Q3 2024 Lands' End Inc Earnings Call
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Good day, everyone and welcome to the lands in third quarter earnings Conference call.
At this time all participants are in a listen only mode.
Later, you will have the opportunity to ask questions. During the question and answer session you.
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Please note today's call will be recorded and I'll be standing by if you should need any assistance.
It is now my pleasure to turn the conference over to Bernie Mccracken Chief Financial Officer. Please go ahead.
Good morning, and thank you for joining the land and earnings call.
<unk> third quarter 2023 results, which we released this morning and can be found on our website.
Dot com.
And Bernie Mccracken Chief.
Chief Financial Officer, and I'm pleased to join you today with Andrew Mcclain, Our Chief Executive Officer.
The prepared remarks, we will conduct a question and answer session.
Please also note that the information we're about to discuss includes forward looking statements.
Such statements involve risks and uncertainties.
Actual results could differ materially from those discussed on this call.
Factors that could contribute to such differences.
But are not limited to those items noted net.
In the company's SEC filings, including our annual report on Form 10-K, and quarterly reports on Form 10-Q.
The forward looking information 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.
Current events and developments may focused on its outlook to change.
During this call we will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relations section of our website at lands' end Dot com.
With that I will turn the call over to Andrew.
Thank you Dorothy good morning, and thank you Victor when he has today.
All right turning to our Q3 results I'd like to congratulate Bernie disappointment, Chief Financial Officer, which we announced in September after having served as our interim CFO since January.
I couldn't be more pleased to continue working with way more than confident.
We will continue to lead our financial organization with accidents.
With that I'll turn to our Q3 performance.
Adult with hemp derived by strong execution of our solutions based strategy.
Quality for our customers and value to our shareholders.
We built on our momentum from Q2, so either increase our inventory position.
Mr crossover assortment and continue to prioritize gross margin improvement to drive incremental gross profit dollars.
Our deliberate strategy to improve the relevance of our solution getting products generated more profitable sale, resulting in gross margin and profit expansion and adjusted EBITDA of $17 million above the high end of our guidance range.
As I previously noted.
Executing our.
Our strategy to drive higher quality sales with a larger portion of our sandwich concurrently with no or lower levels of promotions rather than simply prioritizing moving units. So we can enhance gross margin and deliver increased cash prices.
With our work to further improve our inventory position is clear this strategy is working.
Q3 marked our third successive quarter.
Inventory and margin improvement.
5% deduction.
700 basis points of improvement respectively.
We are confident that we have found a winning formula increasing churns of merchandise.
Lower more efficient inventory skewed to our targeted customer cohorts.
We're taking advantage of the flexibility our lower inventory levels provide to continuously refresh our assortment with new styles.
And Patrick's more frequently throughout the year.
Customers are responding exceptionally well to this approach.
As we introduced last quarter, we transitioned from the demographics.
<unk> focus when it comes to our customers.
This is Julian.
Key high value customer cohort, which we call our resolver and involve risks and leveraging our proprietary data to better understand their shopping behaviors.
Every month, we as always are the largest global other existing base their solutions boring dresses pepperberg classic styles and value quality over trends and shop, primarily on necessity two to three times a year.
<unk>, our second largest cohort and an opportunity for growth there.
Operating in refining this dialogue ongoing journey.
Well the current moment, they generally have more volume potential and spent more than results.
Talk about identity solutions company, we're changing the way, we think about our assortment and marketing strategy and align them more closely to how oxy cohorts shop, we're creating more compelling customer care and provided a more holistic look and feel of the land an iconic American brand and the way we do.
Present, and sell our products, we're taking a more centric approach to our assortment and go to market strategy designing and prioritizing product cross category feature significantly more productive inventory.
So across natural Adjacencies, we can.
We see that and how we are showing up in digital and with the look and feel of our website and marketing.
As a digitally native companies, who are using this new approach and loan size, our investments to drive more robust engagement with our key cohorts, we're continuing to improve our site experience through more targeted marketing to present, our customers with relevant and engaging content supplier quality sales as a result, we get.
