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

Good afternoon, everyone. We're here today at the -- I'm Dana Telsey. We're here today at the 1:30 session with the senior management team of Lands' End. We're going to have a fireside chat after some introductory remarks.

Good afternoon, and thank you, everyone, for joining the Lands' End for this fireside chat. Please also note that the information we're about to discuss may include forward-looking statements. Such statements involve risks and uncertainties. Our actual results could differ materially from those discussed today. Factors that could contribute to such differences include, but are not limited to, those items noted and included in our company's SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q and an investor presentation we filed yesterday with the SEC and posted to our website, landsend.com. Any forward-looking information 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. I turn it back over to you.

Thank you very much. It's on, right? Excellent. Well, good afternoon, everyone. I'm thrilled to be here today to host a fireside chat and a discussion with the senior management team of Lands' End. If you don't know Andrew McLean, you should. He's been at Lands' End since November of 2022?

That's right.

And it's not the Lands' End story that you knew. He's made complete change in enhancing the business model, putting a solutions-oriented offering in. And with his partner, Bernie McCracken, who's the CFO, who's been at Lands' End much longer, they've really retooled the business model and the strategy of Lands' End. It's the modernized Lands' End of today.

So Andrew, we were sitting here in 2023. It's now the beginning of 2025. Just to give a refresher and frame things for everyone, what happened in 2024? And how do you think about that informing 2025 to Land's End?

Thank you, Dana. And thank you, everyone, for being here. It's great to have you all here today. We changed the business. We made a promise and the promise was to be ready for life's every journey. And that was just the thing that I asked all the employees to be thinking about every day for every decision they made. And by doing that, we put the customer back at the center of everything we do. And I think once you make that promise to the customer, everything goes from there. So we started to work on really great merchandising, great product to meet that customer's needs. We knew her well. She's been with us 17 years. And she's been with the ups and downs with the brand. But I think that we were letting her down, and we saw that because she was just buying into one category and she was becoming more discount driven. So for us, it was about creating energy and enthusiasm and putting emotion into the product and then doing the things that we do right. And by doing that, we started to create great product that we could then take the Lands' End brand and really start to wrap around like all the values of like such an iconic American brand and start to leverage those together. And there's so much more that goes behind that, but I think we're going to get to that as we go through the Q&A. But fundamentally, we are a customer-first brand.

And Bernie, a lot has happened because do I remember correctly that there's 7 quarters of consistent gross margin improvement?

Yes. I think what's underneath what Andrew was just commenting on is that we've changed the model of the business. And in doing so, we've strengthened our balance sheet, we've reduced inventory, we've reduced debt, and that only comes with better inventory management. And in that better inventory management, we have generated higher gross margin. And what we've talked to the investment community about is that we're going to grow gross profit dollars. And we're going to do that by selling higher quality sales, changing the model, changing our distribution points and winning with the customer.

You're leading off on a good word, the customer. Andrew, you've given us 2 words to describe who your new customer is or who your customer base is, the evolvers and the revolvers. What happened to them in 2024? And how do you think about that customer file?

So one of the things with Lands' End is that we have these 7 million customers who shopped the brand and a couple of millions of them are active. And so within that, you don't want to throw the baby out with the bathwater, and we view them very much as resolvers. And they were brand loyalists. They've been with the brand. They follow it through thick and thin, but their set of behaviors is more about replenishment and less about fashion. But we saw this total available market, and we saw some of these customers in our portfolio, and we call them evolvers. And we love the evolvers because they're open-minded to having a partner in Lands' End that's going to help them complete their closet and fill their closet. And for us, it was really important to be able to like keep both of them and move forward and so grow one and maintain the other. And that's really what we've been able to do by personalizing the journeys that you can reach the brand on. And that might involve for those of you who are out there on Instagram, taking a look at what we've done with Instagram. We've doubled the amount of followers on Instagram on the brand over the last couple of years. And we intend to do that again as we see a more fashion-conscious customer. And there are places where we'll meet and we use some of our marketplaces to do this to meet a customer who is more value-oriented. And being able to do that is allowing us to really grow the business. And while I know Bernie said that we're focused on our gross margins, we are also focused on our top line, and we'll get to it. We changed the model a little bit. And so as we look at our gross merchandise value, we've seen that grow. And that's gone in a slightly separate direction to where our revenues have gone because some of our revenues moved out under licensing where we meet a particular customer. And so there's been real growth on what I consider to be the top line and the bottom line of Lands' End as a consequence of being able to hold those two customer groups and move them forward.

