Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand I think for your patience.
Ladies and gentlemen, thank you for standing by and welcome to the lands and there's quite a 2019 earnings conference call.
At this time, all participants I know listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone if you acquire any further assistance. Please press star zero I will not likely on the coffins guest speaker today, Bernie Mccracken Chief Accounting Officer. Please go ahead Sir.
Good morning, and thank you for joining the lands and earnings call for discussion of our third quarter fiscal 2019 results, which were released this morning. It can be found on our website lands end dotcom.
On the call today, you will hear from Jerome grew up with our Chief Executive Officer, and President and Jim Good chart, Chief operating officer in Chief Financial Officer. After the company's prepared remarks, we will conduct a question 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 FCC filings, including our annual report on Form 10-K , a 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.
You're not undertake any obligation to update forward looking statements made by US subsequent events and developments may cause the company's outlook to change. During this call will 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 web site at lands end dotcom.
With that I will turn the call over to Jerome Griffith.
Thank you Bernie good morning.
We're very pleased to have delivered both strong earnings growth for the third quarter and the great progress on our strategic initiatives across our businesses.
Briefly highlighting our financial results revenue increased nearly 5% when adjusted for Sears closures with growth led by our U.S. business.
The U.S. ecommerce sales grew 7.4%, while our U.S. company operated retail stores once again delivered strong comparable sales growth of 8.3%.
Adjusted EBITDA grew nearly 20% to $18.8 million, resulting from gross margin expansion of approximately 110 basis points driven by more disciplined promotional strategies as well as expense controls.
While we face sales headwinds related to unseasonably warm temperatures earlier in the quarter, we saw an uptick in selling trends, particularly in heavier outerwear as colder weather arrived.
The progress, we're making across our numerous strategic initiatives continues to put us on track to achieve our long term financial targets.
During the third quarter, we continued to advance our growth strategies, which remains centered on getting the product right.
Operating as a digitally led company.
Executing a unit channel strategy and improving business processes and infrastructure.
Our mission is to deepen our relationships with core customers, while attracting new customers to lands end.
This effort begins with consistently delivering product with purpose and we're driving our product strategy through four main objectives on the water.
When the weather.
Layers layers layers and we fit every body.
During the third quarter, we saw favorable response to newness in our assortment as we increasingly leveraged our data to inform product decisions.
We were particularly pleased with the double digit growth and our knits and sleepwear categories, which represent a meaningful portion of seasonal sales.
We sell strengthen our denim and expand the transitional businesses in both men's and women's.
Our denim business grew double digits in the quarter, reflecting favorable response to a refreshed and expanded assortment.
Our enhanced assortment of transitional products introduced this fall also resonated with customers.
Transitional plays a key role as we look to provide our customer with buy now wear now product appealing to their personal preferences and shopping habits and reducing reliance on unpredictable seasonal weather.
Within this assortment, we saw strength in our new raincoats and and several of our outerwear franchises squall three in one as well as our thermal check 100. Please.
Our sweaters and heavier outerwear business as well slow through most of the quarter did see a meaningful pickup with the colder more seasonable weather in October .
Entering winter, we will focus on our warmest outerwear, adding to successful key franchises, including our expedition collection.
These successes tell us that we can drive incremental growth by expanding in categories, where we see opportunity.
Overall, we will continue to leverage data analytics to more closely as though align our offering with consumer demand and optimize our assortment.
Across our businesses, we remain focused on maintaining healthy gross margin performance supported by an increasingly AI based promotional and Mark Downs strategy.
As we use a I had a test and learn we are gaining traction and driving more effective unprofitable promotions and markdowns.
We have also improved our price clarity experience, where we clearly display the promotional price to our customer by increasing the visibility for a customer and additional selling channels.
With a combination of dynamic promotions and price clarity, we will continue to evaluate which offers best motivate purchasers wall striking the right balance between sales growth and profitability.
We continue to invest and enhancing our mobile experience as we know this is how our customer prefers to shop, especially during the busy holiday season.
