Lands’ End, Inc. (NASDAQ:LE) Q4 2023 Earnings Call Transcript
Lands' End, Inc. (NASDAQ:LE) Q4 2023 Earnings Call Transcript March 27, 2024
Lands' End, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Lands’ End Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note, today’s call will be recorded, and I’ll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Bernie McCracken, Lands' End’s Chief Financial Officer. Please go ahead.
Bernie McCracken: Good morning and thank you for joining the Lands’ End earnings call for a discussion of our fourth quarter and fiscal 2023 results, which we released this morning, and can be found on our website, landsend.com. I’m Bernie McCracken, Lands’ End’s Chief Financial Officer, and I’m pleased to join you today with Andrew McLean, our Chief Executive Officer. After the prepared remarks, we will conduct a question-and-answer session. Please also note that the information we are 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 positive 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 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 Andrew.
Andrew McLean: Thanks, Bernie. Good morning and thank you for joining us today. Our results for the fourth quarter and full year 2023 reflect the continued execution of Lands’ End's value creation strategy. We delivered strong performance in the fourth quarter, including throughout the holiday season, closing out a fiscal year where we generated positive momentum across the organization and drove increased profitability. Our deliberate efforts to generate more profitable sales continued to deliver in Q4 and resulted in a 14% increase in gross profit dollars, adjusted EBITDA of approximately $32 million, which was above the high end of our guidance range, and gross margin expansion of approximately 550 basis points. Q4 marked our fourth consecutive quarter of significant inventory improvement, with inventory down 29% year-over-year in the quarter.
We were able to be nimble and disciplined throughout the holiday season, prioritizing newness during what is a highly promotional period for our industry. Looking ahead, we remain focused on further improving our inventory turn from the speed and efficiency initiatives we are implementing across our supply chain. As a solutions-oriented business, we're deepening our focus on building the brand to best align our assortment with customer shopping behaviors. We're bringing our two key customer cohorts, resolvers and evolvers, the items they love and are looking for, while introducing freshness across our assortment more frequently throughout the year via new styles, colors, and fabrics. We're doing so with more full price selling, lower levels of clearance sales, and less promotional activity.
Our authority in outerwear solutions was a key driver of our strong margin performance in the fourth quarter, both in the US and internationally. As discussed last quarter, we reduced our investment in heavy outerwear and moved towards lighter fabrics and materials. Our Wanderweight offering of middleweight packable jackets performed exceptionally well. As a transitional outerwear solution ideal for layering, we are weatherproofing our assortment and using this offering to extend the outerwear buying season. Across our digital channels, we're creating more compelling and more personal customer journeys, which is driving increased traffic and engagement from new and existing customers, with social media working particularly well. As we've said before, we're taking a more outfit-centric approach to our assortment that features significantly more productive inventory and facilitates demand across natural adjacencies.
Our success in outerwear helped facilitate sales of layering products, effectively supporting the new seasonal launches of our women's tops and bottoms businesses. Sweaters had a wonderful season, with the customer migrating to new silhouettes, like our quarter-zip drifter sweater, hitting a trend that was easy for all our customer cohorts to lean in on, and tying back to our Supima luxury tee program, another of our brand USPs, or unique selling points. Launches of new age and size-appropriate jeans and chinos incorporating solutions for heat and comfort, have been additional strengths for us, with our boyfriend jeans bringing an unrivaled level of comfort and fit, while our striped chino pant sold through in days, which helped to deliver a message to our customer.
Don't wait for the discounts or you'll miss out. Our performance across our swim and vacation solutions was also encouraging. We continue to introduce newness across our swim categories, including new colors and textures, which customers responded well to throughout the full year. It is notable in swim that we are building on the successes of our franchise products, tugless. For 40 years, our go-to swimsuit expanded its footprint this year, adding new products, including a cross-back strap and a texture fabrication. This innovation, leveraging existing brand franchises, is part of our plan to maintain our authority as a leading swim brand in America. Before I turn to performance in our various businesses, beginning in Q1, we expect to change the way we talk about our performance to be more consistent with the evolution of our brand.
B2C comprises our North American and international businesses, serving consumers across a number of channels, while B2B comprises our school uniform and business uniforms verticals. More to come on this next quarter. Our US e-commerce business, our largest B2C channel, delivered a third consecutive quarter of great margin performance, with an increase in gross margin of approximately 520 basis points year-over-year due to our more targeted approach to promotions, driving higher quality sales, and improved inventory management. As we've discussed before, we continue to maximize key events and holidays to drive demand. Following record performance through the Black Friday to Cyber Monday period, we leveraged our data throughout the holiday season to adapt our assortment in real time based on how our customers were responding.
This aligns with our broader strategy of putting inventory to work by taking a more outfit-centric approach that exploits category selling across natural adjacencies. Moving to our third-party business, we found continued success in our balanced approach towards working with a handful of like-minded partners that share our vision for customer-focused solutions that resulted in a low single-digit improvement in revenues, coupled with gross profit dollars increasing by over 50%. Our new exclusive swim product in 200 Target doors is performing well, and our focus on assortments tiered to the individual marketplace, delighted our customer and created both the engagement and journey between channels that we believe amplifies the opportunity. As our product and own channels evolve, we are seeing the behavior and positioning improve within our marketplaces, speaking to the value we place on managing personalized customer journeys.
