Lands' End Inc (LE) Q1 2019 Earnings Call Transcript
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Lands' End Inc (NASDAQ: LE)
Q1 2019 Earnings Call
Jun 4, 2019, 8:30 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Lands' End's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference may be recorded.
I would now like to turn the conference over to Bernie McCracken, CAO. You may begin.
Bernie McCracken -- Chief Accounting Officer
Good morning, and thank you for joining the Lands' End Earnings Call for a discussion of our first quarter fiscal 2019 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 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.
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 measure 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 us to discuss our first quarter financial and business results. We're very pleased to have delivered results at the high end of our first quarter expectations across key financial metrics and to be reiterating our full year revenue and adjusted EBITDA guidance for fiscal 2019. This performance further illustrates the continued progress we're making across our strategic initiatives. Our US e-commerce business continued to deliver solid results. Comparable store sales in our US company operated retail stores remain strong, again showing double-digit growth. Gross margin expanded approximately 130 bps, and adjusted EBITDA was at the high end of our expected range.
Additionally, we voluntarily prepaid $100 million of our term loan with excess cash on hand further strengthening our balance sheet. As a result of the debt reduction, we are adjusting our net income guidance to reflect the positive impact of interest expense savings. Jim will provide details on our guidance.
The continued progress we're making across our numerous growth initiatives put us on track to achieve our stated long-term objectives of $1.8 billion to $2 billion in revenue and high-single digit EBITDA margin.
I'd like to take this opportunity to elaborate on our strategies to achieve these goals. Our growth strategy is centered around getting the product right, operating as a digitally led company, executing a uni-channel strategy and improving business processes and infrastructure. We believe these strategies will enable us to successfully grow e-commerce, develop our uni-channel capabilities and reach and expand our outfitters business. All of our growth initiatives begin with getting the product right. We believe our growth will be driven first and foremost by the continued optimization of our product assortments, focused on our key item strategy.
Our goal is to retain our core customers and attract new customers to Lands' End by delivering product for the purpose that offers great value to our customers. We want to be our customers' destination for our core categories which includes swim, outerwear, knits and bottoms. We're driving our product strategy through four main objectives that we articulate as own the water, own the weather, layers, layers, layers, and we fit every body.
Central to our product initiative is our commitment to inclusion by meeting all of our customers' needs. We continue to leverage our data to align our assortment with customer preferences and determine the optimal product mix. The efforts we put behind these objectives are reflected in the strong performance of our knits, bottoms and outerwear categories during the first quarter. For example, in bottoms, we're building off what the data tells us by adding patterns, different leg shapes or waistline options and successful applications as well as introducing a variety of washes to our denim assortment. We also remain focused on the fit to ensure consistency across all of our bottoms businesses. In addition, our initiatives to increase speed to market will position us to make more informed product decisions and operate with leaner and fresher inventory.
Looking ahead, we will maintain our focus on aligning our assortment with our customers' needs and preferences, and at our foundation is our commitment to consistently deliver strong value and service for our customers.
Regarding our distribution strategy, our goal is to offer our products, however, wherever and whenever our customer wants to shop, whether through e-commerce or brick and mortar stores. At Lands' End, our e-commerce business represents over 90% of our direct consumer sales. While industrywide, only 25% of all apparel sales occur online, digitally native brands are recognizing that there is a value in having a storefront presence.
Our digital customers want to shop our brand in brick and mortar stores, as a way to enhance their digital experience. These stores enable us to showcase our assortment, presented by well-trained sales associates, providing us with the opportunity to further engage our customer with the brand as well as our product look, feel and features.
In addition to providing greater convenience for our customers, we know the customers who shop in more than one channel of a brand are the most productive customers. Our stores also represent a powerful brand marketing tool and we remain very disciplined in how we expand our footprint to leverage our strong brand and heritage.
We're encouraged by the performance of our current store base and we'll continue to evolve our retail model as we evaluate performance and apply our learnings to existing and new stores. The majority of our store openings will be in high quality open air locations, where our target customer shops. To be clear, we are and will remain an e-commerce led direct consumer company. But in support of our uni-channel strategy, we will also be where our customers want to shop and provide a consistent customer experience across all channels.
During the first quarter, we opened three stores to end the quarter with 19 US stores. For fiscal 2019, we plan to open seven stores to nine stores to end the year at 26 locations to 28 locations. But at the end of 2022, we are currently targeting 60 stores to 70 stores in select locations with store economics that generate attractive four wall contribution margins.
