Q3 2022 Lands End Inc Earnings Call

December 1, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good day and welcome to lands in third quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation there'll be a question answer session and instructions will be given at that time.

As a reminder, this call maybe recorded.

I would now like to turn the call over to Bernie Mccracken, Chief Accounting Officer, you may begin.

Good morning, and thank you for joining the Lands' end earnings call for a discussion of our third quarter of fiscal 2022 results, which we released this morning can be found on our website Landsend dotcom.

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 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, and quarterly reports on Form 10-Q.

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.

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 lands' end Dot com.

With that I will turn the call over to Jerome Griffith.

Thank you Barry good morning, everyone and thank you for joining us today for a discussion of our third quarter results.

Our consumer is showing resiliency in the face of the uncertain macro environment stemming from the multi decade high inflation, which is impacting buying decisions for discretionary purchases such as apparel.

Despite these challenges our sales were only 1% below our outlook and our year ago results.

Like others in our industry, we saw consumer activity fluctuate during the quarter and we experienced particular softness at the end of the quarter we.

We believe the sales softness at the end of October which continued into the early days in November .

Also reflects a return to historical shopping patterns as compared with last year. When demand was pulled forward due to consumer concern about inventory shortages.

Our profitability this quarter was lower than we expected as gross margins for the quarter were pressured by increased raw material costs.

<unk> <unk>.

And the incremental promotional activity required by consumers.

As we experienced in the third quarter, we expect that the industry will be very promotional during the holiday season due to the macroeconomic challenges and inventory challenges faced by our competitors.

While our inventory balance at the end of the quarter was 18% higher than a year ago and something we focus on daily given the inventory issues, we see across our industry. We believe in the value of our inventory and the view.

As a source of strength as we move forward.

We're very pleased that our in stock levels are solid and we can fulfill anticipated consumer demand during the fall holiday season.

In order to be ready for the season, we built an extra lead time on this year's receipt and the shipping delays have abated inventory came in early.

Those early receipts account for two thirds of the year over year inventory increases we are showing.

The next largest driver of the inventory increase is carryover of basics and seasonal basics products, which accounted for approximately 90% of our total inventory at the end of the third quarter.

As Jim will discuss we see inventory returning to normalized levels by the end of the spring summer 2023 season.

We continue to be optimistic about the future and our brand is strong we continue to focus on controlling what we can despite the volatile environment by delivering a compelling assortment of products that meet our customers' evolving needs.

Despite the near term impact of higher costs, we have seen some stabilization in our supply chain with freight rates declining from peak levels, which should benefit cost of goods sold in 2023.

I continue to be proud of our dedicated team that is working hard for our customers heading into the holiday season.

While online traffic was challenged during the quarter. We were pleased that the U S. E Commerce conversion improved high single digit year over year, which demonstrates that the customer continues to respond favorably to our product offerings.

Our outfitters business continues to show strength led by National accounts, driven by the broad based recovery in the travel and hospitality industry.

We had a solid back to school season, where purchase habits returned to normalized patterns.

We're also pleased to see continued growth from our third party business. In addition to double digit comparable sales at our retail stores.

Next I will highlight our progress across our strategic growth pillars, including product digital Uni channel distribution and infrastructure.

Beginning with product our customers continue to favor hybrid styles that can be dressed up or down and worn in a variety of settings are one closet focus and versatile assortment and fifth is a critical component of our product offering.

Demand for versatile styles that are equally appropriate at work social events or home was particularly evident in womens with a strong response to our sweater blazer pilot stresses and recover denim, which uses recycled fibers.

In men's we saw strength in our <unk> and our no iron woven shirts.

Denim as well as our no Arancino also performed well with Matt.

Additionally, we are seeing a favorable response to our wear now lighter transitional outerwear, including fleece, and rainwear, which performed well given the warm start to the fall season.

We had a warm warmer wamus strategy with outerwear and our marketing focus that that's as our customer faces the worsening elements throughout the fall and winter season.

These positives were offset by the challenges in our kids business Sleepwear and home furnishings offerings with the latter two categories showing marked slowness from one year ago, where demand was fueled by the pandemic.

We believe the trends in casual ization of demand for hybrid life are here to stay our assortment is perfectly aligned with the consumer demand for made to move fabrics and styles that can be dressed up or down.

Turning to marketing, we're very pleased with the response, we've seen to the Blake Shelton collaboration which was introduced in September and offers men's women's kids and home product.

While still early this branded marketing campaign is performing well and expanding our reach and appeal to Blake's broad audience. We plan to build on this early success with spring Summer and fall holiday 2023 collections Blake has proven to be a great partner anywhere lands' end for the best reason he really likes it.

We also continued to deepen customer engagement through refining search and proving the effectiveness of our catalog and increasing our social media presence.

Pleased that our customer engagement continues to generate healthy lifetime value over a long term duration as our customers have been shopping with us for an average of 18 years.

With this tenure, we have very actionable data driven insight combined with our commitment to sit in quality, which supports our buy now wear now focus.