It increased traffic and engagement from social media and with repeat exposure, we expect our social media prospects to continue growing nicely.
On the heels of strategic infrastructure enhancements, we've made to improve our internal efficiency, we come to the same.
Focus to enhance our customer facing processes.
We recently welcomed a new technology leader, who is spearheading these efforts and work with me so roadmap our strategy and identify leading partners to drive innovation consistent with our asset light model.
Our facility in Tulsa West solutions, but the key driver of our strong performance this quarter.
In the U S and internationally.
Drugs with a key adjacencies, especially.
Any thoughts on the cancer assay for a new styles and key fabrics light quarter, like denim and Velvet and new colors.
<unk> strong performance.
Demand in nearly all women's categories were up double digits in our U S E Commerce business.
Our Sweden solutions finished some are strong in August and we are looking forward to building on that success with the introduction of our upcoming spring swim assortment, which includes a recommitment to the lumpy category with.
With the creation of our products centered around our classic coupler solution and the enhancement from control based technology.
<unk> is shaping technology that we have protected.
Application swim, we made an incredibly innovative space for <unk> to grow and develop.
Building on the theme we've discussed before our customers are responding positively to freshness across categories.
<unk> strong performance in our layering products and traditional asset resolution, which gives us confidence that we will be able to continue this trajectory more consistently in the months and years ahead.
Our U S e-commerce business on largest direct to consumer channel delivered a second consecutive quarter of a great market performance due to our more targeted approach to promotions and improved inventory management.
Offshore our customers distributions Bailey irrelevant presentation.
Active fabrications colors and value they are responding and not necessarily waiting for discounts at the level. We've had in recent years.
We're also continuing our efforts to maximize key events and holiday to drive demand with our customers responding well.
Targeted promotional strategy, which compliments.
Our strategy to minimize markdown within show conviction and our solutions based category and led to improved margins.
Turning to our international business.
With our U S business, our strong performance is driven by our therapies and transitional asset resolutions.
To prioritizing unit and improved inventory management.
<unk> margins were in line with our U S business.
Gross margin in Europe grew nicely by approximately 1000 basis points year over year.
During the third quarter, we continued executing on our licensing strategy, which pads that royalty guarantees and new income streams, allowing us to continue to focus on our core capability.
Recently, we entered into a licensing agreement, but all kids category and we're continuing to ramp up activities under our existing agreement with Costco.
As I mentioned on our last call to footwear.
That gain in income from fees three licenses in 2024.
Moving forward, we expect to maintain our expanded focus on licensing and are continuing to build a robust pipeline of potential partners.
Turning to the accessories business, we're making headway in our efforts to enhance performance and to ensure this critical business achieved the results were constant 810 to be clear this is great opportunity.
To profitably grow our share up in market certain businesses and stew and fuel our BCC customer acquisition engine, a partnership with American Airlines and the upcoming launch of our partnership with Samsung.
Great examples of our work to earn the business of launch again in.
In addition, we will launch a new partnership with Healthcare Corporation of America in the first quarter of 2024, <unk> 3500 managers and frontline employees and a parallel division.
Similarly for <unk>.
Spending on the progress we made last quarter and also uniform business through new relationships with large school districts that will ramp up in 2024, we continued to see schools as a key pipeline outfitters business and having achieved a 92% satisfaction rate among our existing partners that we.
Believe we are well positioned to capture additional market share.
Driving innovation in our business with our planned introduction of our integrated cyber and technology.
The Choppiness is food with plans to roll it out more broadly.
Tool provided by size that allows the purchase such as scan their body with backbone and get fitted with a 97% accuracy rate driving both customer satisfaction and an expected reduction in returns and exchanges.
Technology.
Into consideration personal privacy and information security wholesale has applications to our PCC business and we are actively exploring ways to integrate it with the consumer experience.
We're taking steps to drive efficiency across our PCB business during the predecessor, reorganizing and revamping the organizational structure of our us business division to expand our reach and capture greater market share.