Next, we continue to enhance and leverage our strong digital presence to drive traffic and conversion. We're focused on maintaining our connection with our current customers and attracting new and lapsed customers to Lands' End. Our buyer file is healthy, with growth in the quarter driven by new customer acquisition.
During the quarter, we saw positive results from our continued efforts around search engine optimization, as we leverage key categories to increase our visibility and discovery by customers searching for products that fit their needs. When our customers search for products, we consistently appear early in the search results. Our strategy to match relevant products based on customer behavior enables us to optimize investments across media to continue to grow our customer file.
Additionally, we remain focused on providing a strong value proposition to our customers through pricing and promotions. In our ongoing efforts to improve margin, we were evaluating how AI-based algorithms can determine the optimal offered to place on a given item to drive the best response from our customer. While still early, we're pleased with the results and we'll continue to test and learn through the spring summer season with the goal of having our dynamic promotion model in place for holiday peak.
We also continue to enhance our smartphone experience. Our mobile traffic increased 25% during the first quarter. As we noted on our last call, in the fourth quarter of 2018, mobile traffic exceeded desktop traffic for the first time. That was the case again in the first quarter of 2019, with mobile traffic exceeding desktop traffic by an even wider margin and we expect that trend to continue through the year.
This is particularly exciting heading into the back-to-school season as we know the smartphone is a busy parent's preferred device. We made improvements to our mobile site speed in the first quarter and over the next several quarters, we'll increase our efforts to further improve site speed and optimize our mobile experience.
Our outfitters business is an integral part of our revenue growth strategy. While this business generates some sales volatility due to periodic launches and major programs, it represents a significant growth driver for our Company. Business outfitters consists of corporate uniform accounts and our school uniforms business. We view the corporate uniform business as a great opportunity for growth. We were extremely pleased with the success of our Delta launch and we believe this solidified our standing as a major player serving enterprisewide uniform needs.
As we've discussed on past calls, we have American Airlines scheduled to launch in the fourth quarter, which will further illustrate our capabilities in the uniform business. We will continue to leverage these and other successful relationships as we strive to win new accounts and deepen relationships with existing partners.
In addition, we are planning for more modest organic growth in our school uniform business, driven by both existing relationships as well as the addition of new accounts.
Lastly, I will touch on our plans to improve profitability. As our top line grows, we believe we can scale our SG&A spend appropriately to meet our long-term EBITDA margin goals. We also see opportunities to reduce overall costs through the benefits of the IT investments we are making now and projects such as order management and through the realization of greater business process efficiencies.
In conclusion, we're well positioned to drive revenue growth through our direct business with retention of our core customers and new customer acquisition, retail expansion and the opportunities ahead for our outfitters business.
I'm very pleased with the progress we've made throughout the business and looking ahead, we'll remain focused on executing across our four strategic pillars of product, digital, uni-channel distribution, and business process improvement.
Overall, we remain on track to achieve our long-term goals and I look forward to providing you with an update next quarter.
With that, I'll turn it over to Jim to review our financial performance and review our outlook for the second quarter and the full year.
James Gooch -- Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
Thank you, Jerome, and good morning. As Jerome mentioned, we're pleased with a strong start to fiscal 2019. We saw strength in our US e-commerce and retail businesses although total company revenue and EBITDA declined as we not only anniversaried the Delta launch last year, but also operated a 120 fewer Lands' End shops at Sears.
The US e-commerce business increased 8.1% and comps at our US company operated stores increased 12%. For the first quarter, total company revenue decreased 12.5% to $262.4 million compared to $299.8 million in the same period last year. Excluding the impact of sales from the Delta launch last year and our Sears performance, revenue would have increased 3.4%. We saw solid performance across most of our categories with particularly strength in knit tops and bottoms as we continue to focus on delivering relevant, high quality product at great value to our customers.
Beginning with our retail business, as I said, we drove strong performance in our US stores delivering a 12% comp store growth for the quarter. We saw customers respond very favorably to our product assortment across most categories with particularly strength in bottoms and knit tops.
During the quarter, we opened three new stores and ended the quarter with 19 US company operated stores. As Jerome mentioned, we're encouraged with the performance of our new stores and plan to open an additional seven stores to nine stores this year. Overall sales in our retail business did increase by $16 million to $10.4 million. As expected, sales within our retail business continue to adversely impacted by Sears closings with a 120 fewer locations compared to the same period of last year. We ended the quarter with 39 shops at Sears all of which have leases expiring by the end of 2020.
Within outfitters, sales declined when compared with the Delta launch from last year, as you will recall, we shipped approximately half of the launch orders in the first quarter of 2018 and we shipped approximately 25% of the launch in the second quarter of 2018.
