Bernard McCracken - Chief Accounting Officer & Vice President Federica Marchionni - Chief Executive Officer & Director James Gooch - Executive Vice President, Chief Operating Officer and Chief Financial Officer.

Alex Fuhrman - Craig Hallum Capital Steven Marotta - C.L. King & Associates, Inc..

Presentation:.

Good day, ladies and gentlemen, and welcome to the Lands' End First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Bernie McCracken, Chief Accounting Officer. Please go ahead, sir..

Good morning and thank you for joining the Lands' End earnings call for our fiscal first quarter 2016 results. On the call today you will hear from Federica Marchionni, our President and Chief Executive Officer; and Jim Gooch, our Chief Operating Officer and Chief Financial Officer.

To begin our prepared remarks, Federica will discuss the current state of the business, and then Jim will provide details on our first quarter performance. After the company's prepared remarks, we will conduct a question-and-answer session with our covering analysts.

Please note that this morning we released our fiscal first quarter 2016 earnings results which are now available on landsend.com. I would like to remind you that today's discussion will contain forward-looking statements related to future events and expectations.

These statements are based on current expectations and the current economic environment or are based on potential opportunities. Actual results may differ materially from those expressed or implied in the forward-looking statements.

Factors that could cause the company's actual results to differ materially from those discussed are posted in the investors' information section of landsend.com and in our most recent SEC filings. Our discussion will also include certain non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP financial measures also can be found in the investor information section of landsend.com. Any reference in our discussion today to EBITDA means adjusted EBITDA as defined in the earnings release.

Lastly, we assume no obligation to update the information presented on this call except as required by law. I will now turn the call over to our Chief Executive Officer, Federica Marchionni..

Good morning. I'd like to welcome everyone to the first quarter earnings call for 2016. As with many others in the industry, we continue to be impacted by the soft retail environment including weak consumer traffic trends and aggressive promotional activities in addition to unseasonable weather and order shift in consumer spending away from apparels.

While we have accomplished a great deal in transforming our business over the last several quarters, these headwinds continue to pressure our financial performance. Sales in the first quarter were $273.4 million, down 8.7% as compared to the last year's first quarter. Loss per share were $0.18 and EBITDA was $636,000.

We were able to maintain less inventory year-over-year to last quarter despite a challenging market and the launch of a new collection. Jim will talk to these in more detail in his financial review. While results were disappointing, I'm encouraged by some of the positive signs we're seeing in our business.

Our increased conversion rate across channels indicates that consumer are responding favorably to our products. In addition, we have seen a number of small green shoots throughout the business that give us confidence that we are continuing to move in the right direction.

Product is the heart of our business, and we continue to seek to evolve the assortments to ensure that it speaks to Lands' End customers through timeless yet updating styling, high-quality and a strong value proposition.

We are focused on our core business where we saw positive response to new patterns including florals [indiscernible] and colors; great example of this include our fine gauge cardigans and updated neck details in the [indiscernible].

We also saw a strong response to our [indiscernible] which was presented in a nautical stripe and florals during the quarter. In addition, we saw some positive response across a number of categories.

Consumer continue to recognize Lands' End as an authoritative source for swim and [indiscernible] safety and we had a successful launch of new women's swim fabric collection which feature mix and match tops and bottoms in the season's best color and design.

We also saw better performance in certain areas of men's apparel as consumer responded to our timeless patterns and colors in our shirt offerings and appreciated the addition of new colors in our pants and shorts. Finally, home outperformed most categories driven by bed and bath. We will continue to build on this success going forward.

Also, during this first quarter, we introduced Canvas by Lands' End, a youthful modern collection for both men and women with strong global influence. While this is a very small piece of our overall business, Canvas by Lands' End enable us to broaden our reach to a new younger more fashion-conscious audience.

Initial response has been encouraging with favorable conversion rate, particularly in our dresses, pantsuits and bathing suits. We have also experienced increased average order value of approximately two times the current Lands' End average order value. In addition, we are receiving positive feedback from our customer on product quality and style.