To this end, we implemented a mobile redesign and reengineering effort during the quarter.
Only the enhancements, we made was a 75% reduction and load time on the product detail page, which has already resulted in a significant increase in mobile conversion rates. We have also enabled her to add to her back more seamlessly and quickly on or smartphone by simplifying the checkout process, which should help to drive higher conversions as well as elevate the customer experience.
Currently our mobile conversion is over 25 times the industry average rate of approximately 1.8%.
Turning to our unit channel strategy, our goal remains to offer a product wherever however, and whenever a customer wants to shop, whether it be through our digital or physical channels.
Our ecommerce channel represents over 90% of direct sales and with our strong heritage. We remain committed to building upon our digital capabilities and shopping experience across our business.
We delivered strong U.S. comp growth of 8.3% in our company operated stores, which play a meaningful role in building brand awareness. Our 2018 openings are comping above expectations, reflecting enhancements to our new format.
Notably we are seeing an incremental sales lift beyond the contribution of the new store in a given trade area. When we opened a store. This supports our continuing retail expansion strategy. As this indicates we are gaining brand awareness. In addition to opening accretive stores.
We continue to incorporate new learnings across our entire store base during the third quarter. We opened one store and in November we opened three additional stores, bringing us to 25 U.S. locations.
We continue to take a disciplined approach to expanding our footprint in order to best leverage our strong brand heritage and grow brand awareness.
Building on our marketing efforts efforts in the third quarter, we successfully drove a high single digit increase in new customer acquisition through a data driven digital strategies, which make it easy for prospective customers to discover and fine products that fit their needs.
We continue to build integrated digital campaigns, the target prospects that behave like our existing customers. We show up in relevant searches to answer questions like flat owned versus leased pajamas and targeted media, including Facebook and connected TV smart devices that highlights the benefits of a products and we use machine learning auto bidding technology and pay.
Search to win the click at the point of purchase decision.
As we look to build greater connectivity with our customers, we launched a branded lands and visa and private label credit card in October .
The card allows customers to enjoy free shipping, 5% reward value on lands and purchases and up to 2% reward value Atlanta and on other purchases. We view these benefits as a means to building stronger relationships with their customers and greater loyalty.
Looking at her outfitters business, we remain on track with American Airlines launch we were very pleased with the success of our Delta launch and expect American Airlines to go equally well.
We are proud that the largest and second largest airlines in the world have entrusted us with a uniform needs.
Longer term, we will continue to pursue new relationships by leveraging these and other partnerships that illustrate our capabilities to execute large scale national programs.
And the school uniform business, we saw meaningful profitability improvement as we drove higher gross margin.
Turning to the bottom line, we continue to focus on driving profitable topline growth and leveraging SGN a expense to accelerate our EBITDA growth.
We see opportunities to reduce costs by leveraging the IP investments. We are currently making in areas such as water management, which Jim will discuss in more detail.
In conjunction with the headway, we're making on our core initiatives, we have been working to expand our business by exploring new growth avenues as we leverage our brands strong heritage.
To that end, we would like to provide you with highlights on a few of the opportunities we are pursuing.
First third party marketplaces, we believe we can broaden our reach and enhance our growth by expanding our presence to new third party marketplaces. As you know we have a presence on Amazon and continuing to see approximately 50% of orders coming from new customers.
We are working to grow our business with Amazon as well as expand to new partners that are brand appropriate.
Second we're also looking to selectively enter licensing agreements for products and categories are partners can help us to improve our reach.
We see these as opportunities to create new high margin revenue streams, but more importantly, as avenues for expanding our brand presence across a broader and relevant audience.
And third we're working on collaborations as an example, and 2020, we will be introducing a swimwear collaboration with Draper James Reese Witherspoon is apparel company, which will be offered in both our retail and ecommerce channels in early spring.
This is a meaningful branding opportunity as we leverage our product capabilities to drive incremental growth and brand awareness.
While these when the nason stages, we are excited by the opportunity to leverage our strong brand and product capabilities to drive growth over the long term, we look forward to updating you on these activities as they progress.
