Lands' End, Inc. (LE) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Lands’ End First Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Bernie McCracken, Chief Accounting Officer. Please go ahead.

Good morning and thank you for joining the Lands’ End earnings call for a discussion of our first quarter 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 James 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 are 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 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 will 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 first quarter results. We are extremely pleased with our first quarter results across key financial metrics, with performance far exceeding our expectations. The momentum in our global e-commerce business is stronger than ever as we continue to execute our digitally led product and marketing strategies. Our continued global e-commerce growth is underpinned by our best-in-class foundation and our continued advancements across our four strategic pillars of product, digital, unit channel distribution as well as infrastructure and processes. For the first quarter, revenue grew 48% and global e-commerce increased 44% year-over-year, while adjusted EBITDA increased $34.1 million to $22.5 million from the first quarter of 2020. While the first quarter 2020 performance was obviously impacted by COVID-19, compared to the first quarter of fiscal 2019, revenue increased 22%. Global e-commerce revenue grew 26% and adjusted EBITDA increased $19.5 million. Our results demonstrate the strength and momentum in our business that began pre-COVID and is continuing as we emerge from the pandemic. Through our digitally led and data-driven focus, we increased global new customers by 71% in the first quarter. Our total global customer file expanded the first quarter by 27% from the prior year. Our digitally led strategy as well as our product and marketing enable us to achieve customer retention of more than 55%. These customers become more productive over time as they shop more with our brands. Importantly, we are efficiently acquiring these customers who, on average, become profitable within the first year. These metrics illustrate the work we have done over the past 3 years to create a foundation to profitably grow our market share in the global e-commerce apparel business. We attribute our successful new customer acquisition and retention strategy to our enhanced marketing initiatives implemented over the past several years, specifically the significant shift towards digital marketing. In past earnings calls, we have discussed with you the search engine optimization techniques that we use to drive traffic and grow market share. With digital marketing, our primary focus, we accelerated our spending within paid social media during the quarter. The results so far have been great. Our paid social marketing was more productive than other digital marketing initiatives in the first quarter and was the primary driver of the strength in our new customer acquisition. Within our paid social initiatives in early stages and our strong data analytics capabilities, we see significant opportunity to continue to efficiently drive new customers to Lands’ End. Our U.S. e-commerce sales were strong, increasing an impressive 47% during the first quarter. Beyond the U.S., we are also incredibly pleased with the performance of our e-commerce business in Europe, which was up 55% in the first quarter as we continue to benefit from the initiatives we implemented to drive market share gains. The strong acceptance of the Lands’ End brand in this region furthers our confidence in the strong growth opportunity in front of us as we execute a similar playbook to what drove the strength in the U.S. and advanced our market share position. I’d like to turn now to our product. We continue to emphasize our let’s get comfy messaging this quarter as casual comfort remained a priority for our customers and led our global e-commerce business. Our strongest performing categories were focused on comfort and versatility, including swimwear, sleepwear and knits. Swimwear was a standout this quarter as customers began to make travel plans again. Within the category, swimwear performed across the entire family with positive customer response to the versatility in our product assortment. Sleepwear at home continued to outperform and we are expanding the offering to year round in order to capitalize on this broader opportunity. Our knit business remains a top performing category as we continue to update our colors and styles to meet our customers’ lifestyle needs. As an example, we combined cold weather fabrics with warm weather colors as we build upon our seasonal transitional offering. Our product is well positioned to benefit from what we believe is a permanent shift to a more casual comfort aesthetic. We expect the changes that we began to see at the start of the pandemic are here to stay as many customers will continue to work from home or move to a new hybrid of in office and at homework even as the economy fully reopens. And we see comfort playing a bigger role in where to work. As such, our khakis and woven businesses are attractively positioned to capitalize on the continued strength in the casual wardrobe, particularly as customers refresh their wardrobes in preparation for the office. Turning now to our third-party partnerships, we are pleased with our performance both at Kohl’s and Amazon this quarter, which both exceeded expectations. These relationships have enabled us to expand our reach to consumers with similar attributes to the Lands’ End customer. As we look to future partnerships, we will continue to be targeted and thoughtful in our distribution. With a strong foundation and flexible operating model, we have been able to navigate this unprecedented period and position ourselves even stronger on the other side of this pandemic. Our performance over the last 3 years gives us confidence that we are well-positioned to drive long-term profitable growth as we continue to advance on proven strategies to capitalize on the shift in consumer behavior, which I will speak to following Jim’s discussion of our financial performance. With that, I will turn it over to Jim.