Importantly, we believe that this new line creates a halo effect and enable us to test product and quality updates for the overall Lands' End brand. For example, our new Canvas by Lands' End line feature enhanced fit, which our customer are responding very well to.

Based on this feedback, we will expanding this new fit to some key items in our core Lands' End products. Also, with the launch of this new line with a view that our Circle Membership, which provide exclusive offer for members including free return, this will allow us to test the free return policy as we consider rolling it out more broadly.

Finally, as we look ahead, we are planning a number of grassroots, traditional media and online marketing campaign to drive awareness of these new offerings. We are pleased with our performance of our uniform business, as it continued to be one of our best-performing product categories.

We expect the Corporate and school uniform business to remain strong as we continue to build new partnerships. We are also pleased with a successful test of our Lighthouse by Lands' End brand at Sears, a new retail concept which features our nautical heritage at more affordable prices.

We will continue to evaluate the performance of the test over the next quarter and we will update you on the longer term plans at that time.

I want to note that our overall SKU count for spring/summer declined by approximately 5% beside the launch of Canvas by Land's End as we continue to trade out unproductive color while creating a deeper progress on brands of style.

While we are encouraged by some of the small wins, we saw in the spring assortment, we recognized that this is an evolutionary process and we will continue to monitor results, get feedback from our customers and evolve the assortment as we gain new insight.

As we look ahead, we expect to gain momentum with our core customers particularly in the second half of fiscal 2016 when our initiatives to enhance the product offering will be more broadly implemented.

As part of our progress of the core business, we will begin to place additional emphasis on our men's product and in the holiday, we will have a very strong gifting assortment featuring great home products which we believe will entice consumers to pick up something for everyone on their list including themselves.

Home has been a category that has performed well, and we believe we have an opportunity to capitalize on that trend going forward. Our marketing programs for the year will emphasize catalog and digital marketing designed to drive near-term sales performance. As you may recall, we have previously scaled back our promotion.

While our goal is ultimately to become less promotional, we have to deal with the reality of the current environment and realize that we need to maintain some level of promotion to drive traffic and remain competitive.

Again, we are taking our learnings from the past and using them to evolve our promotional strategy in a way that entices consumers to shop at Lands' End while enabling us to remain competitive in the industry.

We are working to leverage more on traditional holidays like Presidents' Day, Mother's Day and Memorial Day, as well as in certain unique events including our 31.4% Off promotion for Pi Day and our buy one, get one 55% off on Cinco de Mayo to drive customers' interest.

Our ideal future promotions are those similar to our #DearMom, around Mother's Day, focused on creating brand values and connection between our customer and thereby with the brands through our core product offerings.

We also just had our Memorial Day campaign this past weekend which centered around our strong swim collection and we believe results were favorable. Importantly, we continue to feature compelling imagery and storytelling in our marketing programs, helping to create a stronger brand identity and connections between Lands' End and our consumers.

Catalog remain a key area of focus for us, and we have learned a great deal from our recent books. By implementing those learnings, we believe that we can increase catalog productivity throughout the rest of the year.

This will include continuing with our elevated imagery and storytelling while also layering a strong offer and improved product presentation. We will also continue to focus on strategically building back our circulation, working to reactivate consumer and win back their business.

As part of this, we will target lapsed consumers with enticing promotional offers and personalized content, both in our catalogs and via e-mail campaigns. Through these target offers, we expected to capture [indiscernible] and immediate orders, as well as incent customers to visit us again to make future purchases.

We have started these actions began in May and we are encouraged by the early results. In addition, we have continued to enhance our e-commerce offerings in an effort to drive conversions and units per transaction, as well as grow our customer base.

In conjunction with the launch of our Canvas by Lands' End line, we debuted a new multi-brand capable website for desktop, mobile and tablet devices. The new site features distinct customer experience for both our core and Canvas by Lands' End line while still providing an overall experience that is complementary to the Lands' End brand.

Importantly, this site encourages and makes it simple for customers to search, shop and buy across our brands. It also enable us to better connect with our consumers through content and marketing that is targeted to specific customers.