Looking ahead, we're making continued progress on our American Airlines launch, which is still being estimated to be between $40 million and $50 million with the majority expected to occur in the fourth quarter of 2019.
Gross margin in the first quarter increased approximately 130 basis points from last year to 45.7%. The gross margin expansion was primarily related to the inclusion of the lower margin Delta launch in the same period last year combined with meaningful gross margin improvement in both our retail and international businesses.
Our continued improvement in inventory management is driving increased efficiencies and better full price selling mix resulting in improved gross margins.
Selling and administrative expenses decreased by $7.3 million to $116.8 million primarily due to the decrease in the number of Sears locations and the non recurrence of expenses associated with the Delta launch last year. Depreciation increased by $1.4 million to $7.6 million, largely due to our multi-year ERP implementation and investments in our digital infrastructure.
We recorded other income of $0.9 million in the first quarter of 2019 compared to $3.9 million of expense in the prior year. The prior-year expense was primarily driven by the reduction of indemnification assets from Sears Holdings related to the reassessment of tax liabilities.
Income tax was a benefit of $4.9 million for the quarter compared to a $5.6 million benefit in the first quarter of 2018. The tax benefit this year is principally the result of the change in status of certain foreign entities for US tax purposes. The prior-year tax benefit is principally the result of a favorable state tax audit settlement and tax reform.
We expect the tax rate to be approximately 27% for the remainder of the year.
Net loss for the quarter was $6.8 million or $0.21 per share compared to a net loss of $2.6 million or $0.08 per share last year.
In addition to the GAAP measures that we outlined above, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was $3 million, which was at the high end of our prior guidance range.
Turning to the balance sheet, total cash at the end the quarter was $40.2 million compared to $141.6 million last year, as we voluntarily prepaid $100 million of our term loan facility at the end of the quarter. Our $4.9 million improvement in operating cash flow was a result of improved working capital management. Inventories at the end of the quarter were $319.3 million, that's up $14.8 million or 4.9% compared to the end of the first quarter of last year.
As you may recall, in the second quarter of last year, we were under-inventoried in seasonal product, which negatively impacted sales. And during the second quarter this year, we have appropriately planned inventory from both a quantity and mix perspective and are well positioned to meet demand for the spring summer selling season.
Net long-term debt decreased to $381.5 million compared to $485.3 million last year due to the $100 million voluntary loan prepayment and quarterly principal payments.
We're also pleased to note that S&P upgraded our overall corporate and term loan credit rating to a B from a B-minus in early May. The upgrade was based not only on our debt prepayment but also S&P's stated expectation that our operating performance will continue to improve.
Now I'd like to spend a few minutes discussing our IT initiatives. We're finalizing our ERP implementation with the assortment planning and inventory planning module or AP-IP. With the completion of our ERP system, we'll be able to build on that backbone and improve the way we process and fulfill orders across our entire enterprise. Later this year, we'll begin rolling out our Enterprise Order Management system, which will provide us with real-time global visibility of our inventory. It will enable us to improve our inventory productivity and allow for numerous fulfillment options such as buy online and pick up in store. It will also allow us to better plan and forecast inventory which should result in an improvement in working capital as well as provide us with greater visibility around promotional productivity, which should also benefit gross margins.
Before I turn into guidance, I want to take a moment to provide our thoughts on the most recent tariff news. The first tranches that were enacted did not have a material impact on our business and they are incorporated into our guidance. We would see a more meaningful impact if tariffs were to be placed on all Chinese imports. However, we continue to look at measures to offset any potential tariff increase including negotiating pricing with our vendor base, moving production out of China, passing through some of the costs to the customer and looking at other savings opportunities in our business to offset any potential additional cost pressures.
Turning to our guidance, for the full year, we continue to expect net revenue to be between $1.45 billion and $1.5 billion, driven by growth in our direct to consumer and outfitter business combined with 10 to 12 new store openings, partially offset by the reduction of our Lands' End shops at Sears locations.
Revenue growth will be greater in the back half of the year as we anticipate the launch of the new American Airlines program in the fourth quarter. We now expect net income to be between $10 million and $16 million and believe earnings per share to be between $0.30 and $0.50 which includes the impact of interest savings due to the $100 million we prepaid on the term loan. As a reminder, we plan to spend an incremental $10 million to $15 million in marketing in 2019 compared to 2018 as part of our long term strategy to drive brand awareness and new customer acquisition, with the majority of this spend occurring in the second half.
