Yahoo Finance Lands’ End, Inc. (NASDAQ:LE) Q1 2024 Earnings Call Transcript
Lands' End, Inc. (NASDAQ:LE) Q1 2024 Earnings Call Transcript June 5, 2024
Lands' End, Inc. beats earnings expectations. Reported EPS is $-0.2, expectations were $-0.27.
Operator: Good day everyone, and welcome to today's Lands' End First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later you'll have the opportunity to ask questions through the question and answer session. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Chief Financial Officer, Bernie McCracken. Please go ahead.
Bernie McCracken: Good morning and thank you for joining the Lands' End earnings call for a discussion of our first quarter 2024 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.
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Andrew McLean: Thanks, Bernie. Good morning and thank you for joining us today. We delivered strong first quarter 2024 results from the continued execution of our strategy centered around Lands' End's being the innovative solutions-based brand that's ready for life's every journey. This vision is the cornerstone of our value creation strategy, which is underpinned by three key priorities. Build the brand, increase product margins, and grow our customer base. Our deliberate efforts to generate more profitable sales by deploying asset life approaches in tandem with our core digital business gain momentum in the first quarter of 2024, resulting in an increase in gross profit dollars and significant gross margin expansion. With inventory down 23% year-over-year in the first quarter, we remain nimble and continue to prioritize newness and speed to market in our assortment, introducing new styles, fabrics, and colors to which our customer responded positively.
We are focused on further improving our inventory turn through a variety of speed and efficiency initiatives. As noted, it also serves as a reminder to our customer, buy it now or it may be gone. Based on our gross merchandise value, or GMV, we returned the brand to growth in the first quarter with a low single-digit increase year-over-year. We did this by continuing to evolve our brand story, especially across our digital and licensing channels. We're also leveraging our proprietary data to better understand the shopping behaviors of our two key customer cohorts, resolvers and revolvers, to further refine our customer journey and match that with a user experience that is reflective of the Lands' End of today. Late in Q1, we continued to showcase our innovation when we introduced our newly designed website that better represents Lands' End as the brand's ready for customers at every moment.
Social media has become a key part of our marketing, a one that has generated strong new customer acquisition. By combining our elevated brand story with a multifaceted paid social media approach, we're better promoting newness across our assortments, which drives traffic to our own channels and drives more full-price selling. As a result, in the first quarter, we've more than doubled demand from social media year-over-year. Moving forward, we will continue to build our brand through marketing rather than discounting. We will do this by taking a more outfit-centric approach to our assortments, featuring significantly more productive and compelling inventory that facilitates demand across natural adjacencies. From a product standpoint, we had several high-performing categories during the first quarter and saw increased full-price selling from introducing newness.
Our transitional weather solutions performed particularly well and were a key driver of our success. As milder weather prevailed across the winter as early spring, we seized the opportunity to meet the moment for our customers by leading into our wear-and-our approach to our assortment, which yielded a great customer response. Through our authority in outerwear, we once again drove sales across key adjacencies with layering products, including women's sweaters and knit tops, performing particularly well. Zeroing in on outerwear, we're pleased with the performance of our weatherproof assortment of lightweight jackets, raincoats and fleeces, which all continue to perform well in the first quarter. Women's bottoms were another winner, with customers responding well to new styles, like wide leg denim and chino pants and on-trend materials like linen and garth.
In addition to delivering newness in key apparel categories, our strong franchises like our wonder white line of ultra-light packable outerwear, squall jackets and drifter sweaters, enable us to offer a family of products that solidify our positioning as a lifestyle brand. We remain incredibly confident in our ongoing innovation strategy. Turning to our swim business, we took a view across the season that allowed us to introduce and sell our key franchises, including the newly patent-pending WaveShaper Sculpting Suit at full price for a longer time period. Periodic events like our highly popular National Swimsuit Day have reduced our reliance on daily promotions to drive sales. And across all our channels, we were able to deliver on our gross margin goals while leveraging the success of swim to drive growth in our new-to-file customer counts.