In conclusion, we're excited about the strength in the core business and the progress we continue to make against our strategic initiatives.
Before turning it over to Jim I want to take a moment to share that lands in was recently recognized by Newsweek is one of America's best customer service online apparel retailers.
We know that it is important for brands to connect with customers and we believe that we have a strong competitive edge with the brand heritage that lands and carries.
This combined with our commitment to putting the customer at the center of everything we do creates the foundation for us to deliver consistent profitable growth over the long term.
With that I'll turn the call over to Jim to review, our financial performance and review our outlook for fourth quarter and the full year.
Thank you Jerome and good morning.
For the third quarter total company revenue decreased slightly to 340 million compared to 341.6 million in the same period last year.
Our performance reflects 89 fewer claims and shops at Sears and a slower start to our heavier outerwear business.
After adjusting for the shops at Sears, our revenue increased 4.7%.
We saw continued strength in our U.S. ecommerce business, which increased 7.4% as well as continued growth in comparable sales that are company operated stores.
Well outerwear and cold weather categories were challenged with unseasonably warm weather, we were pleased to see solid performance across many of our categories.
Particularly with strengthen our women's denim and expanded transitional businesses in both men's and women's.
Our sweaters and heavier outerwear business began to improve late in the quarter with the arrival of colder weather.
While we continue to achieve strong growth in new customer acquisition consistent with our overall performance total buyers were relatively flat.
We again delivered strong performance in the U.S. company operated stores with an 8.3% comp store increase for the quarter, we're seeing comp improvements across both our legacy stores as well as our newer stores. We opened 2018, which are delivering even stronger performance in their second year.
We also remain pleased with the performance of our new stores, we opened one store in the third quarter and three additional stores in November given that's 25 US company operated stores.
As we expected with a significant number of Sears store closures or overall retail sales decreased from 27.8 million to 14.4 million. We ended the quarter with 36 shops at Sears all of which are an liquidation and have leases expiring this year.
Well, then outfitters, our sales increased 1.1 billion in our school uniform business, we made the strategic decision to reduce promotions, while we saw a minimal negative impact on sales. We still grew sales for the quarter realizing larger increases in both gross profit dollars and gross margin.
We've made significant progress on our American Airlines launch with initial shipments beginning in November .
Today, we shipped approximately 20 million of the expected $40 million to $50 million launch. We continue to believe the majority of the launch revenue will be realized in the fourth quarter of 2019.
Gross margin in the third quarter was up approximately 110 basis points to 45.3%.
The gross margin increase was primarily related to more discipline promotional strategies and use of analytics to optimize our markdowns.
Based on our current trends, we expect gross margin to once again expand in the fourth quarter.
Selling and administrative expenses were flat due to our planned higher marketing spend offset by the decrease in the number Sears locations and continued efficient management of our cost structure.
Income tax was an expense this quarter of 1.3 million compared to 4 million dollar benefit last year.
Net income for the quarter was 3.6 million or 11 cents per share compared to net income of 3.3 million or 10 cents per share last year. In addition to the GAAP measures that we outlined above adjusted EBITDA as an important profitability measures that we used to manage our business internally.
For the quarter adjusted EBITDA was 18.8 million, but thats, approximately a 20% increase versus last year and within our guidance range of 17 to 20 million.
Turning to the balance sheet total cash at the ended the quarter was 15.9 billion compared to 105.9 million last year.
The lower cash balance combined with our borrowings under the bill.
As a direct result of both our voluntary prepayment of $100 million, our term loan and our higher inventory balance compared to last year.
Inventories at the end of the quarter were 499.9 billion, that's up 67.9 million compared to the end of the third quarter last year.
The increase was driven by third quarter receipts in preparation for the fourth quarter launch of American Airlines combined with the decision to accelerate shipments to avoid some of the impact from the tariff increase.
We remain very comfortable with our current inventory levels, which are both seasonally appropriate and at historically low page to levels.
