Lands' End, Inc. (LE) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lands' End Fourth Quarter and Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to introduce your host for this conference call, Mr. Bernie McCracken. You may begin.

Good morning, and thank you for joining the Lands' End earnings call for a discussion of our fourth quarter and fiscal 2020 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 President and Chief Financial Officer. After the company's prepared remarks, we will conduct a question-and-answer session. 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, quarterly reports on Form 10-Q and Form 8-K dated June 2, 2020. The forward-looking information that is provided by the company on this call represents the company's outlook as of today, and we do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company's outlook to change. Of note, in this respect, the COVID-19 pandemic continues to have an impact on our business, and its duration could materially alter our outlook. During this call, we'll be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relations section of our website at landsend.com. With that, I will turn the call over to Jerome Griffith.

Thank you, Bernie. Good morning, and thank you for joining us today for a discussion of our fourth quarter and full year results. Looking back on 2020, I'm extremely proud of what our team has accomplished over the past year. Retrospectively, 2020 told us a lot about the strength and resilience of our business model and the diligence and endurance of our team, for which I am very grateful. We moved quickly to protect our business, our people, and our customers, while at the same time maintaining our focus on the continued execution of our strategic pillars; getting the product right, being a digitally driven company, implementing an uni-channel distribution strategy, and enhancing our infrastructure and processes. As a digitally-led eCommerce business, we are uniquely positioned to capitalize on the accelerated shift to online shopping. We benefited from our investments in data analytics, our eCommerce technology, marketing, and business process improvements to drive sales from both existing and new customers. In fact, our new customer acquisition grew 21% for the year and 14% in the fourth quarter as a result of our data-driven initiatives combined with our comfort-oriented product assortment. To summarize our full year fiscal 2020 results, we grew adjusted EBITDA by approximately 12% to $87 million and expanded adjusted EBITDA margin by approximately 70 basis points to 6.1%. Revenue increased 1%, excluding the American Airlines launch in fiscal 2019. Total revenue was driven by 9% growth on our global eCommerce business, largely offset by the impact of COVID across our 3 Outfitters business segments, which Jim will discuss in more detail. Turning to our fourth quarter. In mid-January, we raised our fourth quarter guidance due to our strong holiday performance, and we are pleased to have come in ahead of those expectations. Our global eCommerce business in the fourth quarter was led by the continued emphasis on our let's get comfy initiative through the holiday season. Our strongest performing categories were focused on the stay-at-home lifestyle, including sleepwear, loungewear, and knits. Sleepwear, which we marketed for the whole family, was the highlight of the quarter with customers responding very positively to the versatility in our product assortment. In loungewear, our offering of indoor/outdoor sweats resonated with consumers and more time being spent on outdoor activities and the continued demand for comfort. We also leaned more heavily into transitional outerwear during the quarter, which proved to be the right decision with strong reception across fleece and lightweight outerwear. Our knit business remains a top-performing category as we continue to update our style and colors to meet customers' lifestyle needs. We continue to see a strong desire for comfort, quality, and great value that we don't believe is going away. Our eCommerce business in Europe was very strong in the fourth quarter, up 38%, resulting from initiatives we implemented to drive market share gains. We are pleased with the strong acceptance of our brand in Europe with a more than 100% increase in new customers during the holiday period versus last year. We continue to see opportunity for growth over the long-term in this region as we execute a similar playbook to what drove improved performance in the U.S. and advance our market share position. Turning to our recent partnership with Kohl's, we remain pleased with the early results in the business, particularly Kohls.com. We remain on track to expand distribution to 300 Kohl's stores in 2021 and look forward to continuing to grow this partnership. Meanwhile, one of our newer initiatives, the Lands' End marketplace, grew to 24 new sellers in fiscal 2020. While still a very small business, we're encouraged by the response thus far. We skewed these offerings to home-related brands over holiday to align with consumer demand for decor as they continued to spend most of their time at home. Turning to marketing. We continue to emphasize our digital initiatives. During the quarter, we significantly increased our social media presence, which drove increased traffic to our site. We also continue to upgrade dynamic promotions through testing on landsend.com to determine what customers best react to as we refine our promotional strategies to focus on driving sales at higher margins. As we begin to envision what the world will look like post COVID, we believe many of the changes the retail industry has experienced are here to stay. This includes both the accelerated shift towards digital and the strong demand for casual, both of which are at the core of what we do. Our performance over the last years furthers our confidence that we are well positioned to achieve long-term profitable growth. Before I turn it to Jim, I'd like to address the press release you may have seen earlier this week announcing his appointment to President of Lands' End. Jim has been an incredible partner as we executed the transformation of the business through the execution of our strategic pillars. He will continue to serve as CFO in addition to taking on the oversight of our eCommerce, international, Outfitters, third party, and retail businesses. Sarah Rasmusen, Executive Vice President and Chief Customer Officer will assume oversight of the company's information technology and performance marketing functions. Peter Gray, Executive Vice President, Chief Administrative Officer, and General Counsel will assume responsibility for distribution center operations. We have assembled an incredibly talented management team with these 3 executives in addition to Chieh Tsai, Executive Vice President, Chief Product Officer; and Matt Trainor, Senior Vice President and Brand Creative. I will focus the majority of my time on our strategic direction and further growth opportunities as we continue our journey forward. I'll further speak to this when I review our 3-year financial targets following Jim's discussion. With that, I'll turn it over to Jim.

