Bernie McCracken - Chief Accounting Officer Jerome Griffith - Chief Executive Officer Jim Gooch - Chief Financial and Chief Operating Officer.

Alex Fuhrman - Craig-Hallum Capital Steve Marotta - C.L. King & Associates.

Good day, ladies and gentlemen, and welcome to the Lands' End First Quarter Fiscal 2017 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 be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the call over to Bernie McCracken, Chief Accounting Officer. You may begin..

Good morning, and thank you for joining the Lands' End earnings call for our first quarter fiscal 2017 results, which we released this morning, and can be found on our Web site landsend.com. On the call today, you will hear from Jerome Griffith, our Chief Executive Officer; and Jim Gooch, our Chief Operating Officer and Chief Financial Officer.

After the company's prepared remarks, we will conduct a question-and-answer session with our covering analysts. 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 10K and quarterly reports on Form 10Q.

The forward-looking information that is provided by the company in 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 company's outlook to change. During this call, we will 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 measure can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relation section of our Web site at landsend.com.

With that, I will now turn the call over to Jerome Griffith..

Thank you, Bernie, and thank you everyone for joining us this morning. Since joining Lands' End, I have been fully engaged in evaluating our business and charting our course forward. I'm pleased to say that during the first quarter we made progress on several fronts, including our efforts on product, marketing, and customer engagement.

Our financial results were in line with our expectations, and importantly, we saw many positive signs from a number of key indicators in our business. We improved our buyer files, driving certain metrics to their best levels in several years.

We also saw higher sell-through as a result of product enhancements that we have made, particularly in swimwear, knitwear, and home. In addition, trends in our U.S. direct business improved despite continued volatility in traffic, and we are pleased to have posted positive comps in both our Sears locations and our standalone stores.

These are all signs that we are moving the business in the right direction, and are on the right course to driving improved overall operating results. Over the last two months, as part of my evaluation, I have taken an in-depth view into the business and assessed our competitive strength and weaknesses.

I deeply believe that we have a strong brand and our loyal customers have a great affinity for the products, value, and service we have historically delivered to them. The senior management team and I are in the process of putting together a longer term strategic plan for Lands' End that will capitalize on our brand strength.

As part of this, we are working to implement a comprehensive brand vision that is reflected consistently in every aspect of our business, our products, our e-commerce site, stores, catalogs, and our marketing messages. Now I want to provide some insights into our priorities.

We are putting product first as we capitalize on our position as an American heritage brand that represent strong family values and a great value proposition. As we work to enhance our assortment in a brand-appropriate way, we will inject innovation into our product assortment in a way that is relevant to our consumer.

We'd also plan to focus on our go-to-market strategy to improve our product development cycle and product flow, which includes working with our vendor base to shorten lead times and optimizing our inventory quality and freshness to deliver a more focused and relevant assortment throughout the year.

These activities will enable us to enhance the productivity of our inventory and put less focus on promotions to drive sales. As we make more timely and relevant buying decisions for our business, we should achieve gross margin expansion over the long-term.

Second, one of the most important initiatives will be to create a philosophy that's centered on using data to inform decisions across the organization.

We have established this practice in our catalog business over the last several years, and believe we can successfully apply these principles to various functions, including product development, merchandizing, e-commerce, marketing, and real estate planning.

We are in the early stages of this digital transformation for Lands' End, and we believe that this is a critical component of our overall business.

For example, we will focus on getting better at testing and reacting using Data Analytics to evaluate product performance and determine where we see the biggest opportunities based on selling trends, customer data, and Web site metrics.

To achieve this, we have begun to implement Data Analytic tools and processes within these businesses, and we expect these to be fully up and running some time during fiscal 2017. Third, our marketing strategies include aligning our investments with media that produces the best results.

We are starting to make progress in our social media efforts, and while these are still in the development phase, we are excited to continue to build momentum over time. More recently, our National Swimsuit Day Promotion in May was an innovative engagement driver. The promotion drove both existing and new customers to Lands' End.

We have also seen some of our more traditional marketing such as catalogs and non-branded search produce strong results leading to vast improvements in our lapsed and new customer buyer files, as well as growth in our active customer base.

