Lands' End (LE) Q2 2020 Earnings Call Transcript

Lands' End (LE -0.69%)
Q2 2020 Earnings Call
Sep 02, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Lands' End second-quarter 2020 earnings conference call. [Operator instructions] Please be advised that today's conference may be recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Bernie McCracken, chief accounting officer. Please go ahead.

Bernie McCracken -- Chief Accounting Officer

Good morning, and thank you for joining the Lands' End earnings call for a discussion of our second-quarter fiscal 2020 results, which we released this morning and can be found on our website, landsend.com. 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, quarterly reports on Form 10-Q and Form 8-K dated June 2, 2020. 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, 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 -- Chief Executive Officer and President

Thank you, Bernie. Good morning, and thank you for joining our second-quarter earnings conference call. I hope that you and your families remain safe and healthy. Before we begin, I want to extend my deepest gratitude to all of our team members for their hard work and contributions as we continue to navigate this highly complex and challenging environment.

Looking at our business, since I joined Lands' End in the spring of 2017, we prioritized investments and resources that would enable us to capitalize on our e-commerce-led organization. We focused on product assortment through our key item strategy; data analytics capabilities; our global e-commerce platform, including website presentation and functionality; marketing strategies and business processes and infrastructure. The work we have done across these areas enabled us to drive momentum in our global e-commerce business and deliver strong growth in the second quarter of 2020. We remain well-positioned to manage through the challenges presented by COVID-19 and to deliver long-term profitable growth when we emerge from this crisis.

My confidence is due to several factors. First, our organization is a digitally driven business with over 96% of total revenue from e-commerce. Second, we offer key item basics as a great value with great service. Third, we have demonstrated the agility and discipline necessary to align our cost structure to a new normal.

And lastly, we have a number of strategies in place to further expand our customer base, including the planned launch of Lands' End on Kohls.com and in 150 Kohl's retail stores in late September, as well as brand collaborations, and the introduction of our third-party marketplace. I will speak to these initiatives in just a bit. Looking back at our second quarter, total revenue grew 4.6%. And our global e-commerce business increased approximately 23%, ahead of our expectation of high single-digit business unit growth.

We more than tripled adjusted EBITDA to approximately $24 million through margin expansion attributable to more disciplined promotions and reduced expenses. Importantly, we also took steps to enhance our liquidity position. Jim will provide details on our financial results shortly. Diving a little deeper into our global consumer e-commerce business, our strategy remains to emphasize comfort and value across our e-commerce site in our catalogs and throughout our communication strategies.

Marketing programs focused on our let's get comfy campaign resonated with both existing and new customers. We use data analytics and search engine optimization programs to capture new customers globally with high intent to purchase, resulting in 34% growth in new customer acquisition. At the same time, we leverage data on existing customers to deliver more personalized messaging. The number of repeat purchases improved in the second quarter as we continue to tailor our messaging to customer preferences.

Our rebuy rates reached nearly 60% for existing customers and nearly 30% for new. These are the highest in our company's history, and we believe are among the best-in-class. Our product offering provides the comfort and value proposition that perfectly matches the work-from-home lifestyle. Our swimwear was a top-performing category in the quarter.

We saw strong response to the versatility in our assortment with board shorts and UV-protected swim tees, both particularly strong performers. Emphasis on a one closet strategy, enabling customers to mix and match key items also resonated. In addition to swim, sleepwear, especially men's, and knits, both performed very well. Home also continues to be an area of strength as we extend our comfort messaging into the living space.

Turning to our Outfitters business. Results were severely impacted by the COVID-19, partially offsetting growth in our direct-to-consumer e-commerce business. As we discussed last quarter, many of our national accounts operate in highly challenged travel-related industries, while our small and midsized businesses were also negatively impacted by the pandemic. Our school uniform business declined double digits in the second quarter.

While we expect continued pressure in Q3 due to delayed school openings, we are seeing trends improve sequentially. Jim will provide more details on this business in his remarks. While we continue to face macro-related headwinds in our Outfitters business, we're extremely pleased with our direct-to-consumer e-commerce business. As we think about the second half of the year, we will continue to leverage our e-commerce capabilities and advance our growth strategies, while carefully managing inventory and cost to enhance liquidity and protect our business in the face of continued uncertainty regarding the pandemic.

