Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly these continued to standby. Thank you for your patience.
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your pace.
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Ladies and gentlemen, thank you for standing by welcome to the lands on fourth quarter 2019 earnings Conference call. At this time, all participants' lines are in listen only mode.
After the speakers 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.
Please be advised on today's conference maybe recorded.
If you require any further assistance please press star zero.
I'd now like to hand, the conference over to your speaker today, Mr. Bernie Mccracken Chief.
Chief Accounting officer. Thank you. Please go ahead Sir.
Good morning, and thank you for joining the land and earnings call Gray discussion of our fourth quarter and full year fiscal 2019 results, which we released this morning. It can be found on our website land.
Then dotcom.
Well the call today, you will hear from drill grip is our chief Executive Officer, President and Jim due to our 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 those items noted and included in the company's FCC filings, including.
Our annual report on form 10-K quarterly reports on forms 10-Q. The forward looking information that is provided by the company on this call represent the company's outlook as up today and we do not undertake any obligation to update forward looking statements made by US subsequent events and developments may cause the companies out there.
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During this call will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principle, a reconciliation of non-GAAP financial matters 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 to work.
Web site at lands end dotcom.
With that I will turn the call over to Jerome grip.
You Bernie and good morning.
Before I begin I wanted to know that we're closely monitoring the corona virus situation and our thoughts are with all of those affected.
We're focused on ensuring the safety of our team members and customers as we navigate through this challenging environment. We will remain focused on executing on our long term strategies.
Jim will speak a bit more on the supply chain situation and consumer demand as we see it today with that I will turn it to our operation.
We were very pleased that delivered strong revenue and adjusted EBITDA growth for the quarter end the year.
Before I review our results I want to speak to you about are exciting announcement yesterday regarding our new partnership with Kohl's.
We view this new relationship as our next step towards expanding our distribution building brand awareness and growing our market share.
As we've said in the past our objective has been to make lands end product available to our customers wherever whenever and however, they want to shop.
We have enhanced the shopping experience through improvements to the functionality speed and search capabilities of our website.
We're expanding our retail presence opening new stores offering a convenient customer experience, including kiosks, what's your access.
To our full assortment online.
We will also provide an assortment of key items on Amazon.
Which continues to attract new customers to the Brent.
Through our outfitters business Weve outfitted the two largest airlines in the World American, which I'm excited to say launch their uniform program earlier, this month and delta as well as the largest bank in the United States Chase.
And this fall we will have another channel through which lands end customers can shop, our brand by expanding our reach on Kohl's Dot com and in 150 select Kohl's stores.
Coals and lands and share a lot in common.
We both had mid western roots and values, but their headquarters just two hours apart in Wisconsin.
Many of our customers are kohl's customers and more importantly, given that the kohl's customer shares. Many of the same demographic features of the land then customer we have an opportunity to expose our products to many more potential customers, who do not yet know our brand.
Or haven't purchase lands end in a long time.
We view this as the logical next step in our distribution strategy and Kohl's represents a meaningful opportunity to drive brand awareness and incremental sales.
Turning to our financial results, we capped off a great year with a strong fourth quarter performance led by our E Commerce business.
We're extremely pleased to have delivered revenue growth of 9.4% and adjusted EBITDA growth of nearly 30%.
In addition, we continued to deliver against our core strategic growth strategies across product digital unit channel and infrastructure.
I will speak to each of these following Jim's review of our financial performance and our outlook.
Thank you Jerome and good morning.
We're very pleased with the strong results, we delivered in the fourth quarter and throughout 2019 actually continue to make progress for crossed or strategic initiatives.
For the fourth quarter revenue increased 9.4% to 549.5 million compared to 502.3 million last year.
No significant revenue increase was mainly the result of the American Airlines launch combined with continued strong E commerce growth of 7.2%.
This was partially offset by revenue decline in Sears operations up 21 that half million directly related to operating 49 fewer lands and shops at Sears as compared to last year.
Our strong E Commerce performance was driven by customers continuing to respond favorably to our key item strategy as well as improved productivity out of marketing initiatives for the quarter. We saw growth in both our U.S. E commerce with a 7.4% increase.
Additional business, which was up 6.1%.
