U.S. Markets open in 3 hrs 18 mins

Lands' End Inc (LE) Q4 2018 Earnings Conference Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Lands' End Inc  (NASDAQ: LE)
Q4 2018 Earnings Conference Call
March 21, 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 Fourth Quarter and Fiscal 2018 Earnings Conference Call. At this time, all participant are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instruction) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Bernie McCracken, Chief Accounting Officer. You may begin.

Bernard Louis McCracken -- Chief Accounting Officer

Good morning, and thank you for joining the Lands' End earnings call for a discussion on our fourth quarter and full year fiscal 2018 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 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 landsend.com.

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

Jerome Squire Griffith -- Chief Executive Officer and President

Thank you, Bernie, and thank you everyone for joining us today. Fiscal 2018 marked another year of significant progress at Land's End as we remain focused on delivering high quality product with compelling values and executing our strategic initiatives. Our progress is clearly reflected in our performance. We have nearly doubled adjusted EBITDA over the last two years and our recent results show continued momentum. This marks our six consecutive quarter of adjusted EBITDA growth and the seventh straight quarter of revenue growth when adjusted for the 53rd week.

As an organization, we have leveraged our iconic American brand, which was founded on the principles of delivering great quality uncompromising service and exceptional value to our customers. These core principles provide us with an advantage as they distinguish us from our competitors. Combining these principles with the progress we've made across our strategic initiatives and our disciplined execution, we are well-positioned to achieve the long-term objectives I first laid out in January 2018, which are $1.8 billion to $2 billion of revenue and high single-digit EBITDA margin.

Now, I will touch on our progress and next steps in the each of the pillars of our strategic plan, which as a reminder, include first product to focus on key high quality items that offer great value to our customers. Second, digital. To be digitally led and leverage the vast data at our disposal to better serve our customers. Third, unichannel distribution. To engage our customer wherever whenever and however they want to shop. And fourth business process. To build and leverage strategic competencies through improved business processes that are based on standardization and efficiency. And, of course, at the center of everything we do is our customer. Throughout the year, our entire organization has been focused on these initiatives and I'm proud of the traction, we gained across all areas.

Beginning with product, we have been intently focused on leveraging the strong heritage of our business and customers have reacted favorably. We continue to deliver key items and iconic styles that provide our customers with comfort, style and value across our major categories of swimwear, outerwear, knit tops and bottoms. Our customers are reacting positively to this approach across all of our channels. We continue to leverage our comprehensive customer data to drive decisions around our merchandise assortment.

We have created new products in the fabrics, silhouettes and price points that our customer loves. We have also worked to standardize our fits across multiple categories and classification. The success of these initiatives were reflected in our fourth quarter performance, where we saw exceptional performance in our three key fall-winter product categories of outerwear, knit tops and bottom. These contributed to record sales performance for us for the Black Friday through Cyber Monday period. We experienced significant growth in our outerwear business and despite greater depth and inventory, we believe we left some opportunity on the table as we sold out of items ranging from quarters at fleece at the lower end of the price spectrum to down park is at the higher end. Other standout categories that drove strong performance for holiday included sleepwear, fleece, knit tops and home.

Better inventory flow also benefited us during the fourth quarter. We successfully time the delivery of key items in the fall-winter selling season and we are well positioned to capture demand, leading up to and throughout the holiday season. For spring-summer, we will apply learnings from holiday and continue to focus on our key items strategy and improved inventory flow.

Turning to Digital, we have taken steps to leverage our data to become a more digitally led organization adapting to ongoing shifts in customer shopping behaviors. As I mentioned in our last call throughout the year, we put in place, many digital improvements designed to give our customer an easier than ever experience. Operationally, we function like the digital innovator that we were once famous for being. We were agile, we took a test and learn approach to our website innovations and we were nimble in our response to changes in customer trends. Specifically, we focused on our internal and external search efforts, improved mobile site speed and leverage the price clarity across all platforms. We are pleased that these efforts contributed to an increase in e-commerce sales in the fourth quarter led by double-digit US e-commerce sales growth adjusted for the 53rd week.

In the fourth quarter, sales on mobile devices grew more than three times as fast as the total. In fact, during the quarter, mobile traffic exceeded desktop traffic for the first time. These efforts further paid off as our customer file once again increased double digits in the quarter, reflecting double-digit growth in new customer acquisition.