Similar to the way we will take a more analytic approach to product we will also use data to inform our marketing decisions enabling us to make deeper and more personalized connections with our customers.

Fourth, we also plan to strengthen our omni-channel capabilities and promote a seamless shopping experience for our customers, whether they are visiting us online, from the mobile devices, enjoying our catalogs, or shopping in our stores.

As an e-commerce-lead business with over 80% of our revenue transacted online, we are starting from a position of strength, and we will look to better leverage our powerful online platform. We will continue to enhance this business by making additional technology upgrades to our platform during the year.

In addition, we are working to refine our store strategy to enhance the customer experience regardless of how and where they choose to shop. In today's omni-channel world, we believe stores are an integral part of building and maintaining brand awareness as they give us a bigger marketing platform.

Importantly, they put our retail destiny firmly in our own control. We are still in the evaluation phase and working to develop a concept that best addresses what our customers are looking for from our brand.

Our preliminary plan is to open a handful of our own stores in fiscal 2018, and we will keep you updated on the process as we work through our planning phase. Fifth, we are investing in systems and processes to increase efficiency across our organization.

We rolled out the first phase of our finance and merchandizing operation system on time and under budget during the quarter. Overall, this will help us to improve merchandize flow and increase efficiencies for the company.

We will continue to roll out additional phases of the system, including inventory management, merchandized planning and financial planning throughout the year. We believe that the implementation of these new systems, the development of processes as well as training will ultimately enable us to drive improved results across the company.

We expect the implementation phase to extend from the back half of 2017 into the first half of 2018. Finally, we are focused on making Lands' End an employer of choice with a great emphasis on our culture, including providing enhanced employee development programs to strengthen our team internally.

We also plan to grow the business from the local talent pool here in Wisconsin. To that end, we've made a strategic decision to reduce the number of employees that work in New York City.

We believe that an important part of our success is merging the design and merchandizing talent under one roof at our headquarters, which will make us a far more effective and efficient organization throughout the entire product cycle.

It will also help to build a stronger culture within the company with our teams working side by side to create the best product and overall experience for our consumers. We are excited to have the team together in Dodgeville as we work to further enhance the Lands' End business.

Overall, we're positioning ourselves to consistently deliver the relevant and high quality product at the great value that customers have come to expect from Lands' End as well as provide awarding winning service that is tailored to their needs.

We are pleased with the progress that we've made on a number of fronts in the first quarter and look forward to building our momentum throughout 2017 and beyond. With that, I'll turn it over to Jim to review our financial results for the quarter..

Thank you, Jerome, and good morning. Overall, we were pleased with the improved trends in the first quarter. Revenue for the quarter decreased 1.9% to 268.4 million compared to 273.4 million in the same period last year with churn improvement coming in both our direct and our retail segments. Sales in our direct segment decreased 1.7% to 228.3 million.

And retail segment sales decreased 2.8% to 40 million. Sales in our outfitter business declined 7.5%, primarily resulting from a timing shift of a large national account shipment. Without the timing shift in outfitter, sales in our direct segment would have been slightly positive for the quarter.

We continue to make strides in improving traffic and conversion which is attributable to a number of factors. First, we reallocated our marketing dollars to our most effective media channels, focusing on digital media and our catalog which helped drive traffic.

Second, we continue to see a positive impact from the refinements we made within our catalog over the last several quarters. And third, we maintained a disciplined strategic approach to our promotions utilizing a test, learn, and react approach. We are also very pleased with the increase in buyer file trends.

During the quarter, we realized growth among existing customers as well as double-digit increases both reactivation of lapsed buyers and new shoppers. We attribute this to a better product offering and enhanced responsive design website as well as continued optimization of our marketing spend based on utilizing data driven insights.

In terms of our product, we saw strong sales in swimwear, tops, outerwear, and home offset by softness mainly in footwear and kids. Looking at our outfitter business, the launch of a major program for one of our national customers, shifted out the first quarter into Q2.