We had an incredible sleepwear season, which delivered strong double digit growth as we built or assortment round. Our key volume drivers. We also saw strength across our expanded outerwear assortment as well as sweaters and knit tops.
Our buyer file grew in the mid single digits with increases across existing lapse and new customers.
Well, we continue to employ strategies to drive all segments of our file with amplified initiatives to drive repeat purchases from new customers.
This is driving increases in our share of wallet as well as building brand loyalty.
As we expected due to the significant number Sears store closures or overall retail sales decreased 44% from 36.8 million to 20.69.
However, our U.S. company operated stores sales increased 55% driven by new store openings and comp store sales increase of 1.3%.
During the fourth quarter, we don't know three stores and one additional store in February bringing us had a total of 26 U.S. locations.
And as of the ended the fourth quarter with completely exited all of our lands and shops at Sears locations.
Within outfitters or sales increased 58%.
That's very prudent was previously discussed we launched American airlines with shipments during the fourth quarter totaling approximately $40 million.
We expect to ship an additional five to 7 million in the first quarter and I don't bring total shipments for the launch to 45 to 47 million.
Gross margin in the fourth quarter was up approximately 90 basis points to 39.8%.
The gross margin increase was primarily driven by our improved promotional strategies and continued use of analytics to optimize markdowns.
Selling and administrative expenses were 30.8% of revenue compared to 31.3% in the fourth quarter last year.
The decrease in the S. Genie rate is largely due to our continued discipline approach to expense management driving improved scale.
Interest expense decreased to 5.8 million, that's compared to 7.7 million.
Largely due to the voluntary prepayment of $100 million of our term loan that took place in the first quarter 2019.
Income tax was an expense of 8.8 million compared to 8.1 billion last year.
Net income for the quarter was 25.5 million or 78 cents per diluted share compared to net income of 16.2 million or 50 cents per not dilutive share last year.
In addition to the GAAP measures that were outlined above adjusted EBITDA was an important profitability measure that we used to manage your business internally.
The quarter adjusted EBITDA was 49.3 million, that's approximately a 30% increase versus last year and that was at the high end of our guidance of 46 to 50 million.
Turning to the balance sheet total cash should be ended the quarter was 77.1 million compared to 193.4 million last year.
The cash balance reduction was primarily due to the voluntary prepayment of our term loan and to a lesser extent an increase in inventory.
Looking at inventories at the ended the quarter were 375.7 million compared to 321.9 million a year or so.
This increase was related to approximately 30 million at American Airlines inventory that we hold and continued supported the ongoing business.
We also search so strategically increased the level of core items in women's basics to meet the growing demand.
Well, we did have some excess seasonal inventory there in a quarter. The overall health of our inventory remains very strong.
Turning geraci initiatives, we will deliver additional phases of our enterprise order management system in early 2020, which we expect will help increase or inventory productivity and improve our ability to offer and fulfill orders through additional channels.
This should result in opportunities for both topline growth and working capital improvement.
I now want to take a few minutes to discuss the Corona virus and her experience in the current environment.
First and foremost our thoughts and prayers are certainly what everyone who's been impacted.
In terms of our business, we don't anticipate a near term inventory or supply chain impact from the virus, that's our spring and summer shipments were in route prior to the outbreak in the vast majority of or fall holiday product.
It's still projected to arrive on time.
We'll continue to monitor the supply chain as the situation or countries a manufacturing remain fluid.
We decided to close or 26 U.S. stores for the next several weeks as far the societal response to the current situation. So we expect to see some near term revenue impact associated with these stores. However, as a reminder, retail makes up approximately 5% over overall business.
That's over 90% of our business is transacted online and we're still offering our customers are full ecommerce and customer service experience.
That said, we've seen a negative impact on customer demand over the past week.
As we expect our customers attention it's understandable in elsewhere.
If the economy experiences a drop in consumer confidence as part of the health crises and stock market fluctuations, our online traffic and sales could continue to be impacted.
Given all the uncertainty in the rapid changes in the U.S. to business and personal behaviors in response to the Corona virus, we're choosing not to issue 2020 guidance at this time.
We're hopeful that will be in a position do provide guidance on our next earnings call. That's we operate through the next few months and the future becomes a big clearer.
Lastly, we began the process of refinancing our term loan due in April 2021.