For the year, we saw high single-digit overall customer file growth, driven by both adding new customers and retaining a greater number of our active customers. In 2019, as we continue our efforts to drive online sales and attract new customers, we will continue to focus our marketing and digital investments and search and smartphone. Our work on search will continue to focus on key items, seasonality investments and updates designed to better align with our customer search habits.

We understand that our customers increasingly discovering Lands End via search on their smartphone. So we are expanding initiatives centered on the customers' experience by offering personalize messaging, improved product presentation and a faster website.

Turning to our distribution strategy, we remain focused on developing a unique channel approach ensuring that customers have access to our key items and the same great experience wherever, whenever and however they choose to purchase our products. This includes through our website, catalog and retail stores as well as third-party e-commerce platforms like Amazon. And we back up the shopping experience with our award winning customer service.

For 2019 Newsweek ranked Lands' End number one for the Best Customer Service in online apparel category. As with all our distribution channels, our retail stores represent the Lands' End American heritage aesthetic, making it easy for customers to find our products in an inviting, brand-appropriate setting, while also enabling us to better engage and connect with our customers.

For the quarter, we had a double-digit increase in our comps in our company-operated stores. As I mentioned last quarter, we've been very pleased with the rollout of our new retail store strategy. Our new stores are another example of how we have tested different approaches and have used the learning's to improve with each store. We're testing the types of locations refining area demographics finding, which real estate characteristics our customers are attracted to as well as varying merchandise offerings among our women's, men's, kids, school uniform and home categories. Our customers prefer locations with easy access, close to other places where they like to shop.

With that in mind, our real estate team is pursuing opportunities in locations that offer these characteristics and as well, where we have strong brand recognition. As to the stores themselves, we continue to gather customer feedback and adjust our assortments, according to local demand. And we strive to offer a consistent flow of newness throughout the season to drive frequency of visits. We are also encouraging customers to shop on our in-store web portals, where we can showcase our full online assortment and we've observed that our new stores are driving a larger percentage of these sales. We opened five new stores in 2018 and end the year with a total of 16 of our own stores in the US. In 2019, we plan to continue to expand our retail footprint and expect to nearly double our current store count with the opening of another 10 to 15 stores in line with our long-term plan to open 40 to 60 locations over the next several years.

Our 17th US store opened in Maryland earlier this month and the initial customer response has been very good. While we're making it easier than ever to shop through our own stores and website, we see tremendous potential to increase brand awareness and expand our customer reach by selling Lands' End products on third-party marketplaces in the US and internationally.

As you know, we began selling key items on Amazon in the US last year, and during the fourth quarter, we also began selling on Amazon in Germany. Even though this business remains very small, we're encouraged to see that more than half of our Amazon customers are new to the brand. While in general customers who shop with us on Amazon have similar characteristics to customers in our other channels. We do note that for the holiday season new Amazon customers skews slightly younger and more male. And items that are selling well on Amazon are the same key items that are selling well through our own stores and website, which reinforces that our product and merchandise strategies are working.

In the area of business process we are nearly complete with our ERP implementation and embarking on an enterprise order management system project as well as building a warehouse management system project. With our updated ERP system in place, we are unable to build on that backbone and upgrade the way we take process and fulfill orders across our enterprise. We expect that the enterprise order management system will enable us to better utilize inventory across our company and allow for numerous fulfillment options such as buy online pickup in store and buy online ship to store.

In summary, I'm highly encouraged by the accomplishments we made over the past year and excited with the opportunities that lie ahead. Given our improved financial performance and visibility, we are initiating guidance for 2019, which Jim will discuss momentarily. In 2019, we will remain focused on executing across our four strategic initiatives product, digital, unichannel distribution and business process as we pursue our long term goals.

With that I am going to turn it over to Jim to review the financial results in more detail.

James Frederick Gooch -- Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer

Thank you, Jerome and good morning. We're very pleased with the continued progress that we've made in the fourth quarter and throughout 2018. For the fourth quarter, revenue decreased 1.6% to $502.3 million compared to $510.6 million in the same period last year. However, as you will recall last year includes $25.9 million from the 53rd week, after excluding the sales from both the 53rd week and $21.4 million from closed Sears stores as well as normalizing for the Delta Air Lines launch, revenue would have increased 9.1%.