Midway into the holiday season, we are capitalizing on the early success of our branded marketing effort and shifting our focus from brand marketing towards a more targeted approach leveraging our buyer file of nearly $7 million to drive customer conversion and retention.

We anticipate a highly promotional environment in the fourth quarter, and we will continue to leverage our data driven strategies to optimize margin and remain competitive.

Next on our unit channel distribution strategy, while recognizing the challenging retail environment, we remain encouraged with the progress we've made.

We're pleased with our performance at Kohl's, both in 500, plus stores, where we saw strength in our seasonal assortment and online where our full assortment is available to the coal shopper.

Our business on Amazon also continues to build momentum and continues to introduce new customers to the brand.

And while a small part of the business. We are pleased with the exposure we are receiving on QVC and our recently launched on target Dot com and Walmart Dot com.

We plan to seek additional distribution partners going forward as we see it as a way to reach more customers and our large addressable market.

Finally, our outfitters business benefited with a solid back to school season Youll.

Youll recall that we saw a pull forward in demand through the second quarter from the third quarter. This year and overall school uniforms for the second and third quarters were up 12% compared to the same period last year.

Our national accounts performed well given the return to travel on strength in hospitality.

While our small and mid sized accounts continue to experience macroeconomic headwinds, we remain confident our investments in digital capabilities and personalization will drive improvement for this business over the long term.

Turning to infrastructure, we continue to focus on productive investment to improve the customer experience and drive operational efficiency.

During the quarter, we implemented our transportation management system, which was the first piece of our multiyear warehouse management system installation to come online.

Our implementation, which is designed to support our business model through optimized transportation management and product visibility labor productivity improvements improve customer service levels and system modernization remains on track.

With that I will turn it over to Jim.

Thank you and good morning.

We delivered adjusted EBITDA fell below our expectations due to the challenging macro headwinds impacted our top line and created incremental cost pressures.

While we expect these challenges to continue in the near term.

We will continue to focus on our operating model and execute against our strategic initiatives.

For the third quarter as compared to last year total revenue decreased 1% to $371 million.

The slowdown across the industry and consumer demand at the end of the quarter led to the slight revenue Miss to guidance.

Despite lower traffic as Jerome mentioned, we're pleased with our strong conversion rates demonstrating the consumer's positive response to our product.

Our global ecommerce sales decreased 5% from 2021.

Within that our U S E Commerce business was fairly flat decreasing 1% from 2021.

Our international business, which was negatively impacted by inflation and geopolitical turmoil in Europe decreased 20% in the quarter.

Revenue for our third party business continues to be very strong increasing 60% as compared to the third quarter last year.

This increase was largely driven by kohl's, particularly within women's seasonal apparel as well as growth in our other marketplaces.

And our outfitters business sales decreased 6% driven by the normalization of some of our travel related national accounts.

After accelerated purchases last year.

Within school uniforms, we're pleased with our overall performance for the season as parents returned to regular purchasing patterns.

We also remain encouraged with the rollout of our improved personalization and customization capabilities will.

We will continue to build out that model throughout 2023.

Moving to our retail business during the quarter, we delivered revenue of $10 million with U S same store sales, increasing approximately 13% from the third quarter of 2021.

Gross margin in the third quarter decreased to 40% and approximately a 440 basis point decline from 2021.

The margin pressure was driven by an incremental $7 million and shipping expenses.

Increased industry wide promotional activity.

<unk> mix from our growth and our third party business.

As a percentage of sales SG&A was 36% a decrease of approximately 80 basis points to 2021 basis point decrease was driven by continued expense controls across our entire business.

Our performance led to a net loss for the quarter of $4 7 million or <unk> 14 per share compared to net income of $7 4 million or <unk> 22 cents per share in 2021.

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 $16 7 million.

Although our expectations of 20% to $24 million and compared to $29 8 million in 2021.

The adjusted EBITDA shortfall was primarily driven by gross margin pressure.

Lately offset by SG&A reductions.

Looking at the balance sheet inventories at the end of the quarter were $565 million compared to $480 million a year ago.

The 18% increase in inventory was primarily driven by early receipts for the upcoming fall and holiday selling seasons as well as carryover of basics inventory from prior seasons.

We've taken appropriate actions to reduce purchases for the upcoming seasons.

And this combined with reduced lead times will allow us to normalize our inventory level by the end of spring Summer 2023.

Regarding our debt at the end of the third quarter, our term loan balance was $248 million.

And our $275 million ABL had a $160 million of borrowings outstanding.

Turning to our guidance, our fourth quarter and full year revised outlook reflects the headwinds presented by the macroeconomic environment and inflationary pressures on the consumer.

We expect to see a significantly heightened promotional environment across the industry in the fourth quarter.

Margin will also be pressured by the higher freight and supply chain costs that are reflected in our fall holiday inventory.

With this all in mind for the fourth quarter, we expect net revenue to be between 510 and $530 million.

We expect net income of zero to $3 million.

And diluted earnings per share to be between zero and <unk>.