We expect overall inventories to return to normalized level by the end of the fourth quarter.
Now I'd like to spend a few minutes discussing our IP initiatives. After the completion of our ERP rollout last quarter, we started to implement our enterprise order management system, which is on plan from both the timing and budget perspective.
This quarter, we implemented initial phase, which provide a global inventory visibility.
Deliver subsequent phases in early 2020, which we expect will help increase or inventory productivity and improve our ability to offer and fulfill orders through additional internal and external channels. This should result in opportunities for both topline growth and working capital improvement.
Before turning to guidance I wanted to take a moment to reiterate the impact from the implemented tariffs.
We expect the increase in tariffs to have a gross impact of eight to 10 million in the current fiscal year.
We still anticipate being able to offset approximately 50% of these terrorists through accelerated receipts ahead of the increase negotiating pricing with the with the vendor base I'm looking at other savings opportunities in our business.
Looking ahead to 2020 and beyond we anticipate further reducing our exposure to China to approximately 20% of our total shipments.
As a result, we expect our ongoing that in impact from the increased tariffs to be approximately $7 million to $9 million per year.
Now turning to our guidance for the full year, we expect net revenue to be between 1.4, or five and 1.46 billion tightening our range from our previous guidance of between 1.4 or five to 1.5 billion.
However, we are increasing our net income outlook to be between 18, and 20, more 1 million and diluted earnings per share to be between 55 cents and 64 cents, which includes a tariff impact that I've mentioned earlier.
We're also revising our adjusted EBITDA outlook to be between 75 to 79 million that's at the high end of our prior guidance.
For the fourth quarter, we expect net revenue to be between 545, and 555 million driven by growth in our ecommerce business and our American Airlines launch, partially offset by the reduction of 49 shops at Sears compared to last year.
We expect net income of 24 to 27 million in diluted earnings per share to be between 74 cents and 83 cents.
We expect adjusted EBITDA in the range of 46 to 50 million.
Finally, we expect Capex of approximately 40 million driven by our new Enterprise order management system.
And additional store openings.
And with that we'll open up the call for questions.
Actually engine before we get started with its una I just want to make one comment.
Yes, the question about cyber week.
Fine last Friday, and cyber Monday, and Tuesday, our three of our biggest volume days of the year overall, we're very pleased with our performance. So far during this busy shopping period, we're still in the middle of it.
But were in line with our expectations. So now with that let's open it up for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question Pester Punky. Please stand by all the compiled the Kennedy roster.
Our first question comes from Steve Marotta with CL King and Associates. Your line is now open.
Good morning, Jerome and Jim Congratulations on the quarter drone just following up with your comment regarding cyber Monday I am assuming given.
Whether around the country that the colder weather categories performed well, but maybe you want to Peel that onion back one layer on.
Black Friday, three cyber Monday, and the categories that you're most excited about uneven promotional cadence over the weekend as well.
Sure we saw a lot of gift, giving activity actually over the over the weekend.
Categories, performing well for us and they should be really no surprise see turtlenecks.
Extremely well to resell and over a thousand minutes for several hours over the weekend, a personalized Christmas stockings pajamas down bashan enjoying very well class service, we sold a lot.
And people have been personalizing lots of product as well are number one monogram, it's been mall, so far and number two as been dad, so lots of gift, giving activity cold weather again for sure and health said, we definitely saw that are coming in so.
Yes, okay for the weekend, but.
Lastly, as a gift, giving timing here and that's going to sell a lot of.
I see Tim can you talk a little bit about mitigating factors next year for tariffs are they similar.
Vendor concession standpoint, I know that you're obviously moving as fast as you can out of China from that price increase standpoint can you talk a little bit about what your expectation is for next year in.
Endeavoring to mitigate the tariff headwind.
Yeah, Steve.
The things that we were able to do this year to help mitigate where a couple of things like that you highlighted there working with the vendors.
But then we're also able to accelerate receipts in front of the tariff increase obviously, we don't have that opportunity next year, but next year. We are going to continue to look to move volume out of China.