We recently hired a new b to B business development leader with over 20 years of experience, who is focused on building a pipeline of mid market and enterprise opportunities.
We also restructured our portfolio management team from a regional focus to a business segment or infrastructure that will enable our teams to hyper focused on the unique needs of each customer group.
We're working with our partners at a sales force to enable a stronger data driven sales process and bolster implementing marketing automation technology to improve customer communication create better defined customer journeys from outreach and lead generation and more effectively engage with existing and perspective customers.
Moving to our third party business, we saw a nice improvement in the quality of the demand.
A deliberate approach to better tailor, our assortment to each marketplace and lead into successful category with a focus on quality of sales improving gross margin.
Inventory return and freshness. The results were conducted with Macy's target and Amazon performing consistently well with Lilly as to where thats been driving demand across each of these marketplaces.
It's the holiday season underway Lands' end has launched an exclusive women's swim collection that target and select warm weather doors beginning in November 2006, we will rollout to 200 tilting towards by early January 2020 for the New Swim collection includes nearly 70 pieces of our iconic.
A new fabrics prints and colors, including accessories.
Very excited to be partnering with target to make our leading product category available to target customers.
Tony will then discuss our third quarter performance as well as our fourth quarter outlook.
Blowing that discussion we will share what we've seen so far in the holiday season before taking your questions.
Thank you Andrew for the third quarter total revenue performance came in slightly below our guidance range at $325 million.
A decrease of 12, 5% compared to last year or 9% when adjusting for our Japan E Commerce business, which closed in 2022 and accounted for $10 million of revenue in the third quarter of last year and excluding the $4 million difference in year over year revenue from Delta.
As Andrew noted, we delivered adjusted EBITDA of $17 million.
Up 4% year over year.
Each exceeded the high end of our guidance range fundamental to these results as our conscious decision to focus on profitability and balance sheet efficiency versus solely on revenue, which has improved our gross profit dollars and markets.
Gross margin in the third quarter with 47%.
And approximately 700 basis point improvement from the third quarter of 2022.
The margin improvement was primarily driven by new products across the brands.
Strength in transitional outerwear in adjacent product categories. The reduction in sales of clearance inventory and improvements in supply chain costs. While we are pleased with our gross margin improvements we will focus on driving additional supply chain cost savings through product cost reductions and improved seasonal inventory management.
While our U S ecommerce business saw a sales decrease of 10% compared to the third quarter of 2022, we generated an increase in gross profit dollars of 7% driven by our concerted effort to reduce promotions within these categories, especially our malware solutions new products across the brands and <unk>.
Inventory management.
Sales in our <unk> e-commerce business in the quarter were down 8% year over year, reflecting continued macroeconomic challenges, but again increased gross profit dollars by 18% driven by promotional effectiveness and improved inventory management.
Globally E Commerce sales decreased 13% from last year or 10% when adjusting for Japan.
Sales from Lands' end outfitters were down 8% from the third quarter of 2022, excluding the $4 million difference in year over year revenue from Delta. The Outfitters business was down 3%, primarily driven by high single digit growth in both our national accounts and mid sized customers more than.
Offset by school uniforms due to timing shifts in back to school deliveries last year related to supply chain disruptions from the second quarter to the third quarter.
Revenue for our third party business was down 22% compared to the prior year, primarily driven by weaker performance at Kohl's, partially offset by strong performance at Macy's and target.
Our partnership with Macys, which launched this year is performing very well driven by strong sales in women's swim and apparel SG.
SG&A expenses increased $3 million compared to last year as a percentage of sales SG&A was 42%, which was an increase of 590 basis points compared to 2022.
Primarily due to approximately 400 basis points of deleverage from lower revenues and a 145 basis points due to higher incentive based personnel costs, partially offset by lower marketing and Teekay continued cost controls.
Continuing to look for ways to improve SG&A and we'll be taking actions to drive savings as we continue to evolve our digitally native visits.
During the third quarter, we took a $107 million impairment of goodwill due to the decline of our stock price and the resulting market capitalization, which led to a net loss for the quarter, the $112 million or $3 52 per share compared to a net loss of $5 million.
