Lands' End, Inc. (LE) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lands' End Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would like to turn the conference over to Bernie McCracken, Chief Accounting Officer, you may begin.

Good morning, and thank you for joining the Lands' End earnings call for our fiscal fourth quarter and fiscal 2016 results. 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 note that this morning we released our fourth quarter and fiscal 2016 earnings results, which are now available on landsend.com. I would like to remind you that today's discussions 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 Investor 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 Jerome Griffith.

Thank you, Bernie, and thank you everyone joining us this morning. I'm pleased to be speaking to you today as the CEO of Lands' End. In the more than half century since the brand was established, Lands' End has become a symbol of American family values, American spirit, and has amassed a strong and loyal customer following. The company's iconic heritage and strong brand recognition as well as its highly compelling model as an e-commerce-led business are the attributes that drew me to the role. However, in the recent history, the company lost traction as it lagged behind competitors and in some ways did not adequately evolve to keep pace with the changing retail landscape. I believe we have a tremendous opportunity to rejuvenate this business as we address these issues and position the company to leverage its strengths. This includes creating a relevant assortment that maintains our classic American heritage with an updated look, providing a clear brand-identity to speak to today's consumer and better leveraging our existing distribution channels, while expanding into new channels. It is a matter of execution and I believe that my brand experience and expertise, and strategically optimizing distribution channels will enable us to strengthen our competitive position and drive sustainable long-term growth. I've had the opportunity to meet with many of our team members and have been impressed by the talent and dedication to the organization. Over the next few months, I'll take a deeper dive into the business and will be asking a lot of questions to better assess our competitive strengths and weaknesses. As I immersed myself into the organization, I expect to gain a greater understanding of who we are as the company, what we mean the consumers and what Lands' End will represent as a brand going forward. I will work with the team, urging these insights to formulate a strategic plan to grow the company over the long-term. That said, based on my initial observations and discussions, I believe that our opportunity lies in several key areas. Let me provide my high-level thoughts on each. On the product front, we will create assortment for the whole family that encapsulate the classic American heritage and innovation that Land's End is known for, in a way that is compelling and aligned with the needs of today's consumer. We want to ensure that every item reflects the Land's End identity and represents what makes Land's End unique. We will do this by focusing on key product categories such as outerwear and swimwear, and our diverse fit and size ranges. Also we will evolve our development calendar to ensure that we are providing customers with products that align with changing trends in a timely manner. By tightly managing the development process, we will also be able to reduce our costs and enhance our margins. Combined, these initiatives will help us to regain our position in our customers' minds as a heritage brand with a great value proposition, and ultimately, create a compelling reason for our customers to view Land's End as a leading lifestyle destination. We also need to develop the strong brand message that is consistent across every facet of organization. We will take steps to further heighten our brand image despite operating in what continues to be a challenging and highly promotional environment. As part of this effort, we will take a strategic approach to our marketing and promotions. Our catalogues are an important part of our marketing program and we'll look to evolve and better leverage this business. We recognize that it is critical to showcase value to consumers, but we believe there is an effective way to approach this without degrading the brand. Our team will be tasked with developing, testing and continually refining our marketing and promotional strategy to ensure that we are regularly communicating our value proposition in a way that resonates with our customer. Our other major opportunity will be leveraging our brand across multiple distribution channels. First, we will focus on capitalizing on our e-commerce business. Overall, our goal is to be seen as an e-commerce led company that sells a great lifestyle brand. We will work to become more agile on our online platforms, adopting a test and react culture, that will enable us to best meet our customer's needs, while also enhancing our [Technical Difficulty]. We've already begun to take tactical improvements, but given the increasingly dynamic nature of our online business, we'll need to be more diligent in improving our online experience. To accomplish this, we will need to augment our team, bringing in expertise to help ensure we maintain an e-commerce business that is ahead of the curve and create a best-in-class digital organization. We will also leverage the expertise and systems that we already have in place. In addition to our established catalogue business to ensure that we're making the right decisions to fuel growth. We announced last week that Bob Bowman has agreed to join our Board. Bob has an incredible wealth of experience in the online and digital media space. And we look forward to leveraging his deep knowledge as we focus on further building our e-commerce business. In addition to e-commerce, we will work to expand our distribution network through various other channels, while we will do the research and assess which areas will make the most sense of our brand, this could include evaluating a presence at both retail and with wholesale partners. In addition, we will focus on evolving our distribution geographically. Within the United States, Lands' End is well known in the Midwest and the Northeast, and can improve its relevance with customers in other regions. Lands' End is already distributed internationally, but we will work to better connect with our customers and further expand the business worldwide. Lastly, I was pleased to see how established the Lands' End outfitters business is. And I'm excited about the growth opportunities with both existing and new partners, as we look to capitalize on our expertise in the area. Overall, I believe that there are number of opportunities ahead for Lands' End. And I'm very excited to work closely with the entire team to ensure we are enhancing the business in ways [Technical Difficulty] profitability and shareholder value over the long-term. I look forward to providing you with additional details on our go-forward strategy and updating you on our initial progress on our next call. Now, I'll turn it over to Jim to review our financial performance. Jim?

