Lands' End, Inc.
Q1 2020 Earnings Call Transcript

Published: 2 Jun 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Lands' End First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to introduce your host of this conference call, Mr. Bernard McCracken. You may begin.

[Bernard McCracken:]

Good morning, and thank you for joining the Lands' End earnings call for a discussion of our preliminary first quarter fiscal 2020 results, which we released this morning and can be found on our website landsend.com. As noted in the release, the results are preliminary, pending the completion of our quarterly procedures and preparation and filing of our quarterly report on Form 10-Q, which we expect will take longer this quarter due to COVID-19 and therefore are subject to change. On the call today, you will hear from Jerome Griffith, our Chief Executive Officer and President; and Jim Gooch, our Chief Operating Officer and Chief Financial Officer. After the company's prepared remarks, we will conduct a question-and-answer session. Please also note that the information we'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. The forward-looking information that is provided by the company on this call represents the company's outlook as of today and we do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company's outlook to change. Of note, in this respect, the COVID-19 pandemic continues to have a significant impact on our business operations, financial results and cash flow. The uncertain and dynamic nature of current conditions and its duration can materially alter our outlook. 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 landsend.com. With that, I will turn the call over to Jerome Griffith.

[Jerome Griffith:]

Thank you, Bernie. Good morning and thank you all for joining our first quarter earnings conference call. I hope that you and your families are healthy and safe. The COVID-19 pandemic has created a complex environment on many fronts to say the least. We believe that our business model provides the flexibility to mitigate, some of these challenges that this pandemic has created across the industry. I am extremely proud of our team's efforts in helping us navigate through this difficult period and encouraged by the more recent trends we have seen in our global e-commerce business. I want to thank the Lands' End team for their hard work and commitment over the past few months. I also want to extend my thanks to our business partners, as we continue to work closely together to manage through this period. We were extremely pleased with the continuation of strong trends we saw entering the first quarter. While our results were impacted by the outbreak of COVID-19, we are no less optimistic about our future for several reasons. First, we are a digitally driven company, with 95% of total revenue coming from e-commerce. Of that 95%, approximately 80% is direct-to-consumer revenue. Second, we provide key item basics at great value with great service, at a time when we are seeing growing demand for our offerings. So while we saw a significant impact in consumer demand at the onset of the virus, these attributes enabled a rebound in the following weeks. Third, we have demonstrated the adeptness and agility to appropriately adjust our cost structure, as we reset the new normal. And finally, we see opportunities to expand our customer base through more recent strategies, including the planned launch of Lands' End on Kohls.com and in 150 Kohl's retail stores this coming fall. I will speak more to our growth opportunities following Jim's remarks. Now, I want to touch on our business response to the COVID-19 pandemic. In March, as the outbreak spread, we took decisive actions to reduce our costs, cut capital spending, adjust our inventory receipts, negotiate select terms with business partners and, in general, prudently manage our cash flow in order to create better financial flexibility during this highly uncertain period. Jim will discuss these actions in more detail. But it is important to note, that our quick and deep actions were necessary to preserve the long-term health of the Lands' End brand and we believe they will position us as an even stronger company on the other side of this crisis. Looking back on the first quarter sales trends, performance in the first five weeks were ahead of our expectations. In mid-March, in conjunction with the spread of the COVID-19 pandemic, we began to see an impact on both our U.S. consumer and business segments. And on March 16, we temporarily closed our 26 U.S. stores. We focused our marketing efforts to drive our e-commerce business, which led us to a rebound in sales volume, beginning mid-April, which accelerated through May. We are very pleased with these recent trends, which clearly demonstrate the resiliency of our business. Our e-commerce business remains an important area of strength for us. The scale of our e-commerce business and supporting infrastructure enabled us to meet consumer demand and fulfill online orders, as the retail industry shifted almost entirely online. The vast majority of our inventory is located in our Wisconsin distribution centers and we were able to remain operational and fulfill customer orders. We also benefited from the heightened demand for comfort and value during the shelter-in-place restrictions. We emphasized these product categories in our online presentation, catalogs and customer communication and saw strong performance in apparel-related categories, as well as our home business. We were also encouraged by a low double-digit increase in new customer acquisition in April, which accelerated to a high double-digit growth in May. We continue to focus on driving eCommerce sales through outreach to existing and new customers and we are in the process of a phased reopening of our retail stores, which we expect to complete by the end of June. This is being done in accordance with governmental guidance and an adherence to CDC health and safety recommendations to ensure safety of our employees and our customers. Our product offering has also been an important differentiator for us in this new industry landscape. Lands' End is best known for high-quality at a value price point, offering our customers a composition of basics, seasonal basics and newness. Over the past few quarters, we have seen success in many of our casual comfort categories, which we expanded in the spring and will further build upon for the fall. Consistent with the shift in customer dynamics, as more people work from home, we are seeing strength in this offering, as well as select multifunctional items with UV protection within our swimwear category, as people are ready to spend more time outdoors. Home is another category for which we are seeing strength, as consumers are creating a more comfortable living space with the increase in time spent at home. In our Outfitters business, we completed the American Airlines launch in the quarter. But due to COVID-19, we saw declines, particularly in our large national accounts and small and mid-sized businesses. Relative to our other business segments, we expect Outfitters to see a slower recovery. In summary, during the quarter we continued to deliver against our core growth strategies across product, digital, unit channel and infrastructure, despite the volatile landscape, while building new growth opportunities across channels. Our dynamic eCommerce business limited retail footprint, attractive value-oriented basics product assortment, solid liquidity position and lean operating structure provides us with a firm foundation to navigate through this temporary disruption. Looking ahead, when the environment improves and the consumer begins to recover, we believe the secular shift to online shopping will continue and we are well-positioned to capitalize on this change. I will speak further on these points following Jim's review of our financial performance and detailed discussion on actions we have undertaken in response to COVID-19. With that, I will turn the call over to Jim.