We expect adjusted EBITDA to be in the range of $20 million to $25 million.

For the full year, we now expect net revenue of $1 five four to 156 billion. We expect a net loss of $9 6 million and diluted loss per share to be between 27 and 2018.

We expect adjusted EBITDA in the range of 66, 5% to $71 5 million or.

Our guidance for the full year incorporates approximately $33 million and incremental shipping expenses.

With that I'll turn the call back over to Jerome.

We are focused on making progress against our strategic initiatives. However, the current environment is very uncertain and volatile.

We're very pleased with our conversion rates showing the strength of our product offering and appeal to our customer.

In addition, as stated earlier the consumer is responding more promotions. This season, and we will be disciplined through our dynamic promotion and marketing initiatives to remain competitive and drive traffic, where we can capitalize on the strong conversion rates.

Our brand metrics remained very solid as we continue to see strength in our active buyers, which reflects the long term resilience of our brands.

We have a highly loyal customer base with an average tenure of 18 years and we are confident that our performance will improve when the macro environment recovers.

As a result of the uncertainties in the marketplace, we have revised our full year guidance as Jim just reviewed.

Before opening the call up to questions I would like to introduce Andrew Mcclain, who joined US last month as Chief Executive Officer designate.

Andrew is an accomplished retail executive with a proven track record of driving growth and will succeed me when I retire as CEO at the end of the fiscal year.

I am confident that under his leadership combined with our digitally driven business model and highly loyal customer base Lands' end is positioned for long term success.

I will continue to work with Andrew over the next few months before I transition into this new role and we expect a very smooth transition.

As we announced in September I will remain on the board following my retirement.

I also want to call out two additional appointments with the supply chain challenges that we and others in our industry has faced we are very excited to announce that Jim index. Most recently head of supply chain for the North America <unk> business at Alibaba.

<unk> joined Us in September as our chief supply chain Officer.

Secondly, as we have been focused on driving growth and our third party business hit hard model at year end.

Is that a long successful career and wholesale at PVH as well as other leading brands to help us further our expansion.

I believe we have the right people in place to leverage our strong brand unique business model and strategic initiatives to drive sustainable returns for our customers team and shareholders.

Before I close I'd like to give more detail on our holiday sales trends.

After initial softness we began to experience a pickup in traffic as we progressed in November and headed into cyber week.

Although traffic trends remained volatile we've seen that customers are positively responding to our product which resulted in strong conversion throughout November .

We expect the environment will remain very promotional and we plan to remain competitive with our pricing to drive traffic through the holiday season.

With that we will now take your questions.

To ask a question. Please press star one one.

Our first question comes from Dana Telsey with Telsey Advisory Group. Your line is open.

Hello, Good morning, everyone.

Good morning, everyone.

Wanted to touch on Jerome can you expand at all on the on the customer environment, what Youre seeing both digitally and also in your third party business and you mentioned that sleepwear and home were the weaker categories is the level of promotions higher on those categories than it is others.

Just with Black Friday, what did you see in terms of the promotional level versus 2019, and how you're planning the remainder and then I have a follow up thank you.

Hey, Dan Hey, John Thanks for the questions, let's start with <unk>.

Customer environment between digital and then also third party.

When we look at what's happening with our third party generally we still continue to see a build as you know we really didn't have a lot of third party business until 2018, when we started with Amazon and then a couple of years ago, along with startup with Kohl's and what we see as both of those businesses plus.

Really our target business, which we just started recently and Walmart.

Continuing to grow and it takes a few years to really maximize what your potential is there and we see longer term continuing to grow with a third party.

Digital customers looking really looking start promotions, what we've seen is that.

She'll buy key items and she'll buy the products that she used to buying but she is looking for a deal I think customers are getting squeezed with food costs with.

Energy cost and also re looking at how they're spending their dollars to the holiday season, but the other thing that we're seeing is if you remember last year. There was the human cry with the supply chain and you better order early and you better get your order and because things are moving slowly and it's going to take a while to get your product I don't see that this year.

We definitely saw a shift in how the customer is shopping the end of October and beginning of November with with traffic numbers because last year, everybody shopped early before the form.

Veterans day, but not this year and in fact, we're actually.

Thinking that youre going to get more traffic as you get closer to Christmas and really be back to what the 2019 trends look like because that's really kind of what we're seeing is the traffic pattern.

A bit like 2019, meaning getting back to what people are used to.

Concerning sleep and home.

It's been a trend in home is a huge trend up over the pandemic and we.

We are recipients of that but you know as well as Nigel was the home business is multi sheet in house and most of that is basics business for us.

So im.

I am not concerned about any softness there because overall.

It picked up at all of our home penetration.

<unk>, we just over planned.

The big trend, it's our second largest category in women's apparel has done very well, but people are responding to that when we get it at a price and that's really what the I think the overall message.

Youll move through inventory and you'll be fine, but it's going to be at a price.