Thank you, Jerome, and good morning. We're very pleased with the strong results we delivered in the fourth quarter and throughout 2020 as we continue to make progress across our strategic initiatives. For the fourth quarter, total revenue did decrease 2% to $538.4 million compared to $549.5 million last year. However, after you exclude the sales from the American Airlines launch last year, revenue increased almost 6%. This was above our previously updated guidance of $528 million to $533 million announced in mid-January. Our global eCommerce sales increased 8%. We saw growth in our U.S. and international businesses with Europe leading the way with an increase of 38% for the quarter. Our better-than-expected results were driven by strong performance across a number of our key categories, including fleece, sleepwear, and knits. Strong growth in these categories was supported by marketing strategies that continue to message the comfort and value in our product assortments. This quarter, we began breaking out sales for third party, which includes U.S. wholesale revenues and sales on third-party marketplaces. Revenue in this segment increased to $21.3 million, a 298% increase as compared to last year. This increase was driven by the launch of our entire product assortment on Kohls.com and a curated assortment of our key items in 150 of their store locations. Partially offsetting the strong global eCommerce and third party growth, sales in our Outfitter business was down 54%. After adjusting for the American Airlines launch last year, sales in Outfitters decreased approximately 21%. The Outfitters business remained challenged largely due to the ongoing impact of COVID on our travel-related national accounts and our small and midsized businesses. However, what's encouraging is based on the progress we've seen in each of our Outfitter business segments during the quarter, we expect the recovery to accelerate in 2021. We expect this recovery to be led by our small and medium-sized business segments in school uniforms while national accounts are likely to take a bit longer to fully recover. Gross margin in the fourth quarter decreased approximately 30 basis points to 39.5% as compared to last year. Gross margin was impacted by higher shipping costs, as well as sales mix from our growing lower margin third-party business. This was largely offset by our improved promotional strategies and continued use of data analytics for both our pricing and inventory management. As a percentage of sales, SG&A increased slightly by 20 basis points due to the deleverage from the American Airlines launch last year. Net income for the quarter was $19.9 million or $0.60 per share compared to net income of $25.5 million or $0.78 per share last year. In addition to these GAAP measures, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was $46.1 million, which was above our updated guidance of $43 million to $45 million. Turning to the balance sheet. Inventories at the end of the quarter were $382.1 million compared to $375.7 million a year ago. The strong sell-through of our global eCommerce business has positioned us with healthy and lean inventories as we head into 2021. Inventory levels related to our Outfitter business are elevated, although this is not seasonal or fashion product, and therefore, we expect to work through this merchandise as these business segments continue to recover in 2021. Before providing our outlook, I would like to share an update on our CapEx plans. Overall, we are projecting CapEx to be approximately $26 million for 2021. In addition to our increased spending for our customer-facing initiatives, we have started the initial planning for our new warehouse management system. The first phase of this project will be focused on labor savings and package consolidation while optimizing our third-party carrier rates. We expect this implementation to drive operational efficiencies and working capital improvements. Now I'd like to discuss our outlook for the first quarter and first half of 2021 as well as our outlook for the full year. As we think about the relative performance, our outlook reflects strong growth over pre-pandemic levels, particularly taking into account that 2021 will be a recovery period in our Outfitters business. Beginning with the first quarter, we expect net revenue to be between $275 million and $285 million driven by our global eCommerce business. We expect a net loss of $10.5 million to $8 million and diluted loss per share to be between $0.32 and $0.25. We expect adjusted EBITDA to be in the range of $4 million to $7 million. As a reminder, last year's first quarter was negatively impacted by the onset of COVID, which was followed by a recovery to double-digit growth in our global eCommerce business in the second quarter. For the first half, we expect net revenue to be between $600 million and $620 million driven by our global eCommerce business, third-party and the continued recovery of our Outfitters business. We expect a net loss of $16.5 million to $11.5 million and diluted loss per share to be between $0.50 and $0.36. We expect adjusted EBITDA to be in the range of $14 million to $20 million. For the full year, we expect net revenue to be between $1.52 billion and $1.57 billion primarily driven by our global eCommerce business and the continued recovery in our Outfitters business. We expect net income of $11 million to $19 million and diluted earnings per share to be between $0.34 and $0.58. We expect adjusted EBITDA to be in the range of $88 million to $98 million. With that, I'll turn the call back over to Jerome to discuss the progress on our core growth strategies.