Longer term, we remain confident in our positioning within the new landscape, given our dynamic e-commerce foundation, limited bricks-and-mortar exposure, key items basic business that offers an attractive value proposition and lean operating structure. I will speak more on our longer-term strategies following Jim's remarks. With that, I'll turn the call over to Jim.

Jim Gooch -- Chief Operating Officer and Chief Financial Officer

Thank you, Jerome, and good morning. As Jerome mentioned, we're extremely pleased with the performance of our global e-commerce business in the second quarter. As expected, our Outfitter business remains challenging. While there continues to be uncertainty in the marketplace, we'll remain focused on executing our strategies, as well as maintaining disciplined expense and inventory management and enhancing our liquidity.

While the pandemic continued to impact our business, our strong results reflect its resiliency. Total revenue increased 4.6% to 312.1 million compared to 298.3 million last year. In our U.S. e-commerce business, sales increased approximately 26%, while sales in our international e-commerce business increased approximately 9% for the quarter.

We saw strength in a number of categories in the second quarter, including swimwear, knits and loungewear, as well as in our home categories. These categories delivered strong double-digit growth in the quarter as we continue to emphasize comfort in our product assortment and marketing strategies with many consumers working from home. Partially offsetting the strong global e-commerce growth, sales in our Outfitter business were down approximately 43% due to continued pressure as a result of COVID-19. Within our large national accounts, approximately half of our partners operate in travel-related industries, including airline, hotel and car rental businesses.

Our small and midsized businesses are reopening, but in many cases, with a reduced number of workers. Although we've seen improved trends in recent weeks, sales in our school uniform business was down double digits in the second quarter due to the uncertainty of schools reopening. We expect continued pressure on our Outfitter business, at least through the remainder of the year, which I'll speak to shortly. Moving to our retail business, which I remind you, represents less than 4% of our total business.

Our U.S. retail sales decreased approximately 51% in the second quarter to 4.3 million. As Jerome mentioned, we completed the phased reopening of our 26 stores by the beginning of August, and we've also opened four new stores during the first half of the year. Since reopening, sales productivity levels at our stores are tracking at approximately 70% to last year.

Gross margin in the second-quarter increased by approximately 10 basis points to 43.4%. Gross margin benefited from our improved promotional strategies and continued use of analytics. This was partially offset by the liquidation of seasonal inventory as we reopened our retail stores. Selling and administrative expenses declined approximately 10.8 million due to strong controls across all of our expenses, as well as actions previously announced in response to COVID-19.

As a percent of sales, SG&A by -- improved by approximately 530 basis points to 35.7% compared to 41% in the second quarter of last year. Income tax was an expense of $600,000 compared to a benefit of 3.2 million last year. Net income for the quarter was 4.4 million or $0.13 per share compared to a net loss of 3 million or $0.09 per share last year. In addition to the GAAP measures that were outlined above, adjusted EBITDA is an important profit-building measure that we use to manage our business internally.

For the quarter, adjusted EBITDA was 23.9 million. That's a 17.1 million increase or more than 3.5x last year's adjusted EBITDA of 6.8 million. Turning to the balance sheet. Inventories at the end of the quarter were 441.5 million compared to 405.8 million a year ago.

This increase was entirely driven by our Outfitter business and specifically the inventory to support the new American Airlines business going forward. In our global e-commerce business, strong sell-through of our spring and summer inventory enabled us to end the quarter with lower inventories, and in a healthy and lean position headed into the fall. As Jerome discussed, we're focused on maintaining our financial flexibility through this challenging environment. Regarding our term loan, which matures next April, we'd like to provide an update on the progress we're making on refinancing.

As you know, the COVID-19 pandemic impacted the financial markets and as a result, the timing of our refinancing. We've received non-binding term sheets from multiple investors for transactions that would allow the company to refinance the term loan and are in active negotiations regarding our refinancing. Our debt structure is expected to be comprised of our ABL line, which has been upsized to 275 million, effective when we close the refinancing, and approximately 275 million of additional debt secured by our non-ABL assets. We're targeting to conclude a transaction before the end of the third quarter.