<unk> or <unk> 14 per share in 2022, excluding the noncash goodwill impairment, our adjusted net loss was $4 million or.
Or <unk> 11 per share.
Moving to our balance sheet inventories at the end of the third quarter were $422 million compared to $565 million a year ago to 25% improvement in our inventory position was a result of the actions. The company has taken to improve inventory efficiency by reducing inventory purchases and.
Capitalized will speed to market initiatives.
Year to date net cash provided by operations was $163 million greater than last year, primarily due to this improved inventory productivity.
In terms of our debt at the end of the third quarter. Our total term loan balance was $234 million.
And our $275 million ABL had $110 million of borrowings outstanding which was $50 million lower than the third quarter last year. Despite.
Despite lower borrowings outstanding on the ABL, we continue to have elevated interest expense driven by higher market rates.
<unk> new store opportunities to re finance, our debt and are committed to doing so subject to favorable market conditions.
During the third quarter, we repurchased $3 million worth of shares under the Companys previously announced $50 million share repurchase authorization, bringing the balance of the remaining authorization to $32 million as of the end of this quarter.
Now moving to guidance building on our prior discussion we are continuing to prioritize high quality sales and improved cash flows, which we expect to drive continued growth profit and margin expansion during the holiday season.
In the fourth quarter, we expect net revenue to be between $490 million and $520 million.
We expect adjusted net income of $8 billion to $11 billion.
And adjusted diluted earnings per share to be between 25 and 30.
<unk> 34.
<unk> adjusted EBITDA to be in the range of Q1 $75 million to 31 5 million.
Which takes into account SG&A impacts related to normalized compensation approach.
Based on our third quarter results and fourth quarter guidance, we are updating our full year guidance and now expect net revenue of $1 45 billion to 144 $8 billion. We expect adjusted net income to be in the range of a net loss of 5 million.
Two 2 million.
And adjusted diluted loss per share of 16 two seven.
We expect adjusted EBITDA to be in a range of 80 million to $84 million.
Our guidance for the full year incorporates approximately $35 million in capital expenditures as we have discussed our improved inventory management will enable us to maintain inventory at normalized levels and bolster our work to further expand gross margin moving forward.
With that I will turn the call back over to Andrew.
Thank you Courtney.
Before we wrap up I'd like to briefly touch upon our holiday sales trends.
At retailers, we introduce black Friday promotions earlier this year.
Can see traffic ramp up as we progressed with November was significantly stronger traffic and increased gross profit dollars across all channels on black Friday and over the weekend and into cyber week.
This holiday season, we are better engaging with our customers to improve.
The brand focus despite higher quality sales further supporting our enhanced inventory position as we approach the end of our fiscal year.
Like other retailers holiday promotions are higher from across the balance of the year.
We continue to scale those promotions back versus prior holiday periods and remain committed to our strategy of driving increased gross margin in both dollars and rate.
We will remain competitive with our pricing and be smart.
How we target different segments of our customer file to drive profitable demand throughout the holiday season.
We remain cautious given that we said and the additional weekend between Black Friday, and fitness, which could push some business later on beyond our shipping capex.
As I mentioned earlier, we're confident that we have found a winning formula to achieve more productive sales by focusing on a better understanding of our customers' shopping behavior and faster moving inventory our customer centric strategy is working and pleased with the progress our team has made as we can.
Turning to play to our strengths and improve operational efficiencies across the business.
Well positioned to finish strong through the year.
That concludes our prepared remarks, we look forward to your questions.
At this time, we will open the floor for questions. If you would like to ask a question. Please press star one on your telephone keypad.
You may remove yourself at any time by pressing star two.
Again, Thats star one to ask a question, we'll take our first question from Dana Telsey with Telsey Advisory Group. Please go ahead.
Hi, good morning, everyone and nice to see the progress on the profitability.
The continuation of the lower inventories I think down 30% in the second quarter down 25% now in the third quarter, where do you see what the normalized rate of inventory level should be how are you planning that going forward.