Thank you, Jerome. Overall, we saw sequential improvement in our fourth quarter financial results. Revenue for the quarter decreased 3.1% to $458.8 million compared to $473.5 million last year. The sales decline was comprised of a 2.6% decrease in the Direct segment with sales of $398.5 million and 6.3% decrease in the Retail segment with sales of $60.3 million. Sales in our outfitter business were up approximately 2% for the quarter. As we discussed on our last call, we made a number of enhancements during the fourth quarter, focusing on improved traffic and conversion among our existing customers, reengaging with lapsed customers and capturing the attention of new shoppers. For the holiday season, we reallocated marketing dollars to our most effective media channels, mainly digital media and our catalogue, which resulted in improved traffic trends as well as increased demand. Refinements to our catalogue, including highlighting key selling items, and more clearly communicating our value message, drove demand among existing customers and helped reactivate lapsed customers. We also implemented a more strategic promotional plan within our test and learn environment. This allowed us to improve our demand while better managing our margin rate. In addition, we made enhancements to our website to improve the overall user experience. We methodically tested, measured and reacted to our customer feedback, which enabled us to increase conversion during the quarter. Overall, through these activities we saw improved trends in conversion, customer reactivation and margin. Importantly, since September we've seen meaningful sequential improvement in our customer file trends from both existing and lapsed customers as well as beginning signs of new customer acquisition. In terms of product, we are pleased with the performance of our sleepwear, women's knit tops and home products, all of which performed better than the company average during the quarter. However, the solid performance in these categories could not offset the weakness that we experienced in a number of other categories. Specifically in outerwear, which is our largest category in the quarter, represents over 20% of our business, was particularly soft in the first half of the quarter with the unseasonably warm weather. And while we did see a pickup in sales later in the quarter, it wasn't enough to offset the initial weakness. In Retail, we saw improved sequential sales trends despite persistently weak traffic trends within malls and particularly in the Sears locations. Our same store sales declined 1.7%, while we operated 11 fewer Sears locations compared to last year and in the quarter with 216 shops at Sears. Finally, turning over to our outfitter business, we spoke to you about our Delta program on the last call. We are working closely with Delta and Zac Posen to finalize uniform designs for the new line. The current timing of the launch is plan for that very end of fiscal 2017 or early fiscal 2018, and we'll keep you updated on that timing as we progress throughout this year. In the interim, we will continue to supply Delta with their current uniform line. Moving onto gross profit for the quarter, it was $176.9 million, this compares to $199.1 million in the same period last year. Gross margin declined 340 basis points year-over-year to 38.6% due to deeper discounting across most of our categories. Our gross margin pressure from the third quarter continued through to November, but we did see improved trends during the Black Friday, Cyber Monday weekend and throughout December. During the quarter, we wrote down $2.3 million of prior-season inventory from our Canvas by Lands' End brand, which contributed 50 basis points to the overall gross margin decline. We've adjusted our buy plan going forward and we don't anticipate any further Canvas by Lands' End inventory write-downs. The Direct segment gross profit decreased 11.5% and gross margin in this segment decreased 390 basis points to 39.2%. In the Retail segment, gross profit decreased 8.7% and gross margin decreased 80 basis points to [Technical Difficulty]. Selling and administrative expenses decreased 3.1% to $146.3 million, which compares to $151 million in the fourth quarter of last year. Total S&A expenses as a percentage of revenue were essentially flat as we carefully controlled expenses and we eliminated unproductive marketing spend during the quarter. This gives us operating loss of $148.4 million and this compares to operating loss of $54.8 million in the fourth quarter of 2015. Operating loss for the fourth quarter of 2016 includes $173 million for non-cash impairment charge related to the write down of intangible assets. Operating loss for the fourth quarter of prior year includes $98.3 million also for a non-cash impairment charge related to the write-down of intangible assets. Income tax benefit for the quarter was $62.8 million compared to $21.1 million last year. The effective tax rate was 39.8% for the fourth quarter and that compares to our last year tax rate of 34.8%. The variance in rate is primarily attributable to the effects of credits and other permanent differences for the company. That results in a net loss for the fourth quarter of $94.8 million or a loss of $2.96 per share, which compares to a net loss of $39.5 million or a loss of $1.23 per share in the fourth quarter of last year. If we exclude the $173 million or $107.8 million after tax non-cash impairment charge, net income for the fourth quarter of 2016 was $13 million or $0.41 per share. If we exclude the $98.3 million or the $62 million after tax non-cash impairment charge, net income for the fourth quarter of 2015 was $22.6 million or $0.71 per share. For the fourth quarter, adjusted EBITDA was $30.7 million and that compares to adjusted EBITDA of $48.1 million in the fourth quarter last year. For fiscal year 2016, net revenue was $1.34 billion, which compares to $1.42 billion in 2015. Fiscal year 2016 net loss was $109.8 million or $3.43 per share, which compares to net loss of $19.5 million or $0.61 per share for fiscal 2015. Net loss for fiscal 2016 included $6.7 million write-down of prior season inventory for our Canvas by Lands' End brand as well as $1.2 million in non-recurring personnel costs, primarily related to the departure of our former CEO. Adjusted net loss excluding the $173 million or $107.8 million after tax non-cash impairment charge was $2.1 million or $0.06 per share. For fiscal 2015, adjusted net income excluding the $98.3 million or $62 million after tax non-cash impairment charge and $3.4 million benefit or $2.1 million after tax benefit from the reversal of a product recall accrual was $40.4 million or $1.26 per share. Now let's take a look at the balance sheet, total cash at the end of the quarter was $213.1 million, which compares to $228.4 million last year. At the end of the year, we did experience approximately $20 million of favorability in accounts payable compared to last year, which is largely due to the timing of inventory receipts and the corresponding vendor payments. We expect accounts payable to normalize during the first quarter of 2017. Inventory at the end of the quarter was $325.3 million, which is $3.9 million less than last year. Despite the sales decline, we are pleased that we are able to effectively manage inventory in the quarter. We ended the year with not only less inventory, but a better balance of higher quality inventory. And we are comfortable with quality and content of our inventory headed into 2017. Long-term debt decreased to $490 million as compared to $494 million at this time last year with reduction due to the quarterly principal payments. Cash provided by operations in 2016 was $23.7 million and that compares to $35.9 million in 2015. As we look ahead, we are going to continue to focus on prudently managing our cash, while making strategic investments particularly in our ERP and infrastructure initiatives. This will better position the business for long-term growth. To that end, expect CapEx to be approximately $40 million to $50 million in 2017, the majority of which will be associated with our ERP program and other technology investments. With that, we are going to open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Alex Fuhrman of Craig Hallum. Your line is now open.