Thanks, Jim. While we are extremely pleased with the progress we have made over the last 4 years, we remain excited about the significant growth opportunity that lies ahead as we further advance our initiatives across our core strategic pillars and adapt to the changing consumer environment. Our efforts have clearly transitioned from executing the turnaround in our business performance beginning in 2017 to driving long-term profitable growth. As a reflection of the confidence and optimism in our business, in January, we provided new 3-year financial targets. For 2023, we expect revenue of $1.9 billion to $2.1 billion, representing a CAGR of 10% to 14% over the next 3 years. This revenue target assumes organic growth in both U.S. and international eCommerce businesses and extended recovery and new initiatives in our Outfitters business, continued growth in Lands' End as a marketplace and expansion of our third-party distribution. We expect to achieve adjusted EBITDA margin in the high single-digit range, assuming a stable to slightly higher gross margin as well as an improved SG&A rate with cost efficiencies. As previously mentioned, we were very pleased with the response to our product offering in the quarter. We will continue to lead with our let's get comfy theme as we begin to introduce new versatile knit-based products that consumers can wear, whether doing calls from home or as they begin to return to the office. We will also maintain our focus on wear now apparel with the introduction of seasonal colors and knits and transitional outerwear as we head into spring. As we look forward, we will continue to leverage our use of data analytics to inform product assortments as we adapt to consumer needs. Our proven track record of getting the product right gives us confidence in our ability to continue to meet the ever-changing needs of our growing active customer base. Within digital, we remain focused on driving traffic and growing market share as we refine and leverage our search engine optimization techniques as well as our promotional and markdown strategy to deliver growth. Similar to our approach to product development, our data-driven marketing enables us to optimize spend while we expand market share. Next, I'd like to spend a little time on how we see our Outfitters business evolving. While we expect to see the recovery continue in this business as we emerge from the pandemic, we are increasing our focus on driving growth in our small and medium-sized business segment. We believe there's potential to drive a more consistent revenue stream in this segment given replenishment needs that in the large -- than in the large national accounts, which are driven by larger launches. To that end, we are taking steps to advance our position as the authority in branded apparel and hard goods for the small and medium-sized business segment. This initiative is underway with enhancements to our website to make it easier to find products and redesign logo renderings. We've also begun to evaluate our operational and supply chain capabilities. In the next phase, we will implement marketing and pricing strategies by employing a test-and-react approach. As we advance these capabilities, we believe that the small and medium-sized segment will grow to more than half of our Outfitters business over time. In our school uniform business, we also plan to have steady growth as schools reopen. Turning to our marketplace business. We're very pleased with the early reads on this initiative. Consistent with our past practice, we continuously look for new innovative ways to drive brand awareness and develop new revenue streams. As we learned from information derived from our search optimization tools, we recognized demand for products that were not core to the Lands' End assortment. Through our marketplace strategy, we're addressing our consumers' needs with complementary product, and we'll continue to explore opportunities to welcome third-party brands to our site. In addition to marketplace opportunities, we're excited about the Draper James swimwear collection for the spring/summer season, and we see potential for additional collaborations with current as well as new partners. In addition to our growth strategies, we're maintaining our focus on profitability. We believe we can achieve high single-digit adjusted EBITDA margin threw stable to slightly higher gross margin, stemming from continued improvements in dynamic promotions, inventory management as well as product life cycle and strategic sourcing initiatives. Before we turn it over to Q&A, I would like to share a brief update on our efforts towards diversity and sustainability. We spoke a bit about our actions around ensuring a diverse and inclusive environment on our last call, which introduced the establishment of our Diversity and Inclusion Council and business resource groups. Our D&I Council has established training modules, which are required of all employees, and launched a speaker series which has been very well received. We're also doing our part to create a more sustainable future by minimizing our impact on the earth. Our focus will be on employing water-saving techniques, obtaining polyester from recycled sources, sourcing cotton sustainably and converting to 100% sustainable packaging and labeling by 2025. Lastly, we're extremely proud to be focusing on our philanthropy on the Lands' End Comfort Fund in support of organizations that help fulfill the basic needs for human comfort: food, shelter and safety. In conclusion, we cannot be more pleased with how the year progressed given the difficult backdrop in the industry as well as the economy as a whole. We recognize that these challenges may extend for some time, and we're prepared to continue to manage the business effectively. Still, we're extremely confident that we will come out of this pandemic stronger on the other side. With a strong foundation largely in place, we believe Lands' End will thrive in this digital-first environment. We look forward to updating you on our progress in future quarters. And with that, we'll open it up for questions.