In fact, looking at the season to-date, where we are consistently flowing more newness, our swim business has the potential to exceed our margin dollar plans while maintaining our leading market share. Before I touch on the performance of our various businesses, I want to remind you that we are preparing to change the way we talk about our performance to be more consistent with the evolution of our brand. Specifically, we plan to discuss our business in terms of B2C and B2B. Beginning with our B2C activities, our U.S. e-commerce business is our largest direct-to-consumer channel. The business delivered its fifth consecutive quarter of great margin performance with an increase of over 600 basis points due to our more targeted approach to promotions, which drives higher quality sales and improved inventory management.
As we've mentioned, we continue to maximize key events to drive demand with lower levels of inventory, we are utilizing occasions like President's Day and National Swimsuit Day to lean into newness and quality products that our customers are responding to. These events have allowed us to drive profitability by achieving more full-price sales while maintaining lower levels of promotional activity. Put another way, our strategy is not to simply move units. We're maintaining lower promotional levels while achieving more quality sales from the strength of our brands and the solutions we offer customers. In addition to driving quality sales, these efforts around key events are also driving a nice increase in new customer acquisition with our global new customer acquisition increasing in the first quarter year-over-year by high single digits.
Building upon a strong fourth quarter, our European business continued its upward trend in Q1 with exceptional gross margin expansion of over 1,000 basis points year-over-year. As in the U.S., we continue to prioritize newness and better inventory management with a focus on increasing margin through lower levels of promotional activity. Moving to our third-party business, we continue to see strong results from our approach of working with partners that share our vision for customer-focused solutions and are additive to our assortment. While third-party marketplace revenue was down year-over-year, we saw similar margin expansion from sales through these marketplaces as we did through sales directly from Lands' End, further reinforcing our brand positioning and story to customers who shop with us in these other channels.
We are managing the third-party business in close coordination with our U.S. consumer division, enabling us to better align our approach across the various channels where consumers interact with Lands' End. Our coordinated approach to maintaining a similar customer experience across our third-party and direct business while also tailoring the assortment for each partner based on their customer needs helps us drive traffic to our website where a customer can access an even wider array of our solutions. Another benefit of this approach and paired with our focus on better inventory management, is that we can better manage our go-to-market channels and maximize the efficiency of our inventory. During the first quarter, our licensing strategy, which adds asset like recurring revenue streams, continued to accelerate.
Our initial foray into the Costco channel exceeded our expectations with a handful of swimsuit options selling through quickly. Along with previously announced licensing agreements in kids and in footwear, we entered into a new licensing agreement for our home product, which expands a business that was already performing well into new channels. While we recognize only licensing royalties on our P&L, the incremental GMV allowed us to return the brand to growth and positions as well for the future. Turning now to our B2B outfitters business, we have used the time wisely over the last year to kick-start the sales engine for a business that we believe can become a high performer for Lands' End. This focus evident last year allowed us to add new accounts and deliver compelling Q1 results in our school uniform business, something we'll look to build in subsequent quarters.
In addition, as we have outlined in the past, we significantly retooled the business to focus on customers by size and by industry, leveraging our strength and being the provider of choice to large, medium and small businesses that share our outlook for high-quality product and outstanding customer service. Consistent with our approach in the B2C businesses, we have chosen to prioritize quality of sales and profits ahead of revenue and deprioritize low-return businesses, notably our promotional products business. That effort has resulted in a more connected approach to client development through a national sales team with successful relaunches of existing clients and several new launches in process for 2025. We'll look forward to continuing this close story in coming quarters.
I'll now turn it over to Bernie to discuss our first quarter performance in more detail.
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Bernie McCracken: Thank you, Andrew. Before I dive into our results, I want to remind everyone on the call that the first quarter of 2023 included the conclusion of our work with Delta. This resulted in the pull forward of significant revenue and gross profit dollars into the first quarter last year. What I'm making note here as the comps adjusting for Delta are more indicative of our year-over-year performance across the company. With the first quarter, total revenue performance came in slightly above our guidance range at $285.5 million, a decrease of 8% compared to last year, or a 1% increase when excluding the $27 million difference in year-over-year revenue from Delta. GMV increased low single digits for the first quarter of 2024, which was in line with our guidance.
As a reminder, we believe GMV, which accounts for the total order value of 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 brand. We delivered adjusted EBITDA of $12 million in the first quarter, which exceeded the high end of our guidance range and a year-over-year increase of over 60% when excluding the $13 million difference from Delta. These results reflect our continued efforts to prioritize profitability and balance efficiency versus solely sales, which has continued to improve our profit margins across our business units. Gross profit increased by 1% compared to last year, driven by our fifth straight quarter of gross margin expansion, and excluding the $13 million difference from Delta, gross profit increased by 11%.