Got it and then Jim can you expand on inventory levels and supply chain costs and how you would just qualitatively frame next 2023, what tailwind and headwinds may be on the margin profile and then welcome Andrew to Lands' end.

Can you just talk a little bit about it's certainly early days, what your vision is and how you see enhancing the lands' end business and we are focused all day. Thank you.

Yes, Thanks, Dana as we said, even though our inventory is about 18% over last year.

Overall, we're pretty happy with the quality of the inventory.

That increase is Jerome I think mentioned, it's about two thirds of that is just because we brought in our receipts earlier than last year and Thats a combination of this year's receipts as the supply chain normalizes with lead times are coming in earlier, and then compared to last year, where many of our receipts were late the remainder.

Of that 18% is.

It's mainly just our basics, mostly from spring and summer, where we had a little bit of softness in instead of.

Mark those down.

We just decided to carry those over so it will be normalizing those through as we repurchase of basics and most of that overage year over year will be normalized at the end of the year, but I expect by next spring summer will be fully normalized back to appropriate levels. When you look at the year over year balances.

Got it.

I think Dana it's nice it's nice to meet you Im really delighted to be here I think as we as we look forward, it's really about picking up where Jerome leaves off and I think for the beginning of the year and Thats really what Jim has just been saying, it's focusing on the inventory levels.

Making sure of that.

We kept those back to the levels, where we want them to be.

Driving the product categories that really works and then.

<unk> gross margin from that.

Being able to drive profitability in the business and I think as we get past that.

Really early days for me, but I look at all the channels. We're in there is opportunity in all of them.

Picking the priorities as we move forward within those they're all great tremendous opportunity.

Thank you.

Our next question comes from Alex Fuhrman with Craig Hallum. Your line is open.

Hey, guys. Thanks for taking my question Jerome Congratulations on your retirement will certainly be sorry to see you go.

Couple of things I wanted to ask one on the on the promotional environment that that youre expecting for the fourth quarter. I mean is that is that something you would say youre fully seeing already or is there more of an expectation that there's going to be pretty pretty heavy kind of post Christmas clearing in January as well.

Sure.

And curious if theres any particular categories, where youre seeing that promotional pressure.

And if you could comment on what Youre seeing in jackets and outerwear.

Sure no problem. Thanks, Alex.

Let's first talk about the promotional environment.

What we're seeing very highly promotional over.

The cyber week period.

I'll just throw out a couple of things you had competition old Navy five dollar flannel pants.

And then the next day, you saw target up with $5 vinyl pants.

And that's all sleepwear related so we're not the only ones that sleep, whether they've got to get it right.

Yes.

But I think what you'll probably find over the course of the next couple of weeks is that people back off promos, a little bit I mean, not much but a little bit because everybody is going to be pretty decent stock ship, but we end up with inventory Gluts Post Christmas I think January is going to be a pretty clearance time.

And most of the people that are.

Our over inventoried and listen I've heard numbers out there you know some people are up $30 40, and sum up to almost 50% from a year ago I think we're actually sitting in a pretty good position.

With plus 18 at the end of the quarter the third quarter. Most of it is we brought it up in early so it has been.

The ability to fulfill as we went through in December and January .

We're up against low sulfur <unk> rates from a year ago. So I think there is still some opportunity in there, but I think people are going to be taking their categories that are glass, which are I think.

That.

Over performed during the pandemic period and now our underperforming because what we're seeing is people are buying items like dresses to go out our sweater jackets denim has been a big seller in both men's and women's our Chino Pant in men.

And then jackets that have also been working additionally, transitional outerwear has been pretty positive our fleece rainwear lighter weight down down vests have all been performing relatively well for us it hasnt been cold enough yet.

For our heavy outerwear to perform but we shifted that as we've talked I think in the last quarter and so the warm or sorry.

Sorry, Michael.

Comments today or the warm warmer warmus strategies and then you want to have more buy now wear now so we're expecting heavier outerwear turn on in December and into January .

Okay. That's really helpful. Thanks, and then I think you had mentioned on the conference call. Obviously, everyone is seeing that as well that container costs from Asia are down very significantly getting closer to pre pandemic level. When are you going to start to see that.

<unk> in your reported gross margin next year.

Yes.

Okay.

Go ahead Jim.

Sorry.

Yes, Youre absolutely right, Alex we are seeing those at times some of the spot market rates are getting close to pre pandemic levels.

These values get capitalized into inventory so as those receipts come in and then as you sell the inventory you'll start to realize that so we will start to see some of it towards the end of spring and summer, but most of that is going to hit next fall and holiday.

Okay.

That's really helpful. And then lastly, just Jerome your commentary about sales being stronger.

The week of Thanksgiving and cyber week, I mean is that just kind of within the.

The normal kind of cadence of that being.

Increasingly important week over the years or was that actually a pleasant surprise given the trends you've seen in earlier in November was that a real pickup in demand in Q.

Curious if you expect that to last for another maybe week or two.

Into the holidays or maybe.

Resume at some point as we get as we get closer to the end of the holiday season.