[Operator Instructions]. Our first question comes from Alex Fuhrman with Craig-Hallum Capital.

Really impressive to see continued double-digit growth in the customer file. Is this a business that you think can continue to be a double-digit growth business for the next couple of years? Just curious how you think about translating that growth in customer file into your business over the next few years.

Alex, we've had this as a strategy, I don't know, since the end of 2016 to continue to grow new customer acquisition, and we're very focused on growing it with look-alike customers. We think there's a big market out there several times where we are today and that there's a lot of opportunity for us. So obviously, in the last year, with COVID and the shift to having more demand in online shopping, yes, this has been a trend. One of the things I think that's going to happen going forward is, I think, that trend's going to continue. I think that the trend of more and more people shopping online, loving the convenience of it is not going to go away, and that's even in a post-COVID world, but I don't know that I would guarantee double-digit increases month in and month out. I think there'll be some fluctuations in and out, but one of the things we are seeing is we're continually picking up market share domestically. And internationally, we've seen that even an advanced level of picking up market share against competitors.

One thing I'd add to that, Alex, if you look at our 3-year numbers that we'd put out in January, we are projecting a top-line growth of 10% to 14%, so we do anticipate that being driven by continued strength in our buyer file.

Great. That's really helpful. And then can you talk a little bit more about what you expect the Outfitters business to look like on the other side of the pandemic? It sounds like you're really focusing on small and medium-sized businesses, whereas it seemed like, over the last couple of years, there's maybe been a little bit more discussion around major customers like Delta and American Airlines. Can you talk about the -- how it's kind of different going after companies of those sizes? Are the margins pretty similar? Do you have a pretty robust pipeline of customers you feel like to go after here? Or is there going to be a big marketing effort? I would love to just hear more about that pivot.