We continue to expect adjusted EBITDA in the range of $70 million to $80 million. We're expecting modest gross margin expansion driven by improved inventory management as well as a greater SG&A leverage in the fourth quarter due to the American Airlines launch.
Finally, we expect CapEx of $35 million to $45 million, driven by our new Enterprise Order Management system, and additional store openings.
For the second quarter, we expect net revenue to be between $285 million and $295 million, driven by continued growth in our e-commerce business offset by 109 fewer shops at Sears, compared to last year. We expect a net loss of $7.5 million to $5 million and diluted loss per share to be between $0.23 and $0.16. We expect adjusted EBITDA to be in the range of $4 million to $7 million.
And with that, we'll open up the call for questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from Alex Fuhrman of Craig-Hallum Capital Group. Your line is now open.
Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst
Great, thanks very much for taking my question and congratulations on another strong quarter here. I wanted to ask about some of the initiatives that you're making to really make the company more digital first and mobile first and I know you've talked about today improving the site speed on your mobile site and other initiatives improving the way that you can attract organic search and things like that and just curious if you can kind of give us a sense of how far along you are on some of those initiatives. I know those are things you've been working on for a little while. Sounds like some of these things are starting to generate positive results for you. I'm just curious how far you are in terms of time and then also just in terms of expense on some of these initiatives as you're going forward?
Jerome Griffith -- Chief Executive Officer and President
Hey, Alex, Jerome. I think, as you look at last year and some of the work that we did last year particularly with dynamic pricing, particularly with search, you saw some pretty good results going into quarter three and quarter four. Some of that has continued into this year. Customer behavior continues to shift somewhat from desktop or laptop into mobile. We think there's a lot of opportunity for us on mobile with our product display pages and being able to get our product in front of the consumer faster making it easier for them to check out.
As you know, there's really no end of technological advancements out there, so we think this is going to be long term for us. But we think when it comes to expense, you know, we've spent a very large amount of money over the last few years on our backbone system, ERP is complete now. EOM is under way. Those are bigger expenses than continuing to manage your website and upgrade the speed or upgrade the flexibility of your website. So we think the bigger costs for us are kind of behind us, but we will see continued investment into our website going forward, that's not going to stop. And as customer behavior continues to evolve, we'll evolve right along with it.
Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst
Great, that's really helpful, thanks. And then if we could switch gears maybe and ask about just uses of cash, obviously, you paid down a big chunk of debt just about a month ago. Sounds like you're also pretty optimistic about the new stores you've been opening and looking to open 50, 60 new stores over the next few years. So just curious how you think about deploying your cash flow, I mean, going forward, might we see another chunk of debt that gets repaid? Or at this point, should we think about your cash more going into some of those new store openings?
James Gooch -- Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
Yeah, it's Jim. I think from a debt perspective, we're starting conversations right now to look at what that refinancing will look like and will probably have the answer for you probably during the next 12 months or so. As far as uses of cash going forward, as Jerome mentioned, we have our largest behind us which was that ERP implementation with the finalization of that new AP-IP, that puts that multi-year roll-out behind us. What we now have on our plate is our EOM or order management system, that will be over the next 12 months, far smaller than certainly what the ERP was, and then we're scoping out the WMS and then besides that you hit on it we have our new store roll-outs and we have the expenses in the capital spend on what we're doing from a digital perspective. But all of those individually are certainly smaller than what the ERP and we think we can do all those in the CapEx guidance that we've given.
Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst
Great, that's really helpful. And then lastly, if I could just ask about swim, sounds like a number of different merchandising and design initiatives that are under way for that category, this year, obviously, we can see your your Q2 guidance and your full-year guidance which I'm sure you incorporated everything that that's been going on, but just any learnings that you can share with thoughts on what the reception has been to your swim collection just given how big of a category that is for you and I'm curious if there's a good read you've been able to have on the design changes that you've made for that category?
Jerome Griffith -- Chief Executive Officer and President
It's still really key item driven, Alex, board shorts, tankinis, seamless tanks seem to be the things that continue to resonate with customers. Our customers also like color and pattern quite a lot. I think for quarter one, the weather was a bit cold for swim, you know, we did extremely well in other product categories with layering -- with in with rainwear and bottoms. But we see swim probably picking a bit more going into the second quarter as things get a little bit warmer, last weekend was pretty decent. So we still feel pretty good, we're in a much better inventory position this year than we were last year and feel pretty good about where we're going to finish the quarter right now.
Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst
That's terrific. Thanks very much.
Operator
Thank you. And our next question comes from Steven Marotta of CL King & Associates. Your line is now open.