We experienced strong revenue growth throughout the quarter. But specifically, during the holiday period with another record Thanksgiving selling week. Within the US e-commerce business, after excluding the impact of the extra week last year, sales would have increased in the low double digits. We saw solid performance across most of our categories with particular strength and outerwear, knit tops, denim and home.

Within the Outfitter business, sales declined entirely due to the Delta launch in the fourth quarter last year, excluding the impact of the Delta launch and the extra week last year. Revenue in our outfitter business would have increased in the low single digit range driven by strength in our national accounts.

As a reminder, our initial shipping period for Delta at the end of fourth quarter of 2017 and was completed in the second quarter of 2018. For 2019, we expect a reduction in revenue from the launch levels, but we'll have revenue driven by replacement purchases and items we've added to our product assortment.

Regarding our American Airlines launch, the teams are still working through the wear testing, and we continue to expect to launch in the fourth quarter this year. As a reminder, we anticipate the American Airlines launch to be approximately $40 million to $50 million, the majority of which will occur in the fourth quarter of 2019.

Turning to our retail business, comps increased 9.1% driven by our company-operated stores, growing 15.1%. As we saw customers respond favorably to our seasonal product assortment, specifically around outerwear and knit tops. We ended the quarter with 16 US company-operated stores, as Jerome mentioned, we are very pleased with the performance of our new stores and plan to open an additional 10 to 15 stores this year.

Overall sales in this business decreased 33.1% to $36.8 million due to the Sears store closures and the extra week last year. As expected, our retail business continued to be impacted by Sears closings with our 125 fewer locations compared to last year. We ended the year with 49 shops at Sears with 76 of the store closures occurring in the fourth quarter. Another nine locations have closed since the end of the quarter. So there are currently 40 Lands' End shops at Sears. Gross margin in the fourth quarter was approximately flat to last year at 38.9% of sales. Through the holiday period, gross margins were up, driven by a favorable full price selling mix, improved promotional markdown management and more efficient inventory management, leading to improved productivity of indices and markdowns sales.

However, the acceleration of liquidations in January associated with the additional Sears store closures negatively impacted our margin for the quarter. In the future, we expect our overall gross margin rate to benefit -- we continue to evolve our promotional strategy and as our company-operated stores become a bigger portion of the retail mix. Selling and administrative expenses decreased $3.9 million to $157.3 million, primarily due to continued expense management and costs associated with the extra week last year, partially offset by an increase in incentive accruals driven by our improved performance. We continue to leverage our costs within SG&A rate reduction of approximately 20 basis points compared to last year. Depreciation increased by $1.3 million to $7.1 million, largely due to our multi-year ERP implementation. We recorded other income of $1.3 million in the fourth quarter of 2018, compared to $4.5 million of expense in the prior year. The prior expense was primarily driven by the reduction of the indemnification assets from Sears Holdings related to the reassessment of tax liabilities.

The income tax expense was $8.1 million for the quarter compared to $21.9 million benefit in the fourth quarter of 2017. The prior year benefit was a result of the impact from the US Tax Cuts and Jobs Act. Net income for the quarter was $16.2 million or $0.50 per share compared to net income of $39.8 million or $1.24 per share last year.

In addition to the GAAP measures that we outlined above adjusted EBITDA as an important profitability measures that we use to manage our business internally. For the quarter adjusted EBITDA increased approximately 1.9% to $38 million versus $37.3 million last year.

Turning to the balance sheet, total cash at the end of the quarter was $193.4 million compared to a $195.6 million last year. Our $19.8 million improvement in operating cash flow was a direct result of continued improvements and effectively managing seasonal inventory and product flow.

Inventories at the end of the quarter were $321.9 million, down $10.4 million or 3.1% compared to the end of the fourth quarter last year. Importantly, the overall health of our inventory is very strong with not only less overall inventory, but less markdown and less aged inventory.

And finally, net long-term debt decreased to $482.5 million compared to $486.2 million at this time last year with the reduction due to the quarterly principal payments. As Jerome said given the increased stability and visibility in our business, we are initiating guidance. For the full year, we expect net revenue to be between $1.45 and $1.50 billion driven by growth in our direct-to-consumer and Outfitter business combined with 10 to 15 additional new store openings partially offset by the continued reduction of our Lands' End Shops at Sears locations.