You just mentioned something very important, GMV and net gross merchandise value. Talk about the new streams of business, what licensing means U.S. e-commerce, B2B, what's happening with Outfitters, a lot of different channels to drive sales.

Yes, absolutely. I think it's a question for both of us. And I'll kick it off and Bernie can fill in the parts that I will miss. But fundamentally, Lands' End, a lot of people think about it as a consumer direct business via a catalog and via a website. About 94% of our sales are driven by a click. So we're very much a digital-first company. But within that, we look at different ways to reach different consumers and on the B2C side, we have landsend.com is the primary vehicle supported by a catalog. But besides that, we leverage our single inventory by being on marketplaces. So we're on Target's marketplace. We're on Nordstrom's marketplace. We've been elevating the brand and reaching wealthier customers. And we have a long relationship that's been going for the best part of 7, 8 years now with Kohl's. And that's been -- those have all been relationships where we can reach a new consumer who doesn't normally see us. So that plugs in and we find a way to get that customer to come to landsend.com. How would you do that? Well, really, we do that through merchandising. So each of the marketplaces that we're in, we really have narrowed the assortment and made it just about getting a taster for what's right for that customer. And once they get to know Lands' End, we bring them to the mother site and then they can really shop the whole catalog as it were online. That's been incredibly powerful for us. The other part of this is really in licensing, and we don't particularly have a physical manifestation of the brand other than our catalog. And I do want to emphasize the importance of the catalog in underpinning our B2C business, but we don't have traditional stores beyond 20, 22 of them. And as a function of that, creating physical manifestations of the brand has become key for us. Hard to do when we're $1.5 billion company and you want to get focused on what your best are, wholesale runs a different calendar. And so we've gone out and created licenses. One of our most successful licenses is with the Costco channel, where we're represented across all Costco doors and on their website with a handful of items, but we look at it and we're like, we're reaching 1/3 of Americans. And it's the 1/3 of Americans that we really want to reach. We see a lot of that evolver customer in there, and there's power in that. I'll let Bernie fill in the missing pieces and maybe talk to B2B.

Yes. And I'll start first with what the dynamics of what Andrew is talking about being in the different channels, and he hinted towards it's a single inventory. And by being able to address these different marketplaces, we're using one inventory. It's leveraging that inventory. A good example is our business at Target tends to be more of a kids and a swim business. And our business at a Macy's and then stepping up to Nordstrom tends to lean into some of the heavier product. And what this really does for us is it derisks our inventory. And as you'll see, we've reduced inventory significantly over the last 2 years. One of the real key factors in this process has been the ability to turn off. So if we have a very hot item and it's, of course, easier for us to generate profits or higher profits on the landsend.com, we can just turn it off from our partners. So we have that control. We have control of the inventory. And when you talk about licensing, we're not even owning any inventory and driving a baseline of profits that are guaranteed over the course of the year. When you turn to our B2B business, which we're very excited about, it's a substantial part of our business. Again, when you talk about our national accounts like an American Chase or Wells, I mean, they are 5-year contracts. So they drive, again, guaranteed profits over a 5-year period that we are able to then build the rest of the business off of. We are a leading school uniform provider and we have found strength there. We're one of the top brands, and there's definitely some opportunity to improve that as some of our competitors weaken along the way.

So when you think about school uniforms and the uniform business, tell us about licensing a little bit. What categories are you're licensing? What's the opportunity and the margin impact?

