to prior year. The Direct segment gross margin increased 50 basis points to 39.7%. We drove a strong 210 basis point increase in our U.S. consumer business as a result of our continued actions to enhance our promotional offers and pricing strategy.

However, this was partially offset by a gross margin decline in our outfitter business, mainly as a result of the Delta launch. As a reminder, the Delta business carries a lower gross margin relative to our other businesses. And therefore, we expect to see this continue to impact our gross margin rate in the first half of 2018. In the Retail segment, gross margin decreased to 31.6%, mainly resulting from increased promotional exposure and a negative selling mix with less full-priced sales compared to last year.

Selling and administrative expense increased $14.8 million to $161.1 million. As expected, this was mainly driven by an increased marketing spend, higher incentive accrual, the additional 53rd week and expenses related to the Delta launch, all partially offset by continued expense reductions. As we discussed in our prior call, we shifted $6 million of marketing dollars from earlier in the year into the fourth quarter, where the spend would be more productive.

Also due to our improved business performance, we accrued $7 million in incentive payouts this year versus no accrual in the fourth quarter last year. The 53rd week resulted in an additional $7 million in expenses for the quarter. And finally, we were impacted during the quarter by increased cost related to the launch of the Delta business while we did not begin to recognize revenue until the very end of the quarter.

Despite these additional costs in the quarter, we were still able to reduce expenses as a percent of net sales by 30 basis points. Please note that the above-mentioned incentive bonus reflects a 72% payout for meeting stated targets in fiscal 2017. In fiscal 2018, the targeted payout is 100%, which would equate to an additional incentive payout of between $6 million and $7 million. Depreciation increased by $0.3 million to $5.9 million, largely due to our multiyear ERP implementation. This program will involve multiple asset go-live dates in 2018 with corresponding increases in depreciation. Operating income was $29.7 million compared to an operating loss of $148.4 million in the fourth quarter of 2017.

Our effective tax rate was a negative 122.2% in the quarter, which compares to 39.8% in last year's quarter. Due to the U.S. Tax Cuts and Jobs Act, the company incurred a fourth quarter tax benefit of $28.4 million. Finally, after adjusting for the transfer of corporate functions from New York to our headquarters and the tax reform this year, adjusted net income was $12.3 million or $0.38 per share compared to last year, $13 million or $0.41 per share, which was adjusted for the impairment of the trade name.

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 $37.3 million. That's a $6.7 million increase compared to $30.6 million last year. For the fiscal year 2017, net revenue was $1.41 billion, including $25.9 million from the 53rd week. That compares to $1.34 billion in 2016. Fiscal year 2017 net income was $28.2 million or $0.88 per share, which compares to a net loss of $109.8 million or negative $3.43 per share for fiscal 2016.

This is based on an effective tax rate of a negative 6,194% compared to 38.6% in fiscal 2016, which again reflects the recent tax reform. As we look ahead, we expect our tax rate to be approximately 30% for next year. For the fiscal year 2017 adjusted net income was $2.3 million or $0.07 per share compared to a net loss last year of $2.1 million or a negative $0.06 per share. Adjusted EBITDA for fiscal 2017 was $58.3 million compared to $39.8 million last year.

Now let's take a look at the balance sheet. Total cash at the end of the quarter was $195.6 million compared $213.1 million last year. Inventory at the end of the quarter was $332.3 million, which was up $7 million compared to last year. This increase was entirely driven by our new Delta business, partially offset by smaller reductions. We continue to be pleased that we are improving our overall health of our inventory and we're entering 2018 in an excellent inventory position in terms of both quantity and quality.

Net long-term debt decreased to $486.2 million compared to $490 million at this time last year with the reduction due to the quarterly principal payments. And finally, looking ahead, we expect CapEx to be approximately $35 million to $45 million in 2018 with the majority of the spend associated with the ERP implementation and other information technology investments.

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

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

Wanted to ask about the performance of some of your key items. It certainly sounds like the -- a lot of the outerwear did very well in the quarter. Can you comment on how some of the basics did as well? And as you look to the spring season, I think you mentioned that swimwear has been doing well. Also do you see the key seasonal categories that Lands' End has historically been more known for, are those becoming a bigger piece of the business relative to what we saw in 2016 or '17? If you could just talk about how kind of that evolution as well as the more basics are trending, would be interested to hear that.

