Lands' End, Inc. (LE) Earnings Call Transcript & Summary

Hello, world. Hi, and welcome to the Land's End fireside chat at ICR. I'm Oliver Chen, Cowen's retail, new platforms and luxury analyst. I'm pleased to be joined by Land's End CEO, Jerome Griffith; and President and CFO, Jim Gooch, this morning. Gentlemen, it's great to be with you here and to see the continued innovation at Land's End.

Good Morning.

Good morning. So Land's End is an iconic brand, we all grow up with known for quality. You also are anchored in Comfort as well as fit. What would you say is most important for investors to know about today's Land's End versus the past year out?

It's interesting, Oliver. We're going to be -- next year, we're going to be 60 years old. And I think the company was and has always been and continues to be a very good innovator in the field. One of the things that we've always thought that people don't quite understand about the company is that we're an Internet company. We're the first company to sell clothing online in 1995. And the company went through some years of not developing and not innovating in the early 2000s, I think it has sort of come out of that and looked at other opportunities where we can still continue to grow and expand. Up until 2017, you can only buy Land's End at landsend.com or at Sears. We've expanded beyond that. We have expanded internationally. We've gone now into Zalando, Auto, About You. We'll open up with John Lewis in the U.K. this coming year. We've opened up Amazon. We've opened up Kohl's. We're in over 500 stores at Kohl's now plus with a full price assortment online. We'll be launching QVC next month, and we've got several other opportunities that we've been talking to potential partners about. Additionally, we've been working on more collaborations with relevant companies that would do a collab with Land's End. That's worked extremely well. And you've got to remember, we're 95% online and probably will continue to be 95% online in these third-party columns. And third-party marketplaces that we've gone into are much more digitally oriented than they are stores oriented. So we're extremely pleased with that and think that our continued innovation, making it easy for the customer online to shop with us, is a big opportunity, and that's what we've laid out with the next 5 years look like. The other thing that people tend to forget is we've got a very good uniform business. It's a mix between school uniforms, national account uniforms and then small business uniforms, which we've redone our website, particularly for small and midsized businesses. It's going to make it a lot easier to get promotional goods for them online and a lot easier to get it shipped.

Very helpful and interesting. Jerome, what about Land's End's core competencies, and this relates to some of your longer-term strategies. But what sets Land's End apart? And what have you really focused on as you continue to build and recenter the brand equity in many ways?

Yes, we laid out a growth strategy several years ago that was really formed around 4 pillars, getting the product right. being a digitally driven company, improving our infrastructure and being a uni-channel distributor. When it comes to product, we're a very basic oriented company. People know our products pretty much worldwide. We sell -- about 83% of our business is either basics or seasonal basics, and we're very happy with that because it's products that are tried and true and customers come back to them for us regularly. When it comes to product innovation, we've tried to get into different collaborations with people that are interesting. You've probably seen the Draper James collaboration that we did for the past couple of years. We've got Blake Shelton coming up this year. So very interesting things for the brand that are relevant for our consumer and for new consumers whose demographics are the same as ours. Being digitally driven has been a big plus for the company. We've really pushed into speed and mobile on our website. That's paid off for us a lot over the last several years. We've got a very robust website in the U.S. and have exported that overseas into Europe and to Asia. We are a unit channel distributor, meaning we want to meet the customer where the customer wants to shop, and we want to make it a very easy shopping experience for her, where she can come and buy and return as she sees fit. That's why the third-party marketplaces have worked extremely well for us. We thought it was going to be a good idea when we started it, but it's turned out to be even better than what we thought it was going to be. It's bringing on a lot more customers into the lands and world and a lot of customers that have the same demographics. And then finally, our infrastructure has really been neglected for probably 10 to 12 years. And we started when we started at the company, upgrading our big software packages internally. We did an ERP implementation in the first few years here. We've done EOM implementation as well. We're in the middle of doing a warehouse management system implementation, and that will be the end of all of our big investments when it comes to IT. Everything else is going to be smaller and tack-ons. So we've done a good job at bringing up the infrastructure so that we can compete today in the world in which we live.

And Jerome, what about your own stores and how those fit into the ecosystem? And as you think about various partnerships, what's your take on making sure you manage cannibalization and incrementality just and also proprietary product or not across different marketplaces.