Great. Thank you for taking my question. I'd love to get your thoughts, Jerome, I know you mentioned looking at some new distribution channels. What are some things that you see as the biggest opportunities? I mean, is it other wholesale outlets that you think could be good for Lands' End or is there maybe some more thinking around doing some more company-operated stores?

Thanks, Alex, for the question. I think both is really the answer. When you look at most successful companies today, they are looking at an omni-channel approach, where you're really distributing product where the consumer is. And I think for us, you've got 87% - almost 90% of everything that we are selling going through e-commerce. You've got still a pretty decent size business at Sears. We're doing a couple of hundred million there. And that's says that there are customers out there that want to shop in a physical presence. And in fact, this week I'll be visiting all of our own stores and some of our top volume Sears stores. I think there is an opportunity for a company-owned store platform. I'm not exactly sure what it is yet. And that I think will play out over the next few months as we take a look and put together, what we think a profit model might look like, and what a store footprint might look like. I think in the wholesale side, we are actually wholesaling product now, but it's sort of without a strategic plan. And you've got opportunities for sure in a third-party e-commerce, and potentially in some brick-and-mortar places where we could be, but its early days. So I would say there are opportunities. We are going to look them quickly, but I don't have any specifics for you at this point in time.

Great. That's really helpful to understand your thinking, and thank you. And then, just thinking about - you mentioned bringing in some more expertise, particularly around e-commerce and Jim touched on the higher CapEx plan for this year, $40 million to $50 million, so it sounds like a number of investments being made around the business. How should we think about the expenses that are going to be hitting on the SG&A side in terms of some of the new headcount you're bringing on? I mean, it looks like you guys did a pretty good job of controlling expenses this quarter and 2016 in general. Do you feel like there is more opportunity to rein in SG&A a little bit or are some of these investments and new hires going to start to pull that number up a little bit.

I see it so far. Now, listen, realize, today is my 12th business day on job. So with my vast experience we looked at a lot of processes in the company, how things get done, where the priority sit, what the opportunities are. And early days, I would say, we are doing a pretty good job controlling expenses, but we are probably spending in maybe not all the right areas. We're an extremely good catalogue company, and we spend a lot of money in managing catalogues. But I think some of those resources could be better used particularly in our e-commerce group. People would kill for our data. I mean, we have so much good data on our consumer where they are, what they buy, how often they buy, what they are looking for. We don't do enough - a good enough job of mining that data, looking at it. We don't do a good enough job of analyzing consumers' needs and wants based upon what they're buying history is. So I think you can safely say that we could do more job - a better job, and put more resources towards running a great e-commerce business as opposed to running a great catalogue business. And that really jumps out at me, because when I look at processes for the company, I think we're probably not up to date where a lot of other companies are in the world today. We are slow on product development. We are slow on reacting to trends. And we've got some pretty good businesses out there. Our swimwear business is a very good business. Our knit wear business is a very good business. We should be able to jump on trends. We can't do that today. Additionally, we should be a lot smarter about how we are managing or advertising dollars from a digital standpoint, we are not there yet. So we've got areas where we do well and then a lot of areas for improvement. And a lot of those improvements really are going to come about from re-tasking resources and putting the right resources in the right areas.

And, Alex, I think that's the key. When you talked about investing in SG&A, I think similar to what we've been able to do on the marketing side where we've taken on productive dollars and put them into more productive working media, our goal would be to do same on the SG&A, is taking on productive spend, and as Jerome mentioned, putting into some of the more productive areas.

Great. That's helpful. Thank you very much.

Yes.

Thank you. And our next question comes from the line of Steve Marotta of C.L. King. Your line is now open.

Good morning, Steve.

Good morning, Jerome and Jim. Congratulations, Jerome, welcome aboard.

Thanks.

Jerome, you mentioned an updated development calendar. Could you talk about what the cycle is now from thought process to delivery? How long that is? Where you think you can get it to? And could you also weave in your thoughts on test-and-react model, what you are doing there and how that can be a larger portion of your total mix?

Yes, idea to warehouse is pushing a year right now, which is way too long. We've got I believe the opportunity to cut that down by several weeks into the months area. I haven't got to the point yet, where I can say here is exactly how long it's going to be. I can tell you 10 years ago I was working at the company where it was 14 weeks out. So we've got a lot of room from improvement. We are making some of the right decisions today, just to talk about how we can get help from our suppliers, change our processes, streamline things to be faster and more react-full. What I've seen from the group so far in the test-and-learn culture is they are embracing it. We're already starting it. The guys had actually started it before I even got here. And there is a lot more thought into putting product on the web, let's see how this works, and doing different A/B testing or different look testing, and getting the learning and reacting to it. So the group is well on its way in that part.

Okay. My follow-up regards Lands' End Sport, could you talk about how that performed in 2016, your plans for 2017 and beyond?

In 2016, it was a small piece of the business. I think as we go forward into 2017 there are opportunities for growth there. But I think Jerome is still going through the different pieces of the business and figuring out where we're going to be investing.

Yes. It's a very small part of the business. What we have learnt from our customer, our customers are not the techie customer. Our customers are more at leisure. And the direction on that product will change a little bit going into the back part of 2017. But even so, it's a small - I wouldn't say insignificant, but it's a couple of percentage points, it's not big.

Thank you.

Thank you. And I'm showing no further questions at this time.

Okay. Thank you all.