So a big kind of licensing. It's capital light. And it lets you build up an expertise where you wouldn't necessarily have the time or the money to invest in it because you're doing what you do and you can work on your own competitive advantage. So licensing falls into 3 categories for us. There's channel, there's product, there's geography. It was one of the first ones that we got into. And that's been incredibly powerful. We've subsequently continued to build that with some of the other clubs out there and into wholesale. In addition to that, we've taken product categories. And one of the things I would say about licensing is from a consumer standpoint, we always turn back to our customer at Lands' End. For them, they have to have a seamless experience where they see the brands, the best vision of the brands, and they have no particular sense that they're buying perhaps from a licensor. So product categories that we've licensed to date have included kids and shoes and our home product that will be hitting stores and websites later this year. That's been incredibly powerful for us, and we see great growth opportunity in there. We are reviewing license opportunities internationally. We see significant opportunity for the brand just based on our passive selling, quite frankly, in some of these markets over the years, we see tremendous opportunity there as well. And actually, the bit -- and maybe I'm stealing your thunder within licenses, again, you're signing multiyear contracts. So you've got recurring revenue that's going to come, and you can build a firewall for your business, which is really based on minimum royalties that come from that. And this has been a significant growth driver for us.

And the only thing I'd add to that is the shoes in the kids is a unique model that not many other providers can provide to their licensees. And it was very exciting for our licensees as we went out and started to do this because we have 7 million customers, and they got to be on our website with those products and act as Lands' End in the shoes in the kids category. We fulfill that product from our DC. So there's no difference to the consumer and what they're going to see and a pair of shoes will show up in the same box as a winter coat. So it's been very productive and very exciting. We fulfill for them. We charge a fulfillment fee to do that. They market with our marketing and they pay for those marketing costs. So it's been a nice partnership with them.

And with your own product, leveraging speed to market seems to be a big focal point in order to take advantage of where now. Where are you on that journey?

So it's a never-ending journey. You and I were talking about this beforehand. It's that you should always be working on this journey. For us, freshness, and it's a recurring theme. Freshness in our product assortment will drive top line and profitability for us. And so there's the key and you can see that our gross margins in the third quarter were the highest gross margins that we have recorded at any time since our IPO, and I just couldn't get back further to find higher numbers with our history. So there's a lot of upside to being fresh and current in your inventory. And that's something that we talk about every day. And we've moved from only having 2 product drops a year to having 11 product drops a year. We have 11.5 candidly, and almost constantly flowing product and getting a turn on that, so we move through it. We create momentum for the customer. There's always something to come back and look at. And a big thing is we don't because it might be gone if you think you're going to wait for a discount. And that's been incredibly important. I understand that, that's very old-fashioned retail thinking, but there's something to be said for old-fashioned retail thinking, which is turn your inventory, create demand, drive margins.

And one of the other things with new retail thinking in a way is the ability to chase and how you've shifted production close to the Western Hemisphere in order to be able to do that. Where does that -- what is that doing? And Bernie, how does that impact the income statement and the balance sheet?

Well, as Andrew said, with the additional shipments instead of bringing the inventory in on at one time and holding it so long, we're turning the inventory faster, which, of course, means we're holding less inventory on the balance sheet. We're lowering our debt costs. By having it closer, we are especially in a volatile out of it lets us buy closer to season. And as Andrew said, we've driven close to 500 basis point margins every quarter this year. And a lot of that is driven off of lower discounting, which is from fresher, newer product.

And I think last year, in particular, for the first time ever, we were replenishing swim in season. So it was -- historically, you'd buy it, you'd run out of it. You're kind of out of luck if there was more demand. We've really created the narrative now where it's like if we see the read, we'll turn around and lean back into it and bring that inventory back in within the season. And that's incredibly powerful. It also opens you up to things like having a great test strategy. You can test and learn on ideas and read and react to those. And I think, again, there's a real power in that from an inventory management side and the attendant growth that you get in gross margins.