[Jim Gooch:]

Thank you, Jerome and good morning. Before I get started, I want to take this opportunity to thank everyone on our team for their hard work and for their commitment throughout this very challenging period. I'll begin with a review of our financial results before detailing the actions we've taken in response to COVID-19 to protect our business, improve our financial flexibility and maintain our liquidity. While the pandemic had an adverse impact on our results in the quarter, our business model is resilient particularly our eCommerce channel and we expect all of our segments to recover albeit at different rates. As Bernie noted at the outset, our results are preliminary pending the completion of our quarterly procedures and filing of our 10-Q. We started out the year building on the momentum from the fourth quarter. For February revenue was up 11.1% with strong performance across all of our business segments. As the pandemic began to impact the U.S. consumer in mid-March, all of our segments were pressured initially before we begin to see a recovery specifically in our global eCommerce starting in April. As a result, our total company revenue for the first quarter decreased 17.3% to $217 million compared to $262.4 million last year. In our U.S. eCommerce business sales decreased 16.5%, while sales in our international eCommerce business remained relatively flat for the quarter. Following a significant drop in consumer demand at the outset of COVID-19, we saw a sales rebound in April. We are pleased to see this trend continue into May with global eCommerce business accelerating to double-digit revenue growth versus prior year. Our efforts in this channel not only led to increased engagement with existing customers, but true new customers as well. We saw strength in our comfort assortment including knits, loungewear and UV-protected basics as well as in our home categories. These categories delivered strong double-digit growth in the quarter as we emphasize these assortments with the drastic shift in consumers working from home. While our overall buyer file declined in mid-single digits for the quarter, we did see low double-digit increase in our new customer file for April as consumers sought comfort and value. Within Outfitters, our sales decreased 26.2%. We completed the American Airlines launch during the first quarter totaling $4 million bringing total revenue for the launch to approximately $44 million. As to be expected the Outfitter business has been slower to recover. Outfitters operates in three market segments

[Jerome Griffith:]

Thanks, Jim. While this is a highly unprecedented environment, we believe there is opportunity for us to emerge stronger on the other side of this crisis. Despite focusing on and responding to the crisis, we continue to make progress in building on our key strategies. The economic challenges and uncertainties we are seeing today are only accelerating the secular changes that have been evolving across the retail landscape over the past 10 years. The four core strategies we established a few years ago remain true today, and we will continue to be guided by them. These include

[Operator:]

[Operator Instructions] Our first question comes from Alex Fuhrman with Craig-Hallum Capital.

[Alex Fuhrman:]

Great. Thank very much for taking my question. We've got certainly quite an accomplishment that you're able to get the e-commerce business back to such nice growth here in the month of May with everything that's been going on in the world. I would love it if you could kind of walk us through a little bit the pace of business. It sounds like things obviously took a big step back in March and have been recovering. Since then can you give us a sense of kind of how the business has been recovering on a category-by-category basis? I know swimwear is typically a big category for you in the spring. Obviously, that could have been pressured with just travel being hampered and town pools and things like that not opening. I would love to just get -- if you could give us a sense of kind of the different lines of your e-commerce business kind of what's been coming back first? What's been coming back fastest and how that looks today?

[Jerome Griffith:]

Thanks for the question Alex. Much appreciated. As far as e-commerce is gone it's been interesting for the quarter. Overall, we had a pretty good start to the year. February looked really good for us. We were up double-digits overall. Even our retail comps were up 14%. But as we went into March, demand slowed somewhat in week 1 but then weeks two through five were really tough for us. And then we started to see e-commerce bounce back in April. Slow in the beginning of the month. We saw pretty decent single-digit increases towards the back part of April. And then into May it's been solid double digits. So, we are pretty happy about the outlook on direct-to-consumer. What's been selling is swimwear still a very big part of our business. Though the best sellers have changed a little bit, it's gone a little bit more out of exact swimsuits and into cover-ups and t-shirts and UPF protection. But some of the outstanding product categories that we've seen knitwear which really lends itself to our let's get comfy marketing campaign has been fantastic both in men's and women's. We've also seen increases in sleepwear loungewear activewear and home categories have been all high double-digit increases for us. So, we're still seeing the trends going into June. But it will be interesting to see as other companies start to open up their store networks how that affects e-commerce. We're still a little bit unsure. So, we're still cautious.