While cyber week is important from a volume standpoint, the weaker and ours is really the important week.

We still are doing a lot of volume going into next week and the week after as well so what we see again going back to <unk>.

Trends from 2019 as far as traffic goes and what I think youre going to find is that in.

I think this will continue.

<unk>.

Not seeing these huge big blockbuster.

Kind of events like what used to have around.

Thanksgiving back in the day, but we call it cyber week now people binding up to get into the stores to get great deals on Tvs and things like that.

You don't see it its a lot more of a friendly shopping environment out there and I think that demand gets spread over over the course of time.

As time goes on I mean this is weird.

We've talked about this before this is my 44th Christmas and you have seen.

<unk> patterns really change over the course of the last several.

Several years and what we're seeing right now I think it's going to be a lot more gallons here and a lot more.

Thoughtful and youre going to see people buying up up to.

The last shipping days in E Commerce and up to Christmas Eve.

And stores so.

I still think that people are going to be cautious, though about how much money. They are spending that's why.

<unk> to still see a pretty promotional environment out there through the holiday season, and then into January .

Okay. That's really helpful. Thank you guys very much.

Sure.

Thank you there are no further questions at this time. This is the question and answer session. Thank.

Thank you for participating in today's conference you May now disconnect everyone have a great day.

Thanks Pat.

The conference will begin shortly to raise Johan during Q&A, you can dial star one one.

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Good day and welcome to <unk> third quarter 2022 earnings Conference call. At this time, all participants are in listen only mode.

After the Speakers' presentation, there'll be a question and answer session and instructions will be given at that time.

As a reminder, this call may be recorded.

I would now like to turn the call over to Bernie Mccracken, Chief Accounting Officer, you may begin.

Good morning, and thank you for joining the Lands' end earnings call for a discussion of our third quarter fiscal 2022 results, which we released this morning can be found on our website Landsend dot com.

<unk> Form 10-K, and quarterly reports on Form 10-Q.

With that I will turn the call over to Jerome Griffith.

Thank you Brian Good morning, everyone and thank you for joining us today for a discussion of our third quarter results.

Despite these challenges our sales were only 1% below our outlook and our year ago results.

Like others in our industry, we saw consumer activity fluctuate during the quarter and we experienced particular softness at the end of the quarter we.

We believe the sales softness at the end of October which continued into the early days of November .

Also reflects a return to historical shopping patterns as compared with last year. When demand was pulled forward due to consumer concern about inventory shortages.

Our profitability this quarter was lower than we expected as gross margins for the quarter were pressured by increased raw material costs.

<unk> <unk>.

And the incremental promotional activity required by consumers.

We're very pleased that our in stock levels are solid and we can fulfill anticipated consumer demand during the fall holiday season.

In order to be ready for the season, we built an extra lead time on this year's receipts and the shipping delays have abated inventory came in early.

Those early receipts account for two thirds of the year over year inventory increases we are showing.

The next largest driver of the inventory increase was carryover of basics and seasonal basics products, which accounted for approximately 90% of our total inventory at the end of the third quarter.

As Jim will discuss we see inventory returning to normalized levels by the end of the spring summer 2023 season.

We continue to be optimistic about the future and our brand is strong.

We continue to focus on controlling what we can despite the volatile environment by delivering a compelling assortment of products that meet our customers' evolving needs.

Despite the near term impact of higher costs, we have seen some stabilization in our supply chain with freight rates declining from peak levels, which should benefit cost of goods sold in 2023.

Continue to be proud of our dedicated team that is working hard for our customers heading into the holiday season.

Our outfitters business continues to show strength led by National accounts, driven by the broad based recovery in the travel and hospitality industry.

We had a solid back to school season, where purchase habits returned to normalized patterns.

We're also pleased to see continued growth from our third party business. In addition to double digit comparable sales at our retail stores.

Next I will highlight our progress across our strategic growth pillars, including product digital Uni channel distribution and infrastructure.

Beginning with product our customers continue to favor hybrid styles that can be dressed up or down and warrant and a variety of settings.

Our one closet focus and versatile assortment and fifth is a critical component of our product offering.

The demand for versatile styles that are equally appropriate at work social events or home was particularly evident in women's with the strong response to our sweater blazer pilot stresses and recovered denim, which uses recycled fibers.

In men's we saw strength in our <unk> and our no iron woven shirts.

Denim as well as Arnaud Arancino also performed well with Matt.

Additionally, we are seeing a favorable response to our wear now lighter transitional outerwear, including fleece, and rainwear, which performed well given the warm start to the fall season.

We had a warm warmer wamus strategy with outerwear, and our marketing focus and thats as our customer faces the worsening elements throughout the fall and winter season.

These positives were offset by the challenges in our kids business Sleepwear and home furnishing offerings with the latter two categories showing marked slowness from one year ago, where demand was fueled by the pandemic.

We believe the trends in casual aviation on demand for hybrid life are here to stay our assortment is perfectly aligned with the consumer demand for made to move fabrics and styles that can be dressed up or down.