And we'll provide more details once the transaction is complete.
And with that I will turn the call over to Jerome to discuss the progress on some of our growth strategies. Thanks, Jim.
I'd like to take a minute to review our forward vision as first outlined in our five year plan presented at the end of 2017.
We've all heard me speak of our financial goals to go to between 1.8 and $2 billion in revenue with EBITDA margins in high single digits.
Additionally, you have heard our key strategies to achieve these goals get the product right.
Digitally driven company.
Execute a unit channel distribution strategy and improve our infrastructure and process.
We have made significant strides in the last couple of years righting the ship in a difficult retail environment with several headwinds. We're pleased with the progress we have made and we feel we were on the right track to reach our stated goals and here's why.
As you know concerning product our main product objectives remain on the water on the weather layers layers layers and we fit everybody.
This focus is working very well for us we have greatly improved our product offering both quantitatively and qualitatively.
First we continue to improve our use of data in defining our product offering.
As a current example data showed us that are swimwear customers want product year round and that she wants key items that she can mix and match. We use this data to write the size of the product offering by season over the year.
Second innovation and newness are important to our customer we use our data to determine how much innovation and newness our customer wants to see an online.
As an example, we will be introducing chlorine resistance swimwear for spring, which we believe will be well received by our customers as we continue to enhance their lives with functional product.
And we have reintroduce certain types of prints and patterns to what she responds favorably.
Within digital we continue to accelerate the use of our comprehensive data across the organization.
Our insights and form a product decisions drive our promotional strategies and refine our customer acquisition and retention initiatives.
We're fine tuning our approach with an increased focus on driving repeat purchases across our customer base, while continuing to target new customers.
As we acquire new customers, we're expanding the application of our predictive analytics efforts to drive their next purchase effectively ramping up our efforts to convert them to highly valued repeat customers.
Essentially we look for similar shopping behavior patterns between new customers and existing customers in order to create comprehensive and integrated digital campaigns.
Well this application is being applied to new customers. It is still in early stages, and we're beginning to see higher repurchase rates from these new customers and greater dollar spent.
We also continue to benefit from our strategy is to stay relevant and online searches well also leveraging media, including Facebook and connected TV smart devices to highlight our brand messaging.
Within our promotional and markdown strategy, we're taking a more disciplined approach to promotions as evidenced by our approximately 90 basis point expansion in gross margin this quarter, despite a highly promotional environment.
We continue to use AI to test and learn and are gaining further traction and improving the effectiveness and profitability of our promotions and markdowns.
Our successful price clarity program has contributed to higher conversion.
We will continue to test and learn in order to drive profitable growth as we better understand our customers purchasing motivations.
I've already touched on our unit channel distribution strategy at the beginning of this call. Our goal is to serve our customer no matter, how and where they shop us we remain committed to enhancing the shopping experience across our business, whether it's in our digital or physical channels.
Our mobile experience remains an important priority as we know this is our customers preferred way to shop.
We are upgrading the mobile experience, particularly with navigation checkout and payment processes, all with increased speed.
Our retail stores serve as an important extension of our ecommerce business, where we can improve convenience and personalized service as well as further expand our brand awareness.
We know our customer appreciates the store experience as she wants to feel and touch products as well as receive personalized service.
In addition, our stores our customer service centers that are a part of our customers interaction with the brand.
Building on a successful in store kiosk launch, we're adding kiosks as well as ways for customers to connect with service specialist while in stores.
We continue to take a disciplined approach to expanding our footprint with plans to open 10 to 15 locations in 2020.
We will continue to target convenient open air locations that are adjacent to other stores our customer shops frequently.
We also look for ways to extend our reach across other marketplaces and through strategic relationships and collaborations.
Amazon has been a great distribution channel, where we have seen approximately 50% of our total purchases driven by new customers and more than one quarter from lapsed customers.
We're also looking to selectively enter into licensing agreements and categories, where there are benefits to begin with partners.
We're currently exploring footwear and men suits along with other opportunities.
And as we shared last quarter, we're introducing a swimwear collaboration with Reese Witherspoon is apparel brand Draper James.
This collection will be available on ecommerce on March Twentyth and in retail locations on April 1st.
We believe this is a meaningful branding opportunity and we'll continue to explore other collaborations as we look to drive incremental growth and brand awareness.