We recently completed the implementation of our Enterprise Order Management system. With the new systems in place, we expect to drive higher inventory productivity and improve our ability to fulfill orders placed on third-party sites like Amazon and Kohls.com. Our capex projection for the year is expected to be approximately $25 million. Turning to our outlook.

With our business stabilizing in the second quarter, we feel comfortable providing sales guidance for the remainder of the year. For the third quarter, we expect net revenue to be down low single digits to flat versus prior year. This assumes low double-digit growth in our global e-commerce business, offset by decreased revenue in our Outfitter business and lower sales in our retail stores as compared to last year. While we're very pleased that our school uniform business has shown signs of improvement and has delivered sequential improvement in August, we still expect to see headwinds in the third quarter as fewer students are returning to school in the fall.

Gross margin is expected to be fairly flat for the quarter. For the fourth quarter, we expect net revenue to decline in the low single digits versus prior year. We expect low double-digit growth in our global e-commerce business driven by continued progress we're making on our strategic priorities. However, as a reminder, we will be lapping the largest portion, approximately 40 million, of our American Airlines launch during this period and continue to expect a slow recovery in the overall Outfitter business.

In addition, despite continued benefit from our more disciplined promotional and markdown strategies, we expect gross margin pressure due to shipping surcharges being implemented by carriers around the holiday period. Lastly, we expect that our continued focus on managing our expenses will allow us to maintain our SG&A rate at historical percentages for the remainder of the year. And with that, I'll turn the call back over to Jerome to discuss the progress on our core growth strategies.

Jerome Griffith -- Chief Executive Officer and President

Thanks, Jim. While uncertainty in the environment remains, we believe we are strategically well positioned to manage through the crisis and maintain our strong competitive position within the evolving retail landscape as we continue to operate in this unprecedented period. As I stated earlier, the strategic initiatives we have developed and executed over the past few years were driving momentum in our e-commerce business and enabled us to deliver exceptional growth in the second quarter of 2020. Our four core strategies: getting the product right; being a digitally driven company; implementing a uni-channel distribution strategy; and enhancing our infrastructure and processes remain our guiding principles.

We are very pleased with the response to our product offering as we emphasize comfort across our categories. We attribute the strong customer response to two main factors: one, our key item strategy focused on owning the water -- owning the weather, layers, layers, layers, and we fit everybody. And two, the work we have done leveraging our data to gain insights into consumer preferences and to inform assortments. As we look ahead to the fall season, our let's get comfy messaging will remain a major theme as people continue to work from home.

Our fall assortment more heavily reflects wear-now items, including fleece and layers, sleepwear and home. We will also continue to optimize our assortment of women's knit tops, which generate high rebuy rates. We plan to expand this offering with soft fabrications and comfortable silhouettes. Within digital, we continue to expand and analyze our comprehensive database to gain greater insights into our customer preferences.

These learnings will guide decisions on both product assortments, marketing programs and messaging in future seasons. Through the leveraging of data analytics and machine learning, we are improving our search engine optimization capabilities and driving customer outreach by identifying where to show up and when. In terms of our marketing spend, we are maintaining a flexible approach to digital and catalog spending to take advantage of opportunities in the marketplace. Our promotional and markdown strategy continues to leverage AI to effectively promote products by determining optimal prices and driving conversion.

These efforts enable us to better understand consumer behavior and drive higher gross margin despite aggressive competitive promotions. As we advance our test-and-learn strategy, we will continue to utilize our database to deepen our understanding of customer motivations. Turning to our retail business. Our brick-and-mortar stores have opened with a priority of health and safety.

While some customers are still cautious to shop, we believe that our retail stores represent an important component of our customer service. That said, we first and foremost, remain an e-commerce company, and our retail expansion strategy remains fluid based on the environment and customer behavior going forward. I would now like to spend a few moments discussing some of the growth opportunities we see beyond our own channels and brand. First, we remain very excited about our planned launch on Kohls.com and in Kohl stores later this month as we believe the Lands' End brand will resonate with the Kohl's customer.