This negative really impacted our first quarter results but will have a positive impact on second quarter. In addition, we continue to work closely with Delta and Zac Posen to finalize designs for Delta's new uniform line. The current timing of the launch is planned for the very end of fiscal 2017 or early '18.

And we will keep you updated on that timing as we progress through the year. Finally, turning to our retail business, we saw a significant improvement in our sales results as we outperformed weak traffic trends within malls in particularly at Sears locations.

Same-store sales were positive in both our Sears locations and our standalone stores with a combined increase of 2.1%. In addition, we operated 20 fewer Sears locations compared to last year, ending the quarter with 205 shops at Sears.

We attribute the significant improvement in the same store sales trend to an increase in customer response to both our promotional pricing and our enhanced product offering, particularly in swim and knit tops.

That said, we recognize the challenges that we continue to face in the overall retail environment and specifically within malls and our Sears locations, which has led to overall inconsistent sales trends week to week. Gross profit was 122.6 million compared to 129.7 million last year. Gross margin declined 170 basis points year-over-year to 45.7%.

The decline includes a 20 basis point negative impact from foreign exchange. The improvement in our trend was driven by our initiatives to enhance our promotional cadence ensuring that we were being thoughtful and consistent around our strategy.

While we expect to remain fairly promotional in the near term, we will continue to analyze our promotional exposure in order to balance sales and gross margin and maximize long-term profitability.

The direct segment gross profit decreased 5% and gross margin in the segment decreased 170 basis point to 47.1%, mainly due to increased marked downs from promotions and liquidating slow moving products, particularly in kids and footwear.

In the retail segment, gross profit decreased 8% and gross margin decreased 210 basis points to 37.4%, mainly driven by a negative sales mix from increased promotional sales. Selling and administrative expense decreased 6% to 121.3 million.

The 7.7 million decline in selling and administrative expenses was primarily the result of lower expenses and continuing to drive improved scale in our variable expenses.

Depreciation increased by 2.4 million to 6.5 million, largely due to the first phase of our ERP go live and the accelerated amortization of website-related items which will not be utilized going forward. During the quarter, several activities were moved from our New York office to our corporate headquarters in Wisconsin.

As a result, other operating expenses increased by 1.5 million primarily due to severance related to the downsizing of our New York offices. Operating loss was 6.7 million compared to operating loss of 3.5 million in the first quarter of 2016.

Income tax benefit for the quarter was 4.3 million as compared to income tax benefit of 3.4 million in the same period last year. This resulted in the net loss for the quarter of 7.8 million or a loss of $0.24 per share compared to a net loss of 5.8 million or a loss of $0.18 per share last year.

In addition to the GAAP measures that we outlined above, adjusted EBITDA is an important profitability measure that use to manage our business internally. For the quarter, adjusted EBITDA was 1.3 million and that compares to adjusted EBITDA of 0.6 million in the first quarter of 2016. Now, let's take a look at the balance sheet.

Total cash at the end of the quarter was 139.8 million compared to 169.1 million last year. Inventory at the end of the quarter was 309.9 million, which was flat to last year. We are very comfortable with the current quality and content of our inventory.

We continue working to reduce our level of inventory investment and further optimize our assortments to improve our overall inventory productivity. Net long-term debt decreased to 489.1 million compared to 492.9 million at this time last year with a reduction due to the quarterly principal payments.

Cash use in operations in the first quarter was 60.3 million as compared to operating cash use of 50.1 million last year. As we previously discussed, we expect CapEx to be approximately 40 to 50 million in 2017. The majority of which will be associated with ERP and other information technology investments.

With that, we are going to open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Alex Fuhrman of Craig-Hallum Capital. Your line is now open..

Great. Thank you for taking my question. Would love to dig into some of those metrics you gave around the buyer file, if I heard correctly, it sounds like reactivated customers as well as new customers were both up double-digit.

Can you give us a sense of what that means in terms of the total buyer file here versus last year? And with the new and reactivated customer file growing so much, just curious where some of the offsetting weakness might have been, was it average spend per customer, would be helpful to try to think about that. Thanks..

Well, good morning. Thanks for that question