Revenue growth will be greater in the back half of the year, as we anniversary the Delta launch in the first half and anticipate the launch of the new American Airlines program in the fourth quarter. We expect net income to be between $8 million and $14 million and diluted earnings per share to be between $0.25 and $0.45. 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.

We expect adjusted EBITDA in the range of $70 million to $80 million and finally, we expect CapEx of $35 million to $45 million, driven by our new enterprise order management system and in additional store openings. For the first quarter, we expect net revenue to be between $255 and $265 million reflecting minimal Delta revenue this year.

As a reminder approximately half of our Delta program shipped in the first quarter of 2018. Additionally, we are anticipating ending the quarter with 120 fewer shops at Sears compared to last year. We expect a net loss of $8.5 million to $11 million and diluted loss per share to be between $0.26 and $0.34. We expect adjusted EBITDA to be in the range of $0 million to $3 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. Your line is open.

Alex Fuhrman -- Craig-Hallum -- Analyst

Great. Thank you very much for taking my question and congratulations on a really strong close to the year. Wanted to ask about the incremental marketing investment that you're going to be making this year. If you could comment a little bit about where we should expect to see that in terms of spending by channel and how that might compare to the spending you've done on marketing historically. And specifically, I'd be interested just to get a sense of what you're planning for catalog circulation as part of that.

Jerome Squire Griffith -- Chief Executive Officer and President

Sure, Alex. If you look at what we expected or toward the back part of the year, I think a lot of the additional spend will be in the back part of the year, when we have most of the traffic online, it's going to be focused around SCM with a very heavy emphasis on SEO. There'll probably be some PPS advertising that will probably go a little bit more in the social media. But we saw a really big results, these last two quarters by investing and search engine optimization, which resulted in high double-digit increases in new customer acquisition. And as you know, new customer acquisition tends to be a predictor of what your future sales are going to be. When we're looking at catalog, we've continued to downplay catalog even though catalog does bring traffic to the website. We're getting smarter and more efficient over the course of time. We've been slowly cutting down on number of pages and slowly cutting down on circ and just getting sharper with how we're managing that investment and moving more of the dollars over to digital.

Alex Fuhrman -- Craig-Hallum -- Analyst

Great. That's really helpful. And then you know, just kind of extending that conversation as to how you think about the new full-line retail stores that you've been opening sounds like they've been doing very well. Just if you could give us maybe a little bit more color on how they're performing and how you think about them playing into the portfolio. When you get up to 40, 50, 60 stores over time. Are these stores currently or expected to be profitable in and of themselves? Or is it more about them bringing in a halo and helping to boost your direct business in the markets where they have that presence or is it maybe a combination of both?

Jerome Squire Griffith -- Chief Executive Officer and President

I've never been a fan of opening up stores just to make yourself look pretty. They need to be profitable, and they are and they will be. No, I will say when you look at stores today. I don't believe that you can just look at four wall EBIT and say this makes a store good or not. I think with the way the customers are shopping today, they want what they want where and when they want it. So our customers interact with us in the stores, but they've also interact with us online. So we're really looking at the total trading area to say, what does the store actually bring to us for the customer experience in the trading area.

You'll notice inside the stores, our employees carry iPads. We have kiosks in the stores, so that you can interact with us online because based upon the size of the store. There is no way that they can carry the full range of products that we offer in the store. But we don't want to penalize the customer. We want the customer to have a great shopping experience. So therefore, we make the full line available to them in a different way. We are super pleased with the way that the stores have been opening up and with the way we're thinking to open up additional stores is where we have a large customer base. That seems to be the one indicator that would tell us, if you open up a store in this area, it will do well. And we've been really pleased with the results that we've seen so far.

Alex Fuhrman -- Craig-Hallum -- Analyst

That's really helpful. Thank you very much.

Operator

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

Duration: 25 minutes

Call participants:

Bernard Louis McCracken -- Chief Accounting Officer

Jerome Squire Griffith -- Chief Executive Officer and President

James Frederick Gooch -- Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer

Alex Fuhrman -- Craig-Hallum -- Analyst

More LE analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

More From The Motley Fool

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.