Second, we remain pleased with the continued success of our Amazon business. With the completion of our ERP implementation, we now have the capability to fulfill orders from our own distribution center for Amazon and for Kohl's. Third, with regards to the Lands' End marketplace, we are still in the early stages. We now have seven third-party vendors selling product on our website and are in the process of onboarding additional third-party sellers with the goal of reaching 25 before holiday peak.

And lastly, turning to our collaborations. The launch of our swimmer collaboration with Reese Witherspoon's apparel brand, Draper James, surpassed our expectations. We are highly encouraged by these results, and we will continue to explore similar opportunities to drive awareness. In summary, we recognize that the challenge we face today will likely extend well into 2021 and we are taking a cautious approach to driving our business.

That said, we are no less excited about our future. We will continue to build on our robust e-commerce foundation and offering of high-quality, value-oriented product assortments with growth initiatives that expand our customer reach. We remain confident that we are strongly positioned within the new retail landscape and the strategies we have in place will enable us to deliver on our long-term growth outlook when we are past the pandemic. We look forward to updating you on our progress in future quarters.

Before I turn it over to Q&A, I want to take a moment to discuss our actions in response to the tragic events related to racial inequality. As we continue to strive to be a great place to shop and work, we are making diversity and inclusion a strategic priority. And to that end, we have had many conversations around these topics. We know we can do better.

We want to do better. And the opportunity exists for us to continue to learn, grow and be stronger together. We know the dialogue must continue. And based on the discussions to date, we have outlined the diversity and inclusion strategy, along with several initiatives to get us started and support our ongoing commitment.

With that, we'll open it up for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Alex Fuhrman with Craig-Hallum. Your line is now open.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Great, thanks very much for taking my question and congratulations on putting up such strong results, certainly with all of the disruption out there in your business, that's quite an accomplishment. I wanted to ask about a couple of things, but to start with you, it sounds like the reorder rates have been really strong over the past couple of months. Can you talk about what's been driving that? And do you think you can sustain that level of retention as we get into the holiday season and into next year?

Jerome Griffith -- Chief Executive Officer and President

It's Jerome. Yes, I think that what we're seeing is just a very high demand rate. And one of the things that we enjoy as Lands' End is a customer that is extremely loyal. And our customer has been with us for upwards of 17 years, and they end up coming back and rebuying from us.

We've seen high rebuy rates. I think it's also partially because it's the right product at the right time. We sell basics. We're more of a basics company or a key item company.

And that's what customers are looking for at this point in time. They're looking for comfort. We have the let's get comfy strategy going on right now. And it's really resonating with the customer demand that you see in the marketplace right now.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

That's great. And then talk a little bit about the Outfitters business. I mean, obviously, demand has been weak this year. Can you talk about the health of the business otherwise? Have you continued to see good retention rates with your key customers? Are there perhaps opportunity heading into next year to perhaps win new business given your robust product assortment?

Jerome Griffith -- Chief Executive Officer and President

I think you have to look at -- break it down into the three parts that we have. You've got school uniforms, which parents have been, through the middle of the summer toward the end of the summer, a little bit reluctant to buy because they didn't really know what was going on with the school systems. But what you saw is as Governor Cuomo said that New York is coming back, so -- and New York is a very large state for us. You could see spikes in the business.

And as we've gotten closer to schools opening and parents getting more clarity with what's happening with their school systems, you start to see sequential improvement week on week. And the good thing about that business is, again, it's a basics business, the product doesn't go down. I just think that as the [Inaudible] is going to be more drawn out than what it's been in the past, where it's been just a short few weeks. On the national accounts area, that's very travel related.

Of course, we have American and Delta, but we also have a -- this rent a car and Hilton hotels and Hanson hotels. So we see that that's going to be continued pressure on that business for some time. And then in the small and midsized business category, the retention rates are very good as it is in school uniforms, we have extremely high retention rates there. But that's going to depend, I think, a lot on what happens with small and medium-sized businesses going into the back part of this year and then into 2021.