In addition to the upgrade to our core e-commerce site, we completed the migration to a brand-new platform for our B2B side, which allow us to better support our growing national accounts business.

As we look ahead, we expect that our e-commerce business will continue to grow as more and more consumer discover our enhanced multi-brand product offering and as we further enhance our online capabilities and infrastructure.

Our international business remain an important area of opportunity for us and we are focused on further building this business. We are executing on a number of key initiatives in our international business across products, marketing and distribution, and are beginning to see some initial sign of improvement in this business in the second quarter.

Overall, we have made progress on our key areas of progress and are continued to execute on our strategy around products, marketing and distribution channel.

While traffic remains a challenge across the retail industry, we will remain focused on driving forward with our key initiative, continue to evaluate our results and evolving our business to position us for profitable growth. Now, I'll turn it over to James to review our financial performance for the quarter.

James?.

Thank you, Federica and good morning. I'll start by walking you through our financial results for the quarter. Revenue for the first quarter was $273.4 million. That's down 8.7% compared to $299.4 million last year.

The sales decline was comprised of an 8.4% decrease in the Direct segment with sales of $232.2 million and a 10.4% decrease in the Retail segment with sales of $41.2 million. The decrease in the Direct segment was driven by the decline in both the U.S. region and to a lesser extent the international business. The U.S.

business continued to realize negative comparable sales in many product categories, as our traffic numbers continue to be very challenging. During the quarter, we saw the continuation of a highly promotional retail environment with unseasonable weather; both of which negative impacted our business. In addition, the decline in U.S.

revenue reflected a planned reduction in our catalog circulation as we continue to optimize our marketing expense. The decline in the Retail segment reflected a 7.1% decrease in same-store sales, combined with 10 fewer locations. We ended the quarter with 225 shops at Sears, and that compared to 235 at the end of the first quarter last year.

The decline in same-store sales was primarily driven by many of the same factors which impacted our Direct business, in addition to an overall drop in traffic at our Sears locations. While we've been pleased to see our conversion improved during the quarter, traffic across all channels has remained challenging.

We continue to see traffic trends being negatively impacted by both external and internal factors. As we've discussed in the past, currently our largest traffic driver is our catalogs.

We've made a number of changes in our catalogs, including circulation as well as product and promotional presentation, all of which were focused on building the brand and improving productivity over the long term.

However, given the ongoing headwinds not only within our business, but across all of retail, we're strategically applying our learnings from prior quarters and specifically evolving our catalogs in order to drive productivity and improve short-term performance.

We're making adjustments to our catalog strategy including content and promotional offerings in addition to methodically rebuilding circulation. We believe that the changes we're making to our catalogs and marketing strategy will help us improve traffic, reconnecting with lapsed customers and over time winning new customers.

While we're beginning to gain some real traction from the recent changes, we still have a lot of work to do. Importantly, we gained a great deal of insight about our customer and we'll continue to look at our results, analyze our business and implement additional learnings.

Overall, we still expect to see sequential improvement as we continue to refine our marketing and promotional strategy. However, with the continued highly promotional competitive environment, we do anticipate the second quarter will remain under pressure until we realize the full impact of the improved product assortment. Moving on to gross profit.

Gross profit was $129.7 million, that's a decrease of 11.5% compared to $146.6 million for the quarter last year. Gross margin for the quarter decreased 160 basis points to 47.4%. The Direct segment gross profit decreased 9.6% and gross margin in the segment decreased 70 basis points to 48.8%.

The Retail segment gross profit decreased 23% and gross margin in the segment decreased by 650 basis points to 39.5%. The decrease in both segments was attributable to a retail environment which required deeper product discounts resulting in increased promotional activity and yielded unfavorable sales mix during the quarter.

Additionally, 200 basis points of the decline in the Retail segment was due to taking markdowns earlier in the product lifecycle this year compared to last year. Looking at selling and administrative, our S&A expenses for the quarter decreased 3.4% to $129 million that compared to $133.5 million last year.

Total S&A expenses as a percentage of revenue increased by 260 basis points to 47.2%. The deleverage was primarily due to the decreased sales volume partially offset by the $4.5 million of cost reductions.