Thank you, Jerome and good morning. We are very pleased with the strong results we delivered in the first quarter as we continue to build on our data-driven initiatives. Given the impact of COVID-19 last year, I will make select comparisons to our first quarter of 2019 in my prepared remarks to help normalize our improving trends. For the first quarter, total revenue of $321.3 million, that’s an increase of 48% from 2020 and 22% from 2019. Our performance compared to our 2019 levels demonstrates the continued strength in our underlying business as we emerge from the pandemic. Our global e-commerce sales increased 44% from 2020 and 26% from 2019 as the momentum we had in our business heading into the pandemic is accelerating. The strength was led by impressive growth of 47% in our U.S. e-commerce business and we also saw growth in our international business of 37%, driven by Europe, increasing 55% from 2020. Our better-than-expected results were driven by strength across a number of our key categories, including swimwear, sleepwear and knits. This performance was supported by marketing strategies that continue to message the value and comfort in our product assortments. Revenue for our third-party business increased to $11.8 million, a $10.3 million improvement compared to last year. This increase was driven primarily by the launch of our full product assortment on Kohls.com and a curated assortment of our key items in 150 of their store locations. In our outfitters business, sales increased 28% with a faster than expected recovery in our national accounts and school uniform sales. We are seeing demand in our travel-related national accounts begin to ramp up as people return to planning trips. We now expect this recovery to accelerate throughout 2021 and into 2022. School uniforms is also showing signs of recovery and we expect this business to normalize as schools reopen this fall. While small to medium-sized businesses have been slower to recover, we remain confident that the strategies we’re putting forth will drive improvement for the business over the long-term. Gross margin in the first quarter increased to 46%, approximately a 260 basis point improvement from 2020. And Gross margin expansion was led by our U.S. e-commerce business with improved promotional strategies and continued use of data analytics for both our pricing and inventory management, helping to drive higher merchandising margin. This resulted in delivering the highest gross margin level in over 4 years. More importantly, we believe our merchandising margin improvements are sustainable given the enhanced data analytics capabilities, and more disciplined inventory management strategies we’ve implemented over the past couple of years. This strength more than offsets the higher shipping costs as well as the impact from sales mix and our growing lower margin third-party business. As a percentage of sales, SG&A improved at 39.1%. That’s down approximately 970 basis points from 2020 and 540 basis points from 2019. The improvement was due to leveraging the higher sales and continued overall cost controls, slightly offset by higher digital marketing spending. Our better-than-anticipated results led to net income for the quarter of $2.6 million or $0.08 per share compared to a net loss of $20.6 million or $0.64 per share in 2020 and a net loss of $6.8 million or $0.21 per share in 2019. 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 $22.5 million, which was significantly above our expectations. Our EBITDA improved from a loss of $11.6 million in 2020, and earnings of $3 million in 2019. Turning to the balance sheet. Inventories at the end of the quarter were $394.3 million compared to $383.2 million a year ago. The strong sell-through of our global e-commerce business has positioned us with healthy and lean inventories as we head into the second quarter. Before providing our guidance, I’d like to share an update on our CapEx plans. Overall, we’re still projecting CapEx to be approximately $26 million for 2021. In addition to our spending on our customer facing initiatives, we’ve started the development of our new warehouse management system, focused on personal management, while optimizing our third-party carrier rates. Now I’d like to discuss our outlook for the second quarter and 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 and will be a recovery period in our Outfitters business. Beginning with the second quarter, we expect net revenue to be between $345 and $355 million driven by our momentum and our global e-commerce business. We expect net income of $1.5 million to $4 million and diluted earnings per share to be between $0.05 and $0.12. We expect adjusted EBITDA to be in the range of $20 million to $23 million. For the full year, we are raising our estimates based on our strong performance thus far in 2021. We now expect net-net revenue to be between $1.61 billion and $1.65 billion, primarily driven by our momentum in our global e-commerce business and the continued recovery in our Outfitters business. We’re raising our net income outlook to a range of $27.5 to $34 million and diluted earnings per share to be between $0.84 and $1.04. We now expect adjusted EBITDA to be in the range of $114 million to $122 million. The assumptions in our guidance account for higher shipping costs and surcharges that we believe will continue throughout 2021. We expect our continued strength in merchandise margins will more than offset these headwinds. With that, I’ll turn the call back over to Jerome.