Turning to marketing, we're very pleased with the response, we've seen to the Blake Shelton collaboration which was introduced in September and offers men's women's kids and home product.

We also continued to deepen customer engagement through refining search improving the effectiveness of our catalog and increasing our social media presence.

We used that our customer engagement continues to generate healthy lifetime value over a long term duration as our customers have been shopping with us for an average of 18 years.

With this tenure, we have very actionable data driven insight combined with our commitment to sit in quality, which supports our buy now wear now focus.

We anticipate a highly promotional environment in the fourth quarter, and we will continue to leverage our data driven strategies to optimize margin and remain competitive.

Next on our unit channel distribution strategy, while recognizing the challenging retail environment, we remain encouraged with the progress we've made.

We're pleased with our performance at Kohl's, both in 500, plus stores, where we saw strength in our seasonal assortment and online where our full assortment is available to the KOL shopper.

Our business on Amazon also continues to build momentum and continues to introduce new customers to the brand.

And while a small part of the business. We are pleased with the exposure we are receiving on QVC and our recently launched on target Dot com and Walmart Dot com.

We plan to seek additional distribution partners going forward as we see it as a way to reach more customers and our large addressable market.

Finally, our outfitters business benefited with a solid back to school season.

Our national accounts performed well given the return to travel on strength in hospitality.

Turning to infrastructure, we continue to focus on productive investment to improve the customer experience and drive operational efficiency.

During the quarter, we implemented our transportation management system, which was the first piece of our multiyear warehouse management system installation to come online.

With that I will turn it over to Jim.

Thank you and good morning.

We delivered adjusted EBITDA fell below our expectations due to the challenging macro headwinds impacted our top line and created incremental cost pressures.

While we expect these challenges to continue in the near term.

We will continue to focus on our operating model and execute against our strategic initiatives.

For the third quarter as compared to last year total revenue decreased 1% to $371 million.

The slow down across the industry and consumer demand at the end of the quarter led to the slight revenue Miss to guidance.

Despite lower traffic as Jerome mentioned, we're pleased with our strong conversion rates demonstrating the consumer's positive response to our product.

Our global ecommerce sales decreased 5% from 2021.

Within that our U S E Commerce business was fairly flat decreasing 1% from 2021.

Our international business, which was negatively impacted by inflation and geopolitical turmoil in Europe decreased 20% in the quarter.

Revenue for our third party business continues to be very strong increasing 60% as compared to the third quarter last year.

This increase was largely driven by kohl's, particularly within women's seasonal apparel as well as growth in our other marketplaces.

And our outfitters business sales decreased 6% driven by the normalization of some of our travel related national accounts after accelerated purchases last year.

Within school uniforms, we're pleased with our overall performance for the season as parents returned to regular purchasing patterns.

We also remain encouraged with the rollout of our improved personalization and customization capabilities we.

We will continue to build out that model throughout 2023.

Moving to our retail business during the quarter, we delivered revenue of $10 million with U S same store sales, increasing approximately 13% from the third quarter of 2021.

Gross margin in the third quarter decreased to 40% approximately of 440 basis point decline from 2021.

The margin pressure was driven by an incremental $7 million and shipping expenses.

Increased industry wide promotional activity.

Mix from our growth and our third party business.

As a percentage of sales SG&A was 36% of <unk>.

Kris of approximately 80 basis points to 2021 basis point decrease was driven by continued expense controls across our entire business.

Our performance led to a net loss for the quarter of $4 7 million or <unk> 14 per share compared to net income of $7 4 million or <unk> 22 per share in 2021.

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 $16 7 million.

Below our expectations of $20 million to $24 million and compared to $29 8 million in 2021.

The adjusted EBITDA shortfall was primarily driven by gross margin pressure.

Slightly offset by SG&A reductions.

Looking at the balance sheet inventories at the end of the quarter were $565 million compared to $480 million a year ago.

The 18% increase in inventory was primarily driven by early receipts for the upcoming fall and holiday selling seasons as well as carryover of basics inventory from prior seasons.

We've taken appropriate actions to reduce purchases for the upcoming seasons and this combined with reduced lead times will allow us to normalize our inventory level by the end of spring Summer 2023.

Regarding our debt at the end of the third quarter, our term loan balance was $248 million.

And our $275 million ABL had a $160 million of borrowings outstanding.

Turning to our guidance, our fourth quarter and full year revised outlook reflects the headwinds presented by the macroeconomic environment and inflationary pressures on the consumer.

We expect to see a significantly heightened promotional environment across the industry in the fourth quarter.

Margin will also be pressured by the higher freight and supply chain costs that are reflected in our fall holiday inventory.

With this all in mind for the fourth quarter, we expect net revenue to be between 510 and $530 million. We expect net income of zero to 3 million and diluted earnings per share to be between zero and <unk>.

We expect adjusted EBITDA to be in the range of $20 million to $25 million.

For the full year, we now expect net revenue of 154 to 156 billion. We expect a net loss of $9 6 million and diluted loss per share to be between 27 2018.