Well, I think you got a few different things in there. As we've discussed before, the Outfitter business is really made up of 3 different components, and they were impacted at different rates during COVID, and we do anticipate the recovery being different coming out. School was definitely the quickest recovery. You saw signs of that over the last couple of quarters, and we talked about that business stabilizing. We anticipate that going into this year if kids are back in person learning, we anticipate a fairly quick recovery and future growth in that business. The SMB, the small and midsized businesses, we talked about, and Jerome mentioned, that we could see that growing to be half of this business where, historically, they've been roughly one-third, one-third, one-third. There will be some marketing against that, but you'll see us treating that a little bit more. You should think of that a little bit more like a direct-to-consumer business, where, historically, we had treated it a little bit more like a B2B business and so a much improved, I think, experience on our site with our SMB business coming later this year. And then the final piece is the national business, and we've talked about this before. It tends to be very choppy with new accounts and new launches. That will continue to be the same going forward. That's probably going to be the longest recovery because I'll remind you, again, that over half of that business is travel-related, but we do anticipate that business recovering with the industry.

Our next question comes from Steve Marotta with CL King & Associates.

Good morning, Jerome and Jim, congratulations on a nice fourth quarter. And Jim, congratulations on the promotion.

Thank you, Steve.

Jerome, can you please provide your thought process on reopening product categories which you'll invest in? You've mentioned that comfort will be a little bit more sustainable even as social distancing guidelines are reduced. Is it -- do you think there will be a tad bit more, for a lack of a better phrase, dress embedded in there? I mean from a men's standpoint, maybe more khakis, something that's a little bit more presentable than just outdoor sweatpants? And if so, how do you think about investing within those categories as social distancing guidelines are reduced?

Well, a couple of things with that. We think that from a return to the office standpoint, it's not going to be the same as what it was before pandemic. I think the Monday through Friday, 9 to 5 workdays are gone. I think that most companies that I've talked to, quite honestly, are thinking some sort of a hybrid model, and we believe that customers are not going to want to give up the comfort factor. Now, we've invested in several things that we've done well in. Our swim business is quite strong. Knitwear has been really good for us across the board in both men's and women's. Loungewear, athletic wear, sleepwear have all been strong categories, and we believe those trends aren't really going to discontinue. I think when you look at like the more dressy part of the -- of our assortment, which would be no-iron khaki pants, button-down shirts, dresses for women, people will start to look at that again but in a different way. So, as an example, we've taken one of our best-selling fabrics, which is sporting it in women's, and we've moved that over to men's and put that into dress pants. Lo and behold, we did test, the spring blew out. So we think that people are still going to love that comfy feeling and going to want to feel comfortable and casual at the workplace, and that won't go away.

I get that and I agree for what it's worth. Can you talk a little bit about Europe being up 38% during the quarter? Obviously, you're optimistic about some of the initiatives there. Could you be specific about what those initiatives are? I'm assuming that there's an attractive tail on that at least 12 to 24 months of what would be at least above-average growth. Can you talk a little bit about, again, specific initiatives around European growth?

Sure. We changed management there a couple of years ago, and their new strategy had really been to get everything aligned globally. What I mean by that is we had done a lot of special product for our European and our Asian markets, which we thought it's just going too far away from what the brand is. And as we continue to hone the brand message, in the U.S., we said, let's make this a global message, and that's resounded very well with customers around the world. We thought that there was an opportunity in Europe, in particular, to continue to grow market share. What we've done is basically implemented a lot of the same marketing techniques and product messages that we use in the U.S. And surprise, they worked, and they didn't just work, they worked really well. So, we've continued to double down on a very clear global message and making sure that we're buying the same things that we're marketing the same way and that we're putting dollars behind the same types of marketing similar to what we're doing in the U.S., and it's working extremely well for us.

That's very helpful. Jim, when will the warehouse management system be fully operational?

Well, it's going to be a multiyear implementation. We talked about the first phase. That should be up and going by the end of this year, but the entire thing is going to take over the next 2 years.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. That also concludes the program. You may now disconnect, and have a wonderful day.