The driver of the decrease in expenses included lower marketing spend mainly driven by the reduced catalog circulations, savings from closed stores, reduction in professional fees and flexing variable expense with the reduced revenue.

As we move forward, we'll continue to invest in marketing initiatives that drive sales and brand awareness, but we'll remain highly disciplined in managing expenses in all other areas of our business. Operating loss was $3.5 million compared to operating income of $8.5 million in the first quarter of 2015.

The decrease was primarily due to the lower revenue. Income tax benefit for the first quarter was $3.4 million compared to income tax expense of $1.1 million for the same period last year.

That gives us a net loss in the first quarter of $5.8 million or a loss of $0.18 per share compared to net income of $1.7 million or $0.05 per share in the first quarter of last year. In addition to the GAAP measures that we've outlined above, adjusted EBITDA is an important profitability measure that we use to manage our business internally.

For the first quarter of 2016, adjusted EBITDA was $0.6 million and that compares to adjusted EBITDA of $13.1 million in the first quarter of 2015. Now, let's take a look at the balance sheet. Total cash and cash equivalents at the end of the quarter were $169 million, which compares to $177.8 million last year.

Inventory for the quarter increased to $309.9 million, which compares to $284.6 million. Through aggressive receipt management, we were able to maintain year-over-year inventory compared to last year despite the softer sales and despite the addition of Canvas by Lands' End products during the quarter.

We're taking all the necessary steps to move through the product, and our plan still is to normalize our inventory levels during 2016. Long-term debt decreased to $492.9 million as compared to $496.7 million at this time last year with a reduction mainly due to the quarterly principal payments.

Looking at operating cash use for the quarter, it was $50.2 million compared to $31.5 million in 2015. The increase in operating use was mainly the result of an increase in payments to direct vendors due to higher balances exiting last year and the lower operating earnings.

Before I open up the call for questions, I want to reiterate a few points I discussed during our last call. First, we'll continue to remain prudent in our cash management in 2016 while making strategic investments where we believe we can yield a positive return.

Next, marketing spend, catalog circulation declined in the first quarter, and we plan to build our circulation over the remainder of the year.

As we move towards optimizing our marketing investment, we'll focus first on our active customer base, and as I mentioned earlier, recognize, and it may take some time to build back our lapsed and attract new customers.

And finally, we plan to continue our capital investment for our ERP system implementation where our initial focus is on our finance functions, merchandising operations and our inventory planning systems. And now, with that, we'll open the call up for questions..

Thank you. [Operator Instructions] And our first question comes from Alex Fuhrman with Craig-Hallum Capital Group. Your line is open..

Hey. Thanks for taking my question. So, it's been a couple challenging quarters in a row now. I'm wondering if you could give us a little bit more insight in what give you confidence that we'll start to see a sequential improvement in Q2.

And to what extent some of the new initiatives like the Canvas and the Lighthouse and the designer collection are feeding into that.

And then, just to understand Jim's closing remarks about marketing spend, is it your expectation that you're going to start to put more dollars in circulation into marketing in the back half of the year and that will help to drive an increase in traffic or are you kind of saying that you're expecting to see the increase in traffic and then you're going to push into that with more marketing spend to ramp up as that starts to happen? Thanks..

Good morning, Alex; and good morning, everyone. This is Federica. First of all, we are confident, as we said, for the initial wins that we experienced by the new initiatives that we have taken. And we are also going forward to improve our product offerings.

We are increasing circulation and having a more efficient digital marketing expense for search, e-mails, affiliates and improving our shopping experience with the online new websites and rigid inventory management.

We're also looking for increasing the efficiency of the marketing expense in particular for catalogs where we are seeing an increase of conversion rates. The conversion rates are increasing across channels. And all of this give us confidence to have sequential improvement starting from Q2..

Yeah, maybe a couple of additional comments for you on that, Alex, and maybe, again, the comment that I made. But, as we look at our initiatives and some of the things that we're starting to see action on, there are some short-term, some mid-term and some long-term initiatives.