When it comes to retail for us, that was a strategy which was more customer-enhancing and customer service oriented. We've opened up about 30 stores in the last 5 years. Those stores have been a plus for us. But since COVID's been around, we've seen traffic still way below 2019 levels, coming up to them almost, but then being very inconsistent. Until I see more consistent numbers with traffic in stores, that's still going to remain small. And even if you went back to opening 10 to 15 stores a year, it's still a very small percentage of what our distribution would be. When you look at what's been happening with online distribution and third-party online distribution, it's all been accretive from a customer standpoint. About 70% of those customers that are working with us through third parties are coming to buy at Land's End. They've either never shopped with us, which is the vast majority or a few of them have been lapsed customers who haven't shopped with us for over 5 years. And what we're finding is, since COVID started, the vast majority of people that have become much more comfortable shopping online and staying at home are baby boomers and Gen Xers. Now our core customer is a baby boomer or a Gen Xer, in fact, most of our new customers are Gen Xers with the same exact demographics that we have in our core customer base. What that's done is we believe it's more than doubled our addressable market in the United States, which is pretty exciting for us because it gives us a lot more customers to market to. The trick is getting ourselves in front of those customers. And that's why this third-party distribution has been so important for us because it gets us in front of a lot more customers a lot faster. And we've seen really good revenue growth and very good profitability growth. And you'll be able to take a look in the presentation online laying out the next 5 years as to how we see that business growing over the course of time.

With respect to that, Jerome, what about promotions and marketing markdowns and also pricing, has that been difficult to manage in the context of multiple partners or not really? We've been going through such a great environment with average unit retail in now.

No, I don't think that's difficult to manage. Everyone's been managing that with their own policies that we've been distributing through. I think what's more challenging, Oliver, is the extreme increase in costs due to supply chain and then also pretty extreme increases in raw materials for products that have happened and are still coming up. I think a lot of people are in the same boat as what we are where we're going to have to pass on a lot of the cost to the consumer. Consumer demand has been pretty strong and consumers have been relatively willing to meet these new costs. I think the thing that will be tricky for the industry, and I'm really hopeful is that we, as an industry, have been extremely promotional since probably 2009, '10, '11 somewhere in there. And what that's done is it's driven down EBITDA margins. I think now people have an opportunity to relook at how much product are you making, how you're pricing it? What do you think you're going to sell and probably bring down your investment costs at the same time as increasing your retail costs out the door.

Jerome, that's a great, important topic. On the supply chain front, what should we know? When might supply be more in line with demand? And how are you thinking about raising prices relative to the incoming costs that you're seeing?

We've already started raising prices. We started in the fall. We've increased that again in spring. It's into the low double-digit increases from a percentage standpoint. We think that, that will help us manage what the costs look like going forward. I think it's an important topic, though, for everybody. I believe that people don't have it -- don't have a very clear picture as to when these things will start to subside. I think everybody believes this will not last forever. But when you believe that costs will come down in 2 months or costs have come down in 2 quarters, I don't think you can guarantee that. I think you have to plan that you're going into 2022. It's going to be another volatile year when it comes to cost and supply chain. And I think that you have to work towards understanding what are the things that are most important to you and most important to your customers because you're not going to be able to do everything for everyone, and you're going to have to prioritize.

And on your question on supply and demand. We talked about this on our last quarterly call, but we really started at the end of the last third quarter. It started to get really choppy for us. Vietnam was a big country for us for our folinate, and those factories were shut down for a couple of months. Our team did, I think, a great job of working through that, and we're able to finally get ourselves back to a reasonable in stock, and we talked about this right before Black Friday and right before the holiday. But it's continuing to be choppy as we start to go into early spring shipments. And right now, looking at the January flow, it's a daily conversation that we're having, but we don't anticipate this getting better, certainly for at least a couple more quarters.

Jim, which classifications, if there's a way to speak to that, and/or regions have been under more pressure?

That's been the challenging thing is it's a moving target, just when you get one better than another one pops up. The biggest one, like I said, for us had been Vietnam because those factories were shut down for 60 70, some of them up to 80 days. And then we had the port issues. L.A. ports were a real challenge. We had trucking issues of getting -- a lot of our product comes into L.A. and we truck it or we rail it over to Chicago, then we truck it up into Dodgeville. So we had challenges across all of those space on boats right now is a major issue, and that's I think across the board, folks are seeing a higher cost there because you're having to go away from your contracted container rates. And having to pay at spot rates, which are significantly higher right now. And right now, trying to get space on those contract rates is very tough. So in order to ensure getting any space here ending up while paying the spot rates.