We continue to execute on our licensing strategy, which adds asset-light recurring income streams, while allowing us to continue to focus on our core capabilities. As we said on our last call, we expect to begin seeing royalties in 2024 from our recent licensing agreements for club stores, primarily Costco, kids categories, and footwear. Moving forward, we have a belief that expansion into existing and white space product, channel, and geographic licenses, can increase the reach of our brand, finding the customer when they want to shop, where they want to shop, and amplify performance across the entire brand footprint. Turning to our international business, we are pleased with how our performance in Europe is trending, and firmly believe that the business has stabilized.
Like in the US, we continue to prioritize assortment units and better inventory management with a focus on protecting margin through lower levels of promotional activity. While revenue was down 6% year-over-year in Europe, the business increased gross profit dollars by 24% and expanded gross margin by over 1,000 basis points year-over-year. We were also pleased to see early success in our efforts in Europe to unlock speed and innovation to deliver our customers the best product, quality, and service. We're leveraging new global sourcing capabilities, including with partners like Li & Fung, to more quickly respond to customer needs and supplement our assortment with market goods, including festive styles like satin skirts that were in demand during the holiday season, while testing new outerwear silhouettes like our long (joley) vest.
Turning to our B2B outfitters business, we saw nice performance during the quarter as our effort to deepen the new customer funnel began to bear fruit, resulting in the launch of new partnerships and continued progress in our school uniform business. We're seeing an encouraging trend upward for the business. Our customer service and can-do attitude, coupled with our highly recognizable brand DNA, set us apart in this space. Over the last year, we deepened relationships with new and prospective customers. We accomplished this through restructured sales and service organizations that placed decision-making closer to the customer and supported it with rigorous feedback processes to ensure their voice was heard and acted upon. Ultimately, we took it upon ourselves to make 2023 about crisp on-point execution, receiving by way of example, an A+ grade on our school uniforms business from decision-makers across the country.
We will continue this focus into 2024 as an underlying business USP. Simultaneously, our restructured high-performance sales and business development teams are building a robust pipeline of opportunities, implementing initiatives to support leadership in service and technology, and providing future upside to the business. Internally, we are pleased with the book of recurring business being generated, both in time and in volume. To summarize the quarter and year, we made tremendous progress on our strategy and put Lands’ End in a great position to build on our successes in the years ahead. I'm confident that by continuing to extend our leadership as the solutions provider of choice, we'll be able to drive enhanced value for our customers, employees, shareholders, and other stakeholders over the long term.
Bernie will now discuss our fourth quarter performance as well as our 2024 outlook.
Bernie McCracken: Thank you, Andrew. For the fourth quarter, total revenue came in at the high end of our guidance range at $515 million, a decrease of 3% compared to last year or approximately flat when adjusting for the 2022 closure of our Japan e-commerce business, and the conclusion of our work with Delta in early 2023. Gross profit dollars increased by 14%, and gross margin improved by 550 basis points compared to a year ago. This efficiency drove a 31% increase in adjusted EBITDA and a 160-basis point improvement in adjusted EBITDA margin versus 2022, and above the high end of our guidance. Global e-commerce revenue was $405 million in the fourth quarter, a decrease of 2% compared to last year and approximately flat when adjusted for the Japan e-commerce closure, which generated $7 million in 2022.
Compared to the fourth quarter of fiscal 2022, US e-commerce was flat and Europe e-commerce decreased 6%. Outfitters revenue for the fourth quarter was $54 million, a decrease of 11% compared to last year. Excluding the $5 million difference in year-over-year revenue from Delta, the Outfitters business was down 3% in the quarter. Revenue for our third-party business increased 3% in the fourth quarter. Driven by the relatively strong performance across our online marketplaces, we also increased gross profit dollars by over 50% and gross margin by over 1,300 basis points as a result of our tailored marketplace assortment strategies. Gross margin in the fourth quarter was 38%, an approximately 550-basis point improvement from the fourth quarter of 2022.
The margin improvement was driven by the new products across the assortment, strength in transitional outerwear and adjacent product categories, reduction in sales of clearance inventory, and improvement in supply chain costs. We delivered adjusted EBITDA of $32 million in the fourth quarter, up 31% year-over-year, which was slightly above the high end of our guidance range. Our net loss for the quarter was $9 million or $0.27 per share. Our adjusted net income for the quarter was $8 million or $0.25 per share. Turning to our balance sheet, in December, we successfully completed a refinancing of our existing term loan well ahead of its maturity in September 2025, and entered into a new term loan of $260 million that matures in December 2028.