Gross margin in the first quarter was 49%, and approximately 410 basis point improvement from the first quarter of 2023. The margin improvement was driven by new products across the assortment, strength in transitional outerwear, swimwear and adjacent product categories, lower promotional activity, reduction in sales of clearance inventory, and improvements in supply chain costs. Our U.S. e-commerce business saw a sales decrease of 4% compared to the first quarter of 2023, and we generated a 10% increase in gross profit dollars driven by continued efforts to prioritize higher quality sales. Our European e-commerce business increased gross profit dollars by 27% compared to the first quarter of 2023, with sales down 2% year-over-year. Sales from Lands' End outfitters were down 42% from the first quarter of 2023, reflecting the impact from Delta.
Excluding the $27 million difference in year-over-year revenue from Delta, the outfitters business was down 9%. Our third party business increased gross profit dollars by over 40% compared to the first quarter of 2023, with revenue increasing by over 60% year-over-year. The increase in sales was primarily due to revenue from licensing arrangements, including $10.5 million of kids product inventory sold to a licensee as this business transitioned to a licensing model. Online marketplaces saw increased gross profit from higher margins driven by the expansion of our higher quality sales strategy to third-party partners. As a percentage of sales, SG&A was 45%, which was an increase of approximately 630 basis points compared to 2023, primarily due to deleverage from lower revenues and investment in digital marketing, driving new customer acquisition.
As Andrew noted, these investments are critical to our strategy and we are already beginning to see them drive results. For the first quarter, we had a net loss of $6.4 million, or $0.20 per share. We had an adjusted net loss of $6.2 million, or $0.20 per share, which came in better than our guidance range. Moving to our balance sheet, inventories at the end of the first quarter were $289 million compared to $376 million a year ago. The 23% improvement in our inventory position was a result of our supply chain team's continued efforts to drive efficiencies in our business. In terms of our debt, at the end of the first quarter, our term loan balance was $257 million and our ABL had $40 million of borrowings outstanding, which was $60 million lower than the first quarter last year.
During the first quarter, we purchased $1 million worth of shares under our $25 million share repurchase authorization announced in March, bringing the balance of the remaining authorization to $24 million as of the end of the quarter. 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 summer selling season. In the second quarter, we expect net revenue to be between $290 million and $320 million, with gross merchandise value, or GMV, expected to be mid-to-high single-digit growth. We expect an adjusted net loss of $4.5 million to $2 million, an adjusted diluted loss per share to be between $0.14 and $0.06. We expect adjusted EBITDA to be in the range of $14 million to $17 million.
For the full year, we raised the low end of our revenue guidance and now expect net revenue to be between $1.36 billion to $1.45 billion, while GMV is expected to be low to mid-single-digit growth. We now expect adjusted net income of $5.5 million to $13 million, and adjusted diluted earnings per share of $0.18 to $0.41. We now expect our adjusted EBITDA to be in the range of $88 million to $97 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. I want to thank our team for their hard work and for delivering a great start to the year following a busy holiday season. We are making significant progress against our strategy and our efforts to innovate every aspect of our business and define and refine our brand are bearing fruit. As we transition from spring to summer, we are encouraged by how our customers are responding to our assortment of summer solutions that offer both fashion and function. Our strong performance during the recent Memorial Day holiday weekend gives us confidence that the solutions we provide and our go-to-market strategy are the right ones for Lands' End and for our customers. We are incredibly excited for what is in store for Lands' End in 2024 as we become a larger part of our customers' daily lives as a brand that can truly meet any moment for our customers.
On May 30th, I had the honor of ringing the NASDAQ opening bell alongside many members of our team to celebrate Lands' End's 10th anniversary as a public company. It's amazing to see how much Lands' End has evolved since then, and particularly over the last year, while staying true to its heritage as an iconic American lifestyle brand. Thanks to the great Lands' End team, we're extremely confident in Lands' End's future and our unique ability to serve as a partner to our customers, ready for life's every journey. That concludes our prepared remarks. We look forward to your questions.
Operator: Thank you. [Operator Instructions] And we will take our first question from Dana Telsey with Telsey Research.
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