[Alex Fuhrman:]

Sure. No that makes a lot of sense. And then I guess a follow-up question just on that caution. Just looking at the release and hearing your comments in the prepared remarks it sounds like you're significantly going to be reducing your inventory receipts coming for the fall and holiday. Can you give us a sense of how much you'll be reducing? What categories are going to be reduced the most? And just thinking about your inventory that you have currently or had at the end of April can you give us a sense of how current that is and what actions you might need to take to right-size that?

[Jim Gooch:]

Yes sure Alex. Actually I think we feel pretty good about where we are from an inventory perspective. We finished the first quarter obviously with about $60 million of inventory greater than last year. But remember about half of that is from the new American Airlines business. So, the other half is the direct result of that short-term consumer drop that we saw mostly in March directly related to the pandemic. But with these improved trends that we've seen in May, with the strong performance that we're forecasting for the second quarter and for the rest of the year, we've made the necessary adjustments from an open/buy perspective. And right now we feel really comfortable that we're going to be able to quickly return to a normalized level of inventory.

[Alex Fuhrman:]

That’s great, appreciate that. Thanks very much.

[Operator:]

Thank you. Our next question comes from Steve Marotta with CL King & Associates.

[Steve Marotta:]

Good morning, Jerome and Jim.

[Jim Gooch:]

Good morning Steve.

[Steve Marotta:]

Can you talk a little bit about customer acquisition costs? You alluded to it in the call that that's probably tracking relatively favorably right now with consumers migrating online. Have you -- and I know you don't disclose the number specifically, but is it accurate that that number is on the decline versus last year?

[Jerome Griffith:]

Generally yes. What we've seen over the course of the first quarter and it's changed a little bit depending on the month or the week, but customer acquisition costs have been a little less expensive for us based upon traffic on the web. So we've tried to take advantage of it. And what we've seen even for the full quarter where we saw a slight decline in our overall file, we saw low double-digit increases in new customer acquisition in April. And then in May, we've seen high double-digit increases there. So we feel pretty good about picking up new customers and picking up market share. That seems to be working for us both domestically and internationally.

[Steve Marotta:]

That's helpful. Will commodity costs sourcing costs benefit COGS in future quarters? And if so when would you expect that benefit to manifest itself in the income statement?

[Jim Gooch:]

Well, if we did see any benefits you're probably looking at probably next spring before you'd really see it. Right now most of those costs were already committed for our short-term buys through the rest of this year.

[Steve Marotta:]

That's helpful. As far as the Outfitter business goes and clearly travel is challenged are there other business segments that you can potentially capitalize on; like healthcare for instance? Are you pitching larger contracts in other segments that might be benefiting or might not have the headwinds that travel does right now?

[Jerome Griffith:]

In the Outfitter business -- basically there's three parts to that business. About 1/3 of it is our national accounts 1/3 of it is small and midsized businesses and another 1/3 is school. So when you look at the national accounts yes we skew a little bit heavy in travel particularly with Delta and American. So we think that business is going to take a little bit longer to recover. For small and mid, we're pretty active on looking at new customers out there. And you'll see probably a turnover of some small and midsized businesses which will have a more difficult time and others which will have pent-up demand. Again, we think that will take a little bit longer to recover, but we've got a better outlook for small and midsized. And school is very dependent on what happens with schools going back into the fall. But so far on a per customer basis, we've seen the same trends that we've seen in the past in school. So as long as that begins to start to open up in the fall, I think that business will bounce back pretty quick.

[Steve Marotta:]

That's helpful. Jim I have one housekeeping question as it pertains to interest expense given what you've drawn down. Will -- do you expect interest expense to vary significantly in the second third or fourth quarters of this year than it did in the first quarter?

[Jim Gooch:]

No. I think you'll have the normal curve that you saw in prior years going into the back. You'll obviously have borrowings as we go into our peak season. But as you said we -- with the stronger performance that we saw in May and with what we're projecting in the second quarter we felt very comfortable paying the $25 million down against that $75 million that we had drawn in the first quarter.

[Steve Marotta:]

Okay, perfect. Thank you very much.

[Jim Gooch:]

Thank you.

[Operator:]

Ladies and gentlemen this concludes the Q&A portion of today's conference call and it does conclude the program for today. So you may all disconnect and have a wonderful day.