And then on it's nice to see scaling back on the promotions.
Especially post the Black Friday time period.
Are you seeing in terms of categories outerwear, how you're planning how are <unk> and then on the margin focus what are you seeing in terms of under the Hood on the margins, whether it's <unk> or whether it's a safe work what is the opportunity for the gross margin going forward. Thank you.
Big data is at the Cowen.
Good how are you.
Okay.
Good.
Leading into the leading into the questions.
We continue to see opportunity with inventory.
So pulling that back we're going to work or is it more to return.
I see an opportunity to move into business between three and four turns I mean, obviously it gets harder as the churn to increase.
Where youre looking better assumption of the speeds that we're putting into our supply chain. So can we talk a lot and this is going to be related to your AUR comments, yet your AUR comments as well.
<unk> talked a lot about getting speed and having more freshness more consistently in the business month after month after month versus the more traditional model behind twice a year and that in of itself will give us more opportunity to increase returns going into next year.
It will give us opportunity to show off and maintain the average unit retail.
I'm going to talk to.
Mailing back promotion, we scaled back promotions, even through Black Friday and cyber Monday.
Excellent and emphasize that point in the script, we did come into the early one of the things I've noticed about lands' end.
It's been probably more to do with our catalog and history and everything else, we really kicked off the holiday in October October tends to be a bigger amount for us in August.
And I've experienced in my career.
And it's really to start to sell off the holiday shopping period and holiday for US is really all about.
Ex successful October November and then that last couple of weeks after cyber Monday, So what we saw that really beginning to market Black Friday in.
October consistent with us starting holiday and that's what's new in math in terms of the overall level of promotions. They were following a major falling consistently.
A lot of box office that we've traditionally done you would see it going up to 70% I don't want to hear about.
7% growth.
They were offset 40% offset.
That's where we started this we sort of pull the needle assets in terms of where the promos or apps.
We saw that that customer came with us on the journey, particularly when we offered newness in there.
We noted in the call in Q3, and it's been something we've seen all year that the women's categories neuro posting double digit comps and gross margin comps.
I think it would be fair to say that we've seen that continue we've been very successful.
Acceptance of our products in those categories.
Answering your question about category.
Okay.
Are we sort of already so it's not like we took simply made some changes in how we approach the outerwear coming through last year. It was clear, where we're taking really our desktop or to oxide and sockets, we were discounting them.
For Black Friday, or cyber Monday, and it was just too much this kind of speed.
We needed to take a different direction on that in addition to that.
It's not not a political statement, which resolved getting warmer.
It may happen later, so we had changed the rating.
The fabrics.
Alex that we saw and really for the early part of holiday. So it was less about that.
I will tell you certainly in the Midwest today as we sit here in the snug.
For the first five six weeks, we really got behind other programs we brought in a.
Non Ben.
Carcinoma issue lag, but it's the best.
Program, that's been very successful game at that price point at a margin and actually sit with rent assignment with that in addition to that we brought in a new middleweight Jackup, we've introduced new program <unk>.
Someone is.
We felt that Patrick pull down.
It's been a very successful sort of entry price point into heavier were heavier outerwear alright.
So very pleased with how the warehouse before we're pleased that our women's has performed.
Italy, Italy showed we showed that we thought categories alongside that along for the ride. We saw good performance in men's actually even products like HUD last last year and I remember this very clearly with discounting hub very heavily we haven't needed to do that and actually on the one off that we gave which was a $10.
CP, Mattel, which fell below to tell her that day, there was a pent up demand waiting for it.
The last part of it as we think about.
The AUC at the margin conversation.
He's got a lot of our game in Q3.
From actually lowered lower discount rates.
The real benefit of the average of that cost work that we did a still to come to us. If you remember we make the arrangements and make the changes in our sourcing organization to move to Li <unk> Fung.
That was a Q2 event and we will.
Even with the speed of our supply chain due to the full effect of that inventory turns and so middle to back half of next year. So we still think that the best is to come in terms of continued margin upside from ADC and it can say we started with us.