Well these new initiatives are in early stages, they provide exciting opportunities to leverage our strong brand heritage and production capabilities to build long term growth.
We look forward to updating you on our progress across these opportunities.
Finally on our business process, we're committed to driving profitable top line growth across our business and leveraging our SGN they expense to accelerate our EBITDA growth.
We continue to see opportunities to reduce costs through better leveraging of our IP investments, particularly with our order management system, which we are currently in the process of implementing.
We're also looking to other areas to improve cost and drive efficiencies in our process.
We're selectively using avatars in places like models for some of our website photos.
This will allow us to update the web site faster expand the number of available photos and drive cost efficiencies.
We're utilizing threed digital modeling and our sourcing process, which increased speed to market and lowest production costs.
We will also benefit from the opening of our own buying office in Hong Kong as we no longer leverage Sears resources.
We expect this transition drive cost improvements next year as the new team become fully operational by the end of April.
With that we'll open it up the questions.
As a reminder, ladies and gentlemen.
And you will need to press star one on your telephone.
Withdraw your question press the pound key please standby well, we compile the Q and a roster.
Our first question comes from Alex Fuhrman with Craig Hallum Capital. Your line is now.
Great. Thanks, everyone for taking my question Yeah, Congratulations on a really strong year and I certainly hope that that you and all of your employees are doing well in these a these these challenging time.
Thank you Alex.
You know a couple of questions I I wanted to ask that you know what what is certainly the colds partnership seems like a very interesting and now think he did you give us a little bit more color on how those shops will will operate and and you can you maybe compare and contrast, what those will look and feel like compare to the shops that you've operated over the years with Citi.
Yes.
Sure absolutely I think the biggest opportunity right now with Kohl's is gonna be having our full line of product up on calls dot com. So that's going to get a lot of eyeballs a ins in store or they're going to be very small stores are focused on key items and focused on seasonal products are there a couple of our strengths Alex you already know.
On the water is a a direction for us I don't think product strategy and on the weather so you'll see somewhere collections in there a seasonally appropriate you'll see outerwear collections in their seasonally appropriate and a small selection of our best key items, maybe contrast that with Sears. There's a couple of differences one as there was never a big cross.
Over with the Sears customer in the lands end customer when you looked at the demographics are they werent similar but there is with Kohl's, we see that a lot of coal shoppers have the exact same demographics as what we do so that's a that's a big plus for us and I think the other thing is we're gonna be sized appropriately CRC or shop in shops were absolute.
The huge which cost a big inventory investment in this case will be much more focused with just best sellers from our lines, both a annually and seasonally.
Okay. That's it that's really helpful. Thanks, and then you know just thinking about the recent weakness you know not not surprising to hear that that things have slowed down a lately I'm sure. That's the case for every retailer out there.
You know he can you talk to us a little bit just about about the balance sheet. You know if it's if things stayed at these levels for months instead of weeks you know what steps might you be able to take two to shore up the balance sheet at you have any any debt payments coming up that we should be aware of it I'm just curious how your.
Thinking about you know your finances, if if you know these these couple of weeks of weakness is turning to perhaps a longer period.
Yeah, Alex I think you know we're out there running scenarios just like everyone else I think for us on the positive side, we're coming off of like you said, a a great year and a great quarter I'm. So we're not trying to dig ourselves out of any prior holes and in fact, we started off the year very strong or first four or five weeks record as strong as well.
So in the fourth quarter show, we had great business trends going in we didn't have any underlying issues going in.
So we have seen some softness I think just like everyone else over these last couple of weeks with some consumer demand.
And then we're looking at right now the biggest thing for US is looking at inventory flow and depending on how long does goes if we reach out.
End of the next season ends and adjust future receipts.
A couple of positives, we have not not only do we have such a small percentage of our business, it's done out in brick and mortar.
But the fact that all of our inventory sits basically in one location and the DC.
So we don't have the challenge is I think everybody else is gonna have where they have a that aged inventory that mark down inventory sitting out all their stores are gonna have to react to that I think that makes our what we need to do in our flexibility.
Much easier than than most of the market.
Great. That's that's really helpful. Thank you very much and a again all all the best to you and your your employees.
Thank you Alex.
Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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