On the short-term side, we think we have some [indiscernible] learnings over the last few quarters and what we've done from a marketing, from a promotion, both from the catalogs and from the digital, and we feel confident that we're going to be able to apply those. I think you'll start to see some of those impacts immediately in the second quarter.

Some other things that are more mid-term and long-term around product changes or around some of the other marketing as it relates to more branding marketing, those are going to be there more in the back-half or even into 2017.

So, we still expect to see the sequential [indiscernible] through 2016 as we start to see more of these initiatives become a more meaningful part of the total..

Great. That's helpful. Thank you.

And could you comment on how the Lands' End Outfitters business did in the quarter? And given your pipeline of customers there, what's your outlook for that business in the balance of the year?.

It's remained very strong. We're actually very pleased with both sides of our Outfitters, both the corporate side and the school side. And the pipeline remains strong and we have a positive outlook for that business going forward..

Great. That's very helpful. Thank you very much..

Thank you. Our next question comes from Steve Marotta with CLK & Associates. Your line is open..

Good morning, Federica and James.

Can you talk a little bit about inventory composition at this time? With the inventory up substantially over the sales decline, is a lot of that hoping for basics or is it a little bit more seasonal? Can you give us a little bit of confidence that the inventory can be right-sized without material margin pressure?.

Good morning, Steve. For the inventory, we are very proud of our achievement because we achieved in maintaining a slight inventory level by introducing also new line and streamline the merchandising plan to make sure that we have productive SKUs in the inventory.

And as we look forward, we will continue to build our lines and our new introduction with eliminating redundant product or colors that are not productive enough in our inventory. And I'll pass over to Jim to give you more nuances on the inventory..

Good morning, Steve. Maybe a couple of things on inventory. When I mentioned that it was flat year-over-year, quarter-over-quarter, if I look at last quarter, we sat at $28 million over last year. And then when we ended this quarter, we're $25 million over last year.

So, a few reasons I think why I feel pretty good about that $25 million number, number one is we obviously had an 8.7% decrease in sales. So, even with that decrease in sales, we're able to make a little bit of progress of inventory compared to last year.

But, maybe the larger point and a point that Federica touched on is there's a significant piece of that $25 million that relates to the Canvas launch. So, if you were to pull that out, you'd see even a greater improvement in the core classic inventory year-over-year. So, that's one piece.

Then as we go through and we break down the quality of inventory, if we look at what's markdown inventory versus full price, what's basic versus seasonal, and maybe, more importantly, as we look at our age inventories, what's age more than 12 months, that number year-over-year continues to come down.

So, we've made progress year-over-year in the core. We've been able to launch the Canvas, brought the total down and that age number continues to come down..

All right. That's helpful. Thank you.

And can you talk about how many fewer catalogs were sent in the first quarter versus last year [indiscernible] absolute number, but just as a percentage would be helpful? And then, what do you see as the progression going out? Is it going to be flattish in the second quarter and then increases in the back-half? Is it still going to be a small decline in the first quarter and then maybe flattish in the third quarter, higher in the fourth quarter? Can you give us just a little bit more color on number of catalogs sent versus last year and the changes going forward?.

I'll give you a little sense. Overall, the circulation was definitely down in the first quarter and you're looking at double-digit percentage. The second and the third quarter, we expect to see, as we said, sort of strategically building back that circulation and you can expect to see an increase in circulation in both those two quarters.

Fourth quarter will be more flattish. Haven't finalized all the numbers there, but it will be much closer to flat. Overall, for the last three quarters combined, you'll see an increase over the last three quarters..

And, Steve, what I want to add on that is the reason why there are certain changes in the number, is because what we did last year and we accomplished more on the Q4 is to increase, what I would say, the conversion rate. So that's our goal first of all. So, the more we can increase the productivity, the more we can increase the circulation.

That's our criteria..

I think overall we're taking what we've done over the last few quarter and as we've said applying some of those learnings. If you notice, this month, for instance, there was Friends and Family that was incremental, this month being May, incremental year-over-year.

So, as we look at what performed last year, that was the decision that we made to add that into the second quarter..

I'm showing no further questions. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day..