Another -- there's many aspects Jim, you're covering so many parts of that supply chain that are under pressure, but it's happening. On the Omicron and variant front, are you seeing anything in terms of your distribution centers and/or labor? I mean labor availability has been tough even without this, but there have been companies that have guided down during ICR related -- partly related to Omicron. So I would love your thoughts there.

I would say our team is doing a great job of managing that. It's not that we haven't had any issues, but we do have the fortunate situation of most of our distribution centers sits out in Dodgeville and in somewhat of a contained environment. And I think the community and our teams are doing a good job of managing it. We have seen a spike, I think, with everybody else over the last couple of months here with Omni. And so keeping our eye on that. I think the fourth quarter was a challenge for us with hiring, as you mentioned, but we're able to work ourselves through that. Teams did a great job, I think, of stepping up and working extra hours. But as we look forward and you see at some of these growth rates that we have in the presentation that Jerome referenced that we posted on our site, and we're looking for a 10% CAGR over the next 5 years. We have the capacity from a distribution center. That's not the problem. We recognize that a big problem is going to be labor. We're hoping that, that's going to normalize going forward, but this year was a challenge. And so the teams are doing what they can to try to get out in front of that as we go into this year.

And Jim and Jerome, what were some highlights in terms of the holiday season. In our view at Cowen, it was relatively elongated, given it started earlier and also the delivery seem better than feared versus prior years as well. I'd love some key thoughts.

If you look backwards, I think 2020 was a challenge just getting goods out of the warehouse to the consumer, that part of the distribution chain. I think this year was a lot better and a lot calmer. I believe you're correct in that everything was really spaced out very much along -- starting in October and then running through. Because I think customers understood that there's going to be logistical issues with getting product from e-commerce sites and e-commerce warehouses to their doorstep. I think that from a product standpoint, the tried and true good gift items were good this year as they were a year ago. One of the things that was interesting that we've seen is we continue to lean into swimwear. Swimwear has been -- was great for us in the first, second quarter, continue to be good through third and fourth. And that's now turned into a year-round business for us, no different than T-shirts no different than pull-on pants. It's a great year around business, and we're continuing to see strength in basics.

There's a question in the chat. So Jim, what about the balance sheet and the debt and the coupons of the debt? What's your thoughts in terms of prioritizing different structures and return of capital as well as reducing some leverage potentially?

Yes, it's a conversation that we're having right now. I'm looking from a time line perspective to look at that predating the third and fourth quarter of this year. If you look at the structure of the debt, there's a greater amount of flexibility at that point once we get to September. As the business continues to perform, you're really getting at that level that it can produce some significant cash flow. We have the ABL locked up for 5 years. If you project that out, that's going to be very low to no usage on that. So that gives us some flexibility to probably better utilize that. So I would say all things are on the table. All things are up for discussion and probably look for us to do something towards the end of this year.

Okay. And Jim, what are the key near- and long-term top line and margin drivers. This is a general question that you'd like investors to pay most attention to?

Yes. For those of you on the call, and we've referenced this, we posted a new 5-year projection on our site, and we've tried to be more specific with what some of those drivers are. Three big ones that we call out, the core business, the core e-commerce business, both in the U.S. and international is going to be the -- always going to be the largest dollar business. We continue to see solid growth in that business. But the 2 incremental pieces that we've given you some detail and we talked about this already a little bit, it's that third party is probably the biggest one. And we see that business growing from what -- where it is right now, which is about 5% of our mix up to 15% of our mix. So we're continuing to roll out the Kohl's business seeing some great performance there, up to 500 stores and also expanding into more of their southern stores with an expanded swimwear assortment. Amazon continues to be strong, and we think we have additional opportunities for looking for additional partners going forward. And then the other piece is within our Outfitter business and think of it more in that small and midsized business area -- and we think we have an opportunity for some product expansion on the hard line side of it, where right now, we're mainly a soft line provider for them. And we see many of our customers that are looking for both hard goods and soft goods. And then we've also made some nice improvements to our site. And I'd best characterize it as treating it a little bit more like a direct-to-consumer business here before we're treating it more like a B2B business. And I think initial sciences pretty good reaction from our customers there. So we think that business has significant opportunities for growth. And we think that outfitter business grows from about 15% of our mix up to 18% of our mix. From a profitability perspective, we think we can grow this in 5 years to be EPS of up over -- we need to manage the gross margin. There's certainly some headwinds there as we talked about with supply chain, but we think a lot of those are short term. We're working ourselves through there. What we're doing with dynamic promotion, what we're doing with promotional productivity is helping to offset that, what our sourcing team is doing with looking at different countries of opportunities is helping to offset that. We think we have the infrastructure capabilities, the SG&A capacity to scale this with the top line where you're going to see some efficiencies on SG&A. And then you mentioned the balance sheet that I think we can get far more efficient from an interest perspective that can help drive EPS.