We expect adjusted EBITDA in the range of $66 five to $71 5 million.

Our guidance for the full year incorporates approximately $33 million and incremental shipping expenses.

With that I'll turn the call back over to Jerome.

We are focused on making progress against our strategic initiatives. However, the current environment is very uncertain and volatile we're very pleased with our conversion rates showing the strength of our product offering and appeal to our customer.

In addition, as stated earlier the consumer is responding more key promotions. This season, and we will be disciplined through our dynamic promotion and marketing initiatives to remain competitive and drive traffic, where we can capitalize on the strong conversion rates.

Our brand metrics remained very solid as we continue to see strength in our active buyers, which reflects the long term resilience of our brands we.

We have a highly loyal customer base with an average tenure of 18 years and we are confident that our performance will improve when the macro environment recovers.

As a result of the uncertainties in the marketplace, we have revised our full year guidance as Jim just reviewed.

Before opening the call up to questions I would like to introduce Andrew Mcclain, who joined US last month as Chief Executive Officer designate Andrew.

Andrew is an accomplished retail executive with a proven track record of driving growth and will succeed me when I retire as CEO at the end of the fiscal year.

I am confident that under his leadership combined with our digitally driven business model and highly loyal customer base Lands' end is positioned for long term success.

We will continue to work with Andrew over the next few months before I transition into this new role and we expect a very smooth transition.

As we announced in September I will remain on the board following my retirement.

I also want to call out two additional appointments with the supply chain challenges that we and others in our industry have faced we are very excited to announce that Jamie did most recently head of supply chain for the North America <unk> business at Alibaba join.

Joining us in September as our chief supply chain officer.

Secondly, as we have been focused on driving growth and our third party business hit hard Molly Europe , who is that.

A long successful career and wholesale at PVH as well as other leading brands to help us further our expansion.

I believe we have the right people in place to leverage our strong brand unique business model and strategic initiatives to drive sustainable returns for our customers team and shareholders.

Before I close I'd like to give more detail on our holiday sales trends.

After initial softness we began to experience a pickup in traffic as we progressed in November and headed into cyber week.

Although traffic trends remained volatile we've seen that customers are positively responding to our product which resulted in strong conversion throughout November .

We expect the environment will remain very promotional and we plan to remain competitive with our pricing to drive traffic through the holiday season.

With that we will now take your questions.

To ask a question. Please press star one one.

First question comes from Dana Telsey with Telsey Advisory Group Your line is open.

Hello, Good morning, everyone.

Good morning, everyone.

With Black Friday, what did you see in terms of the promotional level versus 2019, and how you're planning the remainder and then I have a follow up thank you.

Hey, Dan Hey, Don Thanks for the questions, let's start with customer.

Customer environment between digital and then also third party.

When we look at what's happening with our third party generally we still continue to see a build as you know we really didn't have a lot of third party business until 2018, when we started with Amazon and a couple of years ago, along with startup with Kohl's and what we see as both of those businesses plus.

Really our target business, which we just started recently and Walmart.

Continuing to grow and it takes a few years to really maximize what your potential is there and we see longer term continuing to grow with a third party on digital customers looking really looking for promotions, what we've seen is that.

She'll buy key items and she'll buy the products that she is used to buying but she is looking for a deal I think customers are getting squeezed with food costs and with.

Energy costs and also re looking at how they're spending their dollars for the holiday season, but the other thing that we're seeing is if you remember last year. There was the hue and cry with the supply chain better order early and you better get your order and because things are moving slowly and it's going to take a while to get your product I don't see that this year.

We definitely saw a shift in how the customer is shopping the end of October beginning of November with with traffic numbers because last year, everybody shopped early before the form.

Veterans day, but not this year and in fact, we're actually.

Thinking that youre going to get more traffic as you get closer to Christmas and really be back to what the 2019 trends look like.

That's really kind of what we're seeing is the traffic pattern.

A bit like 2019, meaning getting back to what people are used to.

Concerning sleep at home.

It's been a trend home is a huge trend up over the pandemic.

We are recipients of that but you know.

Now as well as I'd use the home business is multi sheets in house and most of that is basics business for us.

So.

I am not concerned about any softness there because overall.

It picked up in all of our home penetration at Sleepwear, we just over planned.

The big trend that is our second largest category in women's apparel, it's done very well, but people are responding to that when we get it at a price and that's really what the I think the overall message.

Youll move through inventory and youll be fine, but it's going to be at a price.

Got it.

And then Jim can you expand on inventory levels and supply chain costs and how you would just qualitatively frame next 2023, what tailwind and headwinds may be on the margin profile and then welcome Andrew to Lands' end.

Can you just talk a little bit about it's certainly early days, what your vision is and how you see enhancing the lands' end business and we are focus will date. Thank you.

Yes, Thanks, Dana as we said, even though our inventory is about 18% over last year overall, we're pretty happy with the quality of the inventory.