Sure, no problem. Yes, you're pretty right on track when it comes to basics at Lands' End. We've taken a stance in the last, let's say, 6 to 9 months of marketing our basics much more aggressively, whether it be how we show things online, whether it be how we're managing our search or our e-mails and basics across the board earning extremely well for us. Every area, outerwear was great, knitwear was great, our bottoms were great for the holiday season. And we see that trend continuing into spring. I think customers are reacting to some minor changes and upgrades that we have made on some of our basic items. We've introduced stretch into men's polo shirts and men's bottoms. Functionality continues to grow in our outerwear business. In fact, we continue to expand slightly seasonal products in basics. And that seems to be resonating very well with the customers also. It also helps us in the long run to help cut down on SKUs and cut down on inventory, which is, I think, something that's going to really work well for us with profitability going forward.

Great, that's really helpful. And then just kind of some questions about your uniforms outfitters business and some of the recent partnerships that you've had. Can you give us a sense of how much of the initial sell-in for the Delta business did we see in Q4 versus how much is left to come in Q1? And it sounds like some of that is going to ship through Q2 as well. And then as we think about the American Airlines partnership, I think you said in the past that Delta is expected to become your biggest uniforms partner. Can you give us a sense of the scale of the American Airlines partnership? Will that be a major one for Lands' End as well? And when should we expect that to really hit?

So I think, as I've said in my prepared remarks, 25% of the launch came in, in the fourth quarter of last year. The remaining 75% of the launch will come in, in February through May of this year. We have a May in uniform date. From that time, the business will slow down a little bit with really just new hires for the next 12 months. And then we'll get on a more normalized basis in 2019. We have said that Delta was going to be our largest account. American will only be -- keep in mind that, that will only be above-the-wing. So we don't anticipate that being quite as large as Delta since we have both the above- and below-the-wing business.

Okay, that's very helpful. And then just lastly, thinking about the longer-term target of getting to a high single-digit EBITDA margin. Can you give us a sense of how much of that do you expect would come from gross margin versus of leverage of some of your SG&A expenses?

Far more leverage from SG&A than from gross margin. We don't anticipate this promotional environment going away. So we anticipate gross margin being flatter and more of that improvement to getting to high single digits coming from leverage with growth at the top line.

And our next question will come from the line of Steve Marotta with CL King & Associates.

Jerome, I believe you just mentioned the decline in SKU count is one of the ways to improve efficiencies over the next 12 to 24 months. Can you quantify what the SKUs were, say, in '17 and what you expect them to be in '18?

We're looking to continue to reduce the SKU count year-on-year. And it depends on the area, quite honestly. I mean, in certain areas like home, we'll continue to expand it. In other areas like women's, we'll continue to reduce it. On average, we're looking for double-digit SKU counts over the next few quarters. And there's going to be more than just that when we're thinking about concentrating on product. There's lead times, which I think we have opportunity there. There's taking better positions and just piece goods going forward because we're running a basics business, so we know more or less what's going to happen on a month-by-month basis. So it's just really one of the areas where we're relooking to maximize that KPI.

You actually touched on my second question, which is supply chain efficiencies. Your goal had been to materially reduce the product development to delivery lead times. Can you talk a little bit about where you are in that process and how much you would expect that to shrink in the coming year?

It's still early days. We've implemented what's called True North, which is our name for that project for the fall '18 delivery period. We haven't even written orders for our holiday. Well, we're just in the process of writing orders for holiday '18 right now. And I think it's going to take somewhere between 2 and 4 quarters for that to really kick in. And what we were doing is looking to reduce our lead times by between 25% and 30%.

Okay. And could you please remind us how much swimwear is as a percent of sales in the first and second quarter?

I don't think we've given that exact percentage. But we have said that's our largest category in both quarters.

Okay. And my last question is how much cash do you have overseas? And does the new tax law help you rethink cash allocation? And could some of that be repatriated? And if so, what would be the uses?

It's not a significant amount. I don't have that exact number. We could discuss that later. But it's probably not as large as it might be with others. We are looking at that. But we don't look at that as a major opportunity.

Okay. Actually, one quick follow-up, the 30% guidance for the tax rate in the coming year, would expect that to decline again in the following fiscal year? Or based on the current tax laws, it's going to be 30% in perpetuity?

With the current information we have right now, we wouldn't expect it to reduce any further. We're putting that in at 30% going forward.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. We thank you for your participation on today's conference, and you may now disconnect. Everybody, have a wonderful day.