Steven Marotta -- CL King & Associates -- Analyst
Good Morning, Jerome and Jim. First, Jim from exposure to China standpoint, you mentioned the potential obviously of tariffs and mitigating factors. What is your specific exposure to China now on domestic COGS. And I'll start there -- and where do you think it'll be at the end of the year?
James Gooch -- Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
We've been as high up in the 40% range, moving through this year, we're going to end probably lower in the lower 30s, and as we move into this year, we anticipate moving that even lower probably in the mid 25% range somewhere in there.
Steven Marotta -- CL King & Associates -- Analyst
Okay, that's very helpful. As it pertains to speed to market, you mentioned earlier in the call that you're endeavoring to shorten that product cycle and sort of product initiations. Could you talk a little bit about where you are now and where you expect to be toward year end?
Jerome Griffith -- Chief Executive Officer and President
Yeah, we ended up through 2018 shaving off somewhere around 20%, 25% of the time that it took us to get product to market. We're working with some outside people to help us right now, continue to shave that down. It kind of depends on what type of product you're looking at Steve, because we've kind of bucketed things into three areas. We've got product which are basics, we carry on day in and day out, we've got product which are seasonal items which come in for six months to nine months and then fashion items.
So we'll look at different timeframes for each one of them, with the thought that it's going to help us continue to free up capital and continue to have us help manage our inventory in a better more productive way. As you've seen, we've continued to whittle down old inventory over the course of the last several quarters. I think the guys have been doing a pretty damn good job at it. But there's still ways to go and we'll continue to work at that and making ourselves more productive.
Steven Marotta -- CL King & Associates -- Analyst
Okay, that's helpful. Also it's been widely reported across the retail space in the first quarter was pretty difficult. There's a little bit of inventory backing up in the system, promotions are ticking up. Can you talk a little bit about the environment that you find yourself in that vis-a-vis competitors? How much promotional stance, if you will, is provided in the second quarter guidance and where you think things shake out by the time back-to-school comes around?
Jerome Griffith -- Chief Executive Officer and President
Well, my feeling is for quarter one, we actually came through the quarter relatively OK. I mean, our largest business, which is our US direct business, was up in the high-single digits. So I think that was pretty good, double-digit comps on our owned stores, I think that was also pretty good. And overall, our margins ticked up a little bit. But I got to say, I still see a pretty promotional environment out there. Customers are a lot more well informed than they have been in the last few years. I think our biggest initiative, which is dynamic promotion, is under way. We're still testing a lot of stuff, we see ourselves testing a lot through the summer to get ready and see what we can really implement well for Q3 and Q4 sales for this year.
I think back-to-school, every year, it gets a little bit tougher quite obviously. I know -- you have X amount of students and it's not like it's growing huge out there. So you're generally taking business from somebody else. I think it'll be a relatively promotional time period yet again, as we have seen in the past. And I don't think that there's any signs of that changing out there.
If you look at the retail environment, I think the tariff discussions have been difficult for some people. I think that's hurt people's bottom line, has definitely hurt what the evaluations have been on the market, and whether that's right or wrong, it is what it is for the time being and you're going to have to manage yourself through the rest of the year. As you guys saw last year, the beginning of the year is a little bit slower, the back part of the year ticks up a bit when people get into the buying mood and we expect to see that again this year.
James Gooch -- Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
You know Steve, I think a couple of things to go on and talk about. That promotional environment, we feel like we've included that into our guidance. We don't anticipate it getting any better in the second quarter and really throughout the rest of this year. As it relates to your comment on inventory, you can see that our inventory is higher year-over-year. But if you go back to last year, you would recall that we were very light on inventory coming out of second quarter and into -- coming out of first quarter and into the second quarter and we specifically talked about how that negatively impacted our top line sales. So we're very comfortable with where we are not only from a quantity but from a mix and from our quality of inventory, Jerome mentioned, our each inventory were really at an all-time low with our inventory over one-year old. So we do have more inventory year-over-year, but we feel like we're in a much better in-stock position.
Steven Marotta -- CL King & Associates -- Analyst
That's great. Very helpful. I'll take the rest of my questions offline. Thanks again.
James Gooch -- Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
Thanks Steve.
Jerome Griffith -- Chief Executive Officer and President
Cheers.
Operator
Thank you. And this does conclude our question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone, have a great day.
Duration: 32 minutes
Call participants:
Bernie McCracken -- Chief Accounting Officer
Jerome Griffith -- Chief Executive Officer and President
James Gooch -- Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst
Steven Marotta -- CL King & Associates -- Analyst
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