This is where we've seen the most progress as we expand that thinking that to other categories and we see that we will be able to continue that momentum as well.
The story was up to date every state with it pretty consistently since I took over.
Absolutely committed to that I believe will get this done and this is a <unk> pain really great margin story that we have Atlanta and at the moment and really are we elevation of our product.
And then Dana I'll, just add for the inventories for the perspective that you can use pre pandemic levels.
As a guide to what our future levels of <unk> and the timing of the inventory levels. And then you also received benefit as you saw on the announcements that we also have announced another license with case, our licensing arrangements will also have a benefit to reducing our inventory.
Got it thank you very much.
The asset data.
Yeah.
Thank you. Our next question will come from Alex Furman with Craig Hallum Capital Group. Please go ahead.
Hey, guys. Thanks, very much for taking my question. So clearly the focus on prioritizing profitability over revenue is producing some nice results here I'm curious how.
How much more room, you think there is to pull back on unprofitable sales could there be another leg down.
You as you identify more promotions or clearance activity that you want to pull back on and then looking out over the next couple of years as you add more high margin revenue, presumably from growing the licensing business.
Can you continue to grow EBITDA without necessarily a big increase in revenue can it be $100 million EBITDA business on the current $1 5 billion dollar revenue base as you start to grow some of those other areas.
Yeah, So I'm not sure you're considering some of our strategy meetings, but yes.
Yes, I think.
It really is important for us when we talk about licensing that's one of the strategies that will reduce our cleared itself.
We get out of the products, we're not as focused on that and don't have the authority will be able to drive without a top line will be able to drive a better profit.
Our net income number from a licensing arrangement, then selling a lot of product candidates.
We tended to do.
So I think you definitely hit on that we expect to be able to drive ultimately to an EBITDA of $1 5 billion.
Revenue company.
Say that Alex.
As we look further out.
There is a point, where we have the customer reeducate, if that's what's happening right now I think that.
We have.
Customer desktop was at $1 lowest our lowest decile is the one that we have probably have the most customer that all stay.
Whilst the brand's commitment to the pads you never had customers come in they stay with <unk> for 17, 18 19 years.
They are not.
They are struggling most to respond to that.
Traditionally used it a little bit like a Dutch auction riches, but they put product in Nebraska, and they wait until they get the price. They want and then they'll buy it we're moving towards customers, who will buy the product narrow or it won't be there.
We're not going to discount our product portfolio to spend all of our brands, we're going to spend on what we believe are the key attributes of <unk>.
<unk> solution company that we have built and we're going to drive that.
I think what you will see and we're seeing it ourselves to them.
In our internal discussions that we're shifting from us right now.
But the simple desktop based model that looks at all customers the same and we're moving towards a more thoughtful.
Thank you graphic model that looks at customers and cohorts and the two cohorts that we've identified with oversight of all residents.
Would be fair to say that we use the fourth quarter to start repositioning some of the thinking around them and how we go to market how.
How do we sell to them.
<unk> uniquely versus more generic space and how we attract.
Part of what we've been doing in Q4, but part of what we use black Friday and cyber Monday forwards to go out and.
Find new customers new customers that we like which is why and I know just from throwaway comment in the script, but it's why we talk so much about social media, we really like the customer we're finding from methane set our revolver platform.
They are not.
Less inclined to buy at a discount so we're doing the hard work like met the commitments that we're getting from the commitment they are getting from this management savings.
Welcome to deliver gross margin comps and this isn't just about getting rate.
Declaring victory, we understand that we're here to drive EBITDA and ultimately earnings per share.
We are very focused on that so we're constantly evaluating that as threatening that need elaborate dates pay that black Friday cyber Monday arent just by casual Tuesday in January.
Okay. That's really helpful. Thank you I appreciate your insights and congratulations again on the strong third quarter results.
Thank you Alex.
Thank you. This does conclude today's Atlanta in third quarter earnings call. You may all disconnect at this time and have a wonderful day.
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