Yes, that $5 EPS target is really helpful. And this presentation is great. I'd encourage everyone to download it and check it out. So on the $5 of EPS, it looks like offset by increased marketing spend slightly to drive brand awareness. Could you speak to that in terms of where you're thinking about marketing as a percentage of sales? And Jerome, you have a pretty powerful AI team at Land's End. So how are you thinking about the right way to approach digital marketing and the land where privacy is also accelerating IDFA as well?

I'll start with sort of our plans on marketing and let Jim follow up with what we think the investment will be. We've seen really great performance in SEO over the past few years, and it's worked extremely well for us. It's brought in a lot of new customers. We've had double-digit customer -- new customer acquisition numbers quarter in, quarter out for the last few years. I think that's great. I think there's going to be a continued increase in new customers because of the size of the marketplace that we've seen with COVID and what's going to happen post COVID. What I think you're also going to find for us though, is continuing to reduce our investment in print, increase our investment in digital. We've been doing that for the last few years. That seems to be working very well and really improving in what our social media campaigns look like, where they are, the proliferation of them and looking at online TV advertising. We'll branch out into that and we want to be a little bit different. We've been very, very focused on e-mails and SEO, and that's been great for us. But I think now it's time to branch away a little bit and do some other interesting things that we haven't been known for.

Well, those catalogs are iconic, so I'm going to mess prints. So hopefully...

Well, we're not going away. No, no, no, it used to be 75% of our spend now is slightly under half. We think we can continue to drive efficiencies there.

Yes. Maybe you should add stickers and other things inside the catalog for consumers to play with. Jerome, I always love talking to you briefly about products. So what are the hot uptrending categories that you're seeing? And as we think about a life of post-store post-modern or with COVID, what's going to happen from a lounge to structured or not? Just would love some highlights and any closing remarks you may have.

I think one of the things you see from us is products that are comfort-oriented. Our customer demands and really looks for comfort from Land's End. It's, I think, great. And I think that when we deliver products that are comfort-oriented for her or make her feel comfortable their successes. Probably the biggest success we've got right now has been swimwear last year and then starting out into this year. And it's not just swimmer, but it's also lounge wear, it's also active, but because we lump that all into one. But that business has been running extremely well for us, and we see continued opportunities there as we see in most of the women's categories. On the men's side, we've seen a bit of a return to I'm dressing up to go to the office, but mostly with dress shirts and khaki pants and that's been running very well for us. And home furnishings has been great. We have really doubled down on home. It's mostly bedding and towels but we've carried other additional expanded assortments in the home category, it has all been working for us, and we feel really good about it. I think the biggest thing that we feel great about over the course of time in front of us is what our revenue and bottom line opportunities look like. You've hit on all of them already today, expanded assortments, expanded distribution channels. They all seem to be working. We've talked a lot about marketing and really going out to get more customers and bring them in as new customers. And then on the bottom line, as Jim mentioned, going from $1 and change as to where we are today into $5 in 5 years, that's going to be a really big accomplishment for us. But we see, maybe 5 years ago, we still had some go gets to figure out as to how we were going to get to what our 2022 targets were going to be. We've seen we've met that, and we don't have any go gets on this one. We've got a very good understanding of what the opportunities are in the marketplace, where we can distribute, how we're going to distribute and understanding how to take advantage of those opportunities. So a pretty good time.

Yes. You have an exciting line of sight and also new innovative partnerships and a product portfolio that seems really relevant to what's happening in the marketplace. Also, I'm impressed by the focus on sustainability slide and things that you're thinking about with respect to ESG. So thanks to Jerome and Jim. It was great spending time with you. Happy New Year, everybody. This concludes our presentation.

Thanks a lot.

Appreciate it.