But I would say, overall, while we think it's going to be a little bit longer recovery period for the uniform business, we're pretty well set to take market share as companies want to come back into the full -- through our personalization opportunities.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

OK. And then lastly, if I could just ask about the Kohl's launch. Is that a big driver of the guidance in the third in the fourth quarter? And just bigger picture. I mean how big could something like that be? Do you think it could ultimately be in a lot more stores than that? Just anything you could help us to size that up would be great.

Jim Gooch -- Chief Operating Officer and Chief Financial Officer

Yes. Alex, it's Jim. We haven't given a formal guidance on how large Kohl's opportunity will be. But keep in mind, it's just launching now and it's only going to be in 150 stores, so we're certainly very excited about.

The full assortment will be available on Kohls.com. As far as going forward, we'll first get the 150 stores open. I think we'll work out all the kinks and then we'll have conversations with Kohl's, and we'll update you with any expansion opportunities.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

That's terrific. Thank you very much.

Operator

Thank you. Our next question comes from the line of Steve Marotta with CL King. Your line is now open.

Steve Marotta -- C.L. King and Associates -- Analyst

Good Morning, Jerome and Jim. Can you talk a little bit about third-party -- opportunities with other third-party platforms? You mentioned that with the new ERP system that will allow you to -- with a little bit better ease, essentially drop-ship, essentially fulfill out of your own e-c. Where can that business go? Are there additional platforms you can get on?

Jerome Griffith -- Chief Executive Officer and President

One of the things I've always said, Steve, is that we're really a digitally native company. We started selling online in 1995. And one of the things that this company has really looked to do is to continue to advance the technological investments that we've been making over the last several years. Our ability to ship to other third parties, we're on their website, like a Kohl's or like an Amazon, is something that we're quite proud of.

We're able to really service the customer. And the other thing that we're able to do now is bring on other third parties. We think this has a lot of legs. We did one as a test last holiday season.

We're going to have about 25 new vendors of this holiday season. And I think as we see what happens with consumer demand on our platform, we'll determine how big we think that can go, but we think it could be a significant part of growth for us in the future.

Steve Marotta -- C.L. King and Associates -- Analyst

That's helpful. Can you talk a little bit about potential product opportunities around the holiday season? If, let's say, dream a little dream, holiday comes in better than what you are currently expecting. Where do you think that growth would be driven from product-wise?

Jerome Griffith -- Chief Executive Officer and President

We're concentrating right now on footwear, accessories, home furnishings and seasonal items for this back part of the year.

Steve Marotta -- C.L. King and Associates -- Analyst

I understand. And lastly, you mentioned that search engine optimization is helping improve customer acquisition, customer retention. Can you delve a little bit into the current processes that you're utilizing there? And is there anything new technologically that might be coming on in the next six to 12 months that would enhance those capabilities as well?

Jerome Griffith -- Chief Executive Officer and President

Well, we've been -- first of all, we have a great team of people that we've brought onboard in the last couple of years that have been super helpful in making sure that we're content-rich and that we're employing the right strategies and going out for the right product categories. Secondly, we've been working with outside firms to use machine learning on how we're actually spending our dollars on marketing. And that seems to be working quite well for us. And if you combine that with the increase in demand as of late, what you're seeing is not just new customers coming onboard, but higher rebuy rates from those customers.

And what you're also seeing is as we're transitioning into comfortable clothing, particularly knit wear, which we call layers, layers, layers, they have higher rebuy rates than some of our previous product categories that customers have known us for. And again, that brings on more customers and turns them into active customers.

Steve Marotta -- C.L. King and Associates -- Analyst

That's really helpful. I'll take the balance off line. Thank you again.

Jerome Griffith -- Chief Executive Officer and President

Thanks Steve.

Jim Gooch -- Chief Operating Officer and Chief Financial Officer

Thanks Steve.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Bernie McCracken -- Chief Accounting Officer

Jerome Griffith -- Chief Executive Officer and President

Jim Gooch -- Chief Operating Officer and Chief Financial Officer

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Steve Marotta -- C.L. King and Associates -- Analyst

More LE analysis

All earnings call transcripts