Thanks, Jim. We were extremely proud of our accomplishments this quarter as well as over the past year despite a still challenging environment. Our strength and resilience was further demonstrated by the momentum in our business during the first quarter, with global e-commerce delivering 26% growth over our 2019 pre pandemic trends. As we look ahead, we see significant opportunities for land and grounded in our four strategic pillars of getting the product right, being a digitally driven company, implementing a unit channel distribution strategy, and enhancing our infrastructure and processes to drive long-term profitable growth for our shareholders. Through the pandemic, the accelerated shift to online shopping and increased demand for comfort enabled us to leverage our business model to further advance our market share position. Importantly, with over 95% of our business transacted online, we continue to see ample opportunity in front of us as we believe the pandemic has changed customer shopping behavior, driving a significant increase in U.S. households willing to shop online, particularly within our target demographic. As a result, we believe our total addressable market has nearly doubled, further expanding our runway for growth. In terms of our marketing initiatives, we continue to invest in our digital strategies, which now represent approximately half of our marketing spend. Our heightened focus on paid social media has been yielding strong results and driving profitable new customer acquisition, and we will continue to test new strategies in combination with refinements to search engine optimization and social media. At the same time, we continue to drive efficiencies in catalog spending to optimize profitability. Through a combination of these successful marketing strategies and our data-driven initiatives, we see opportunity for continued growth and retention in new customers. Looking to our product assortment, we will continue to lead our let’s get comfy campaign, emphasizing comfort as well as versatility. We believe that comfort is here to stay, and we are well positioned to meet the needs of consumers as they refresh their wardrobes in preparation for a return to the office, at least part-time and to resume a more social lifestyle. We will also remain focused on Wear Now apparel with the introduction of seasonal colors and knits as we head into the summer. As always, we will leverage our use of data analytics to inform product assortments, as we continue to adapt to our consumers’ evolving needs. Turning to our third-party partnerships. With regards to Kohl’s, we remain on track to expand distribution to 300 Kohl’s stores in 2021. And look forward to continuing to grow this successful partnership. We are seeing assortments resonate with customers, both online and in stores. Subsequent to quarter end, we launched our second Draper James swimwear collection, which we are excited about, given the strength in our first collection. Building on this partnership, we also announced plans to launch sleepwear and home collections with Draper James, founded by Reese Witherspoon, this fall as we continue to see strong demand in these categories. We also remain pleased with the performance of our Lands’ End marketplace. While it is still early and our marketplace represents a small portion of our business, we believe this is an opportunity to expand our reach by providing customers with complementary products that address additional needs. We will continue to look for third-party brands to welcome to our site and expand our overall offering. Next, building on what Jim discussed in regard to the evolution of our Outfitters business. The pace of recovery in our national and school uniform accounts is occurring faster than we had anticipated, furthering our optimism in this business. We remain focused on driving growth in our small and medium sized customers, which is recovering at a slower pace. Last quarter, we discussed steps that we are taking to advance our position as the authority in branded apparel and hard goods for small and medium-sized businesses. With the changes we are making to enhance our website and processes, combined with their test and react approach to marketing and pricing, we continue to believe that the small and medium-sized accounts of Outfitters could grow to represent approximately half of the Outfitters business over the long-term. In conclusion, we’re extremely pleased with our first quarter results despite the many headwinds still facing the apparel industry. The momentum in our business supports the underlying strength, particularly in our global e-commerce business. We will continue to execute our disciplined approach grounded in our four pillars to profitably grow our business for the long-term. We believe we have a strong foundation in place and an expanding total addressable market, and I am extremely excited for our significant opportunities that lie ahead. We look forward to updating you on our progress in future quarters. With that, we will open it up for questions.

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

Great. Thanks very much for taking my question and congratulations on a really incredible start to the year. I wanted to ask about the big sort of reward droving opportunity ahead as people start to return to their workplaces, it sounds like your product assortment certainly resonated as people were working from home with comfortable clothes and similarly, sounds like a big opportunity to kind of be that comfortable where to work brand as people start to get back to the office. When did you start to see sort of a pickup in work apparel? And can you give us a sense of based on what you are seeing now, how long do you think this is going to continue for? Is this going to be throughout 2021? Is this going to be sort of a multi-year reward droving as people catch-up from not having updated their work as higher in the last 1.5 years?

Alex, it’s Jerome. Thanks a lot. We think that going forward, what you are seeing is almost a resurgence in the apparel industry. Over the last year, you have seen fewer people shopping in stores, more people shopping online. In fact, the big increases in online shopping have come from GenX and Baby Boomers. So, what we think is really going forward, you are going to see continued interest of shopping online and continued interest and comfort. We have seen the same product categories resonate with customers recently as we have over the course of 2020. Everyone is looking for comfort. It’s cotton, it’s natural fibers, it’s stretch. And our knitwear business, our loungewear businesses have been great. And we have seen that continue into 2022. A little bit more in dresses. A little bit more in bottoms. But generally, our product assortment lends itself well to comfort and versatility. So, we think that this is a trend going forward is not going to be a blip with something happening in 2021 and then fading away in ‘22.