That increase as Jerome I think mentioned, it's about two thirds of that is just because we brought in our receipts earlier than last year and Thats a combination of this year's receipts as the supply chain normalizes with lead times are coming in earlier, and then compared to last year, where many of our receipts were late the remainder.

Of that 18% is.

It's mainly just our basics, mostly from spring and summer, where we had a little bit of softness in instead of.

Mark those down.

Got it.

And I think.

It's nice it's nice to meet you I'm really delighted to be here I think.

As we look forward, it's really picking.

Picking up where Jerome leaves off and I think to the beginning of the year and Thats really what Jim has just been saying, it's focusing on inventory levels, making sure that Matt.

We get those back to the levels, where we want them to be.

Driving the product categories that really works and then generating gross margin from that.

And being able to drive profitability in the business and I think as we get past that.

It's really early days for me, but I look at all the channels. We're in there is opportunity in all of them.

It's about picking the priorities as we move forward within those are all great tremendous opportunity.

Thank you.

Our next question comes from Alex Fuhrman with Craig Hallum. Your line is open.

Hey, guys. Thanks for taking my question Jerome Congratulations on your retirement will certainly be sorry to see you go.

A couple of things I wanted to ask one on the on the promotional environment that that youre expecting for the fourth quarter. I mean is that is that something you'd say youre fully seeing that already or is there more of an expectation that there's going to be pretty pretty heavy kind of post Christmas clearing in January as well.

And Im curious if theres any particular categories, where youre seeing that promotional pressure and if you could comment on what youre seeing in jackets and outerwear.

Sure no problem. Thanks, Alex.

Let's first talk about the promotional environment.

What we're seeing.

Very highly promotional over the.

The cyber week period.

I'll just throw out a couple of things you had competition old Navy five dollar flannel pants.

And then the next day, you saw target up with $5 vinyl pants.

And that's all sleepwear related so we're not the only ones that sleep, whether they've got to get it right.

But I think what you will probably find over the course of the next couple of weeks is that people back off promos, a little bit I mean, not much but a little bit because everybody is going to be pretty decent stock ship, but we end up with inventory Gluts Post Christmas I think January is going to be a pretty clearance time.

And most of the people that are.

Our over inventory.

There are numbers out there you know some people are up $30 40, and sum up to almost 50% from a year ago I think we're actually sitting in a pretty good position.

With plus 18 at the end of the quarter, the third quarter, mostly because we brought it up in early so it has.

The ability to fulfill as we went through in December and January .

We're up against low sulfur elmont rates from a year ago. So I think there's still some opportunity in there, but I think people are going to be taking their categories that are glass, which are things that.

For our heavy outerwear to perform but we shifted that as we talked I think in the last quarter and so the warm or sorry.

My comments today on the warm warmer warmus strategies and then you want to have more buy now wear now so we're expecting heavier outerwear turn on in December and into January .

<unk> in your reported gross margin next year.

Yes.

Okay.

Go ahead Jim.

Sorry.

Yes, Youre absolutely right, Alex we are seeing those at times some of the spot market rates are getting close to pre pandemic levels.

Those values get capitalized into inventory so as those receipts come in and then as you sell the inventory you'll start to realize that so we will start to see some of it towards the end of spring and summer, but most of that is going to hit next fall and holiday.

Okay.

That's really helpful. And then lastly, just Jerome your commentary about sales being stronger.

Weak of Thanksgiving and cyber week, I mean is that just kind of within the.

The normal kind of cadence of that being.

And increasingly important week over the years or was that actually a pleasant surprise given the trends you've seen in earlier in November was that a real pickup in demand and.

Curious if you expect that to last for another maybe week or two.

Into the holidays or maybe.

Resume at some point as we get as we get closer to the end of the holiday season.

While cyber week is important from a volume standpoint, the weaker and ours is really the important week.

And we still are doing a lot of volume going into next week and the week after as well so what we see again is going back to <unk>.

<unk> trends from 2019 as far as traffic goes and what I think youre going to find is that in.

I think this will continue.

We are not seeing the huge big blockbuster.

Kind of events like what used to have around.

Thanksgiving back in the day, but we call. It cyber week now people binding up to get into stores to get great deals on Tvs and things like that.

You don't see it its a lot more of a friendly shopping environment out there and I think that demand gets spread over over the course of time.

As time goes on I mean this is.

We've talked about this before this is my 44th Christmas and you have seen.

Shopping patterns really change over the course of the last several years and what we're seeing right now I think it's going to be a lot more gallons here and a lot more.

Thoughtful and youre going to see people buying up.

To the.

And the last shipping days in E Commerce and up to Christmas Eve.

And stores so.

I still think that people are going to be cautious, though about how much money. They are spending that's why.

Spectrum to still see a pretty promotional environment out there through the holiday season, and then into January .

Okay. That's really helpful. Thank you guys very much.

Sure Alex.

Thank you there are no further questions at this time. This is the question and answer session. Thank.

Thank you for participating in today's conference you May now disconnect everyone have a great day.

Thanks Pat.

Q3 2022 Lands End Inc Earnings Call

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