The completion of this refinancing initiative was an important step in Lands’ Ends trajectory, and provides us with more favorable terms under which we can continue to invest in the strategic growth and evolution of the company. Inventories at the end of the fourth quarter were $302 million compared to $426 million a year ago, representing a 29% in improvement during the quarter. As Andrew said earlier, Q4 marked our fourth consecutive quarter of inventory improvement, and we averaged a 25% reduction every quarter of our 2023 fiscal year. This was a result of the actions the company has taken to improve inventory efficiency by reducing purchases and capitalizing on speed-to-market initiatives. Now let me touch on a few performance highlights for the 2023 fiscal year.
Gross margin for the year increased approximately 430 basis points to 43% compared to 38% in fiscal 2022, driven by significant expansion primarily in the back half of the year. Adjusted EBITDA for fiscal year 2023 was $84 million, slightly above the high end of our guidance, compared to $71 million in fiscal 2022. These results reflect our continued efforts to prioritize higher quality sales and balance sheet efficiency, which has continued to expand our profit margins across our business units. To demonstrate the power of our new approach versus focusing primarily on revenue, we brought in an additional $0.17 of profit for every dollar of lower revenue versus last year. We're confident that as we return to revenue growth, we'll be able to build on our success by continuing to prioritize and drive quality profitable sales.
For the fiscal year, we had a net loss of $131 million or $4.09 per share. We had an adjusted net loss of $5 million or $0.15 per share, which excludes the $107 million impairment of goodwill in the third quarter due to the decline of our stock price and resulting market capitalization, as well as other significant items. In the fourth quarter, SG&A was 34% of net revenue, an increase of 510 basis points compared to the fourth quarter of 2022. For the full year, SG&A increased $23 million to $550 million or 37% of net revenue compared to $527 million or 34% of net revenue in fiscal 2022. The 350-basis point increase was driven by deleverage from lower revenues and higher incentive-based personnel costs. After a comprehensive review of our organizational structure, we executed a high single-digit percent reduction in corporate headcount in January.
We determined that creating a flatter, more agile organization, would set us up to continue to profitably grow over the long term, while generating additional cost savings that can be reinvested in the business. This reduction, combined with earlier changes in our sourcing organization, constitute a total reduction of approximately 10% of our corporate headcount. These organizational changes reflect the new narrative of our teams around how we think about the skills, strategies, and requirements to grow our business in the future. During fiscal 2023, we returned $12 million of cash to shareholders in the form of approximately 1.5 million shares repurchased, including $2 million in the fourth quarter. Under the board's previous authorization, we repurchased 2.3 million shares for an aggregate $20 million.
As announced earlier this month, the board of directors has authorized a new $25 million share repurchase program set to run through March 2026. Now, moving to guidance, we are continuing to prioritize high-quality sales and improved cash flows, which we expect to drive continued gross profit and margin expansion during the spring, summer selling season. As a reminder, Q1 2023 included the conclusion of the Delta contract, which positively impacted our revenue by over $25 million and approximately $12 million in adjusted EBITDA. In the first quarter, we expect net revenue to be between $255 million and $285 million, with gross merchandise value, or GMV, expected to be low to middle single-digit growth. We believe GMV, which accounts for all merchandise sold to customers through B2C and B2B channels, as well as the retail value of the merchandise sold through third-party channels, is an important indicator of the performance of the comparable growth of our businesses.
We expect an adjusted net loss of $9.5 million to $7.5 million, and adjusted diluted loss per share to be between $0.30 and $0.24. We expect adjusted EBITDA to be in the range of $9 million to $11 million. For the full year, we expect net revenue of $1.33 billion to $1.45 billion, while GMV is expected to be low to middle single-digit growth. we expect adjusted net income of $3 million to $12 million, and adjusted diluted earnings per share of $0.10 to $0.38. We expect adjusted EBITDA to be in the range of $84 million to $96 million. Our guidance for the full year incorporates approximately $30 million in capital expenditures. As we have discussed, we expect our improved inventory management to enable us to maintain inventory at normalized levels and bolster our work to further expand gross margin moving forward.
With that, I will turn the call back over to Andrew.
Andrew McLean: Thanks, Bernie. Our fourth quarter results demonstrate the continued success of our strategy and our performance throughout 2023, which has been characterized by steady improvements in our operating and financial position, paving the way for sustainable profitable growth. Before we open the floor to questions, I'd like to touch on innovation. Lands’ End has always been at the forefront of innovation. We delivered the first 1-800 number service, and we were one of the first internet retailers. This specifically is a touchstone we are returning to in 2024. Innovation can come from anywhere in the business, and alongside some of the AI-driven tools that we are applying to our uniforms business, I wanted to highlight our sourcing and product teams who recently applied to patent a new wave shaper, a body sculpting swimsuit technology solution.
Through constant customer-first curiosity and the belief that we can amplify our solutions competence, these teams continue to set Lands’ End, an iconic American brand, apart and ready for life's every journey. As we look to 2024 and beyond, I am confident we have the right team and the right strategy to enable our ability to build on our progress, to create value for our stakeholders over the long term. That concludes our prepared remarks. We look forward to your questions.
Operator: [Operator Instructions] Our first question comes from Josh Herrity with Telsey Advisory Group. Please go ahead.
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