Great. That makes a lot of sense. And then I would love to talk more about the gross margin. You mentioned that rising freight costs and just supply constraints in general are likely to continue throughout the year and yet gross margin has been up really nicely because of your merchandise margins. Where is that coming from with commodity costs rising? Has it just been a reduction of markdowns or people buying more at full price? Would love to just hear a little bit more about how you think about managing gross margin throughout the rest of the year?

Yes. I think it’s really come from probably 2 places, mainly, Alex. The first is our sourcing team has been doing a great job. We are sourcing our products. So, we have been seeing some nice reductions in our average unit cost. And then the second is what we are doing from a promotional perspective. And we have talked, I think about the last few quarters about what we are doing from our dynamic promotion pricing and what we are doing from being able to be more promotional productive. Overall reducing our level of promotions, I think allowing better shelters, more profitable shelters and therefore raising our gross margins.

Great. That’s really helpful. And then lastly, if I could just ask about the uniform business, it sounds like you are starting to see a nice recovery there. What’s the expectation of how that’s likely to play out over the next couple of quarters? It sounds like back-to-school is off to a strong start. When does that business really tend to reach its peak season in the calendar?

Yes. I think we still expect it to recover different paces from the different industries or the different businesses. The school business, as you mentioned, very early stages there. So, that’s all anecdotal. What we are hearing in the market is most of the schools are hoping to be back in person learning. So, assuming that they are back in schools within person learning, we expect that business to normalize this year. The national accounts has really been the pleasant surprise for us going into this year. We anticipated a longer recovery there. But led by some of this return to travel, specifically the leisure travel, we – all signs are that we haven’t seen that business travel recovery. But the numbers coming out of the industry are that leisure travel is returning close to pre-pandemic levels and therefore we are seeing that business recover for us. And then the sense right now is our small to medium size, I think, as markets and when cities and counties and businesses go back, we are seeing a recovery, but we still think that’s probably a multi-year. So school is normalizing this year, national accounts going into next year and probably small and mid-size also going into next year, we expect to hopefully see a fully normalized level of business.

Great, that’s really helpful. Thank you.

Thank you. Our next question comes from Steve Marotta with CL King. Your line is now open.

Good morning, Jerome and James. Congratulations on the quarter. Just appealing then you back 1 more layer on the back-to-school season and overlay that with potential shipping delays. Are there any issues from your in stocks regarding back-to-school, which would it be expected to start to occur? I assume, in about 6 weeks or so?

I would say we are certainly seeing challenges like everybody else seeing in the industry. We are doing what would tend to expedite it. There are instances where we are doing things from shipping by air. We are doing things where we are expediting the ocean freight. That’s certainly adding a little bit of cost in, but we are doing some of that from the key items. At this point, Steve, I would say we think it’s manageable. That’s not to say that we are not going to have some one-off issues like everybody else. But again, I think the team is doing a great job of trying to manage around it.

That’s great. That’s very helpful. And did the results in the first quarter alter your longer term outlook. I believe that was sales of $1.9 billion to $2.1 billion and high-single digit EBITDA margin?

We haven’t updated that yet. I think there is a potential of certainly, these trends continue. But at this point, we are going to stop with the $1.9 billion to $2.1 billion.

Okay. And it’s something on a more granular level, can you give an example how your data analytics recognized something that you could alter your product assortment that you wouldn’t have otherwise known just from normal trajectory of sales returns, if you will. And by sales returns, I mean growth in a particular category.

Sure. One of the things that we look at is how much development time we put in, how many styles we develop, what’s the exact right amount of styles and colorways to put into the assortment. And if you look at the last several years since Jim and I have been here, we have cut the number of styles that we produce on an annual basis, almost in half. That’s really helped us with productivity of the line. And then when you look at your optimal sales curve, our AI programs, we will look at what the optimal sales programs – our sales curves are for each individual style and colorway and can change pricing based upon demand in order to reach that optimal curve. So, those things combined are really helping us very much with how many styles we are producing, how many colorways, how many prints and then how we are managing selling through to maximize gross margin.

Super, helpful. Thank you very much. I will take the rest of my questions offline. Thank you.

Thanks Steve.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.