As we set a couple times now we're we're looking at that number being close to 20% of our of our total shipments next year, which is down significantly from where we were this year and certainly where we've been in prior years.
Okay. Lastly, it's wrong I think you mentioned leveraging data analytics during the prepared remarks can you talk a little bit about what analytics.
You are currently getting.
Now versus a year ago, and how you anticipate that will help in markdown cadence and promotional activity and inventory management.
A couple of things part of it is we put tiger teams together, a internally and work with our data in order to understand better what the customers actually looking for says we're building a lie and when the line plans are trying to make smarter decisions upfront. The bigger push is really AI based something they call dynamic promo on it.
Trying to maximize the gross margin and sales volume with all your items through through item numbers and also some colors and sizes. So we've been working and.
Cash and this past year timing in the algorithms just right in order to maximize price for the customer and maximize our gross margins we've seen some pretty good.
Right, so far and we'll continue to experiment with this going into the coming here and we didn't want to drill down beyond just style in size and color into customer attribute.
We will run through 2020.
Helpful. Thank you.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
Our next question comes from Alex Feldman with Craig Hallum Capital. Your line is now open.
Great. Thanks for taking my question and congratulations on raising the guidance for the year. One thing I wanted to ask about is you have this nice American Airlines partnership that's about to launch soon obviously, that's a a very nice piece of revenue as you think about your three year financial targets on you know is it.
Is it necessary that in 2020 there'll be another big uniform Wayne in order to grow EBITDA and revenue on top of what you've been able to do for this year. If you could just talk a little bit about how you balance the sort of regular ongoing business with with some big new account wins and how those can contribute to getting to that.
Goal.
I think it's great Alex that we get the not a confidence from a lot of these larger companies you think of American in Dallas.
Airlines in the World, We did chase bank, so changes the largest bank of America.
That's great, but does things can be a little bit choppy, particularly around times. When you have a launch a new product person to stay in business.
We'll be concentrating on in the coming years really our consumer site for our business. There's a lot of small and midsize businesses out there that we think we have a lot of opportunity and Raleigh, and making the site experience and a lot more.
More seamless for the customer comes on there is other companies out there, which had been gotten into this business in a pretty rapidly and we think that theres market share that we could change that we make the buying experience a lot easier for the customer, particularly when it comes to getting your logo on products. The other thing leading concentrating on and have had pretty good success with them.
And this year has been a school uniform business and managing that at a much less promotional price point.
Jim talked about a little bit where the margins came out and ER and business out there and we were very pleased with that.
Things that we're working on over the next two three years is continuing to pick up our gross margin was how we're managing price points and how we're managing pricing in front of consumer.
Okay. Great. Thanks, that's that's really helpful. And then if I could ask halted it's about the inventory this looks like the second quarter in a row. It was up pretty significantly you mentioned, the American launches as well as proactively bringing in some some products ahead of ahead of terrorists.
Can you talk a little bit bit about just the composition of that inventory do you feel confident that that you know as you as you work towards more normalized levels at the end of Q4 as you indicated that that the composition of that inventory won't be heavily weighted towards any of your seasonal categories.
Yeah, I think first of all we feel very confident in the composition of the inventory as I said, it's very seasonally appropriate.
American Airlines, just the timing of that we started to take orders I'm right at the beginning of November and so all of that inventory was sitting in the balances that we discussed.
No sales against it at that point in October so that will normalize during the course with the launch on the tariff was something that we intentionally did it and it had a sizable cost avoidance against it we feel that that's also going to normalized by the end of the or the third piece of it which is the smallest pieces, obviously our topline.
Sales were a little bit soft in the third quarter, but the softness was driven by our colder weather categories and as we mentioned as as to whether cool off at the end of the third quarter ended the fourth quarter, we started to see a pickup in those categories and so we still feel very comfortable that by the end of the fourth quarter, we're going to be able to work to a normalized level.
Okay. That's very helpful. Thank you.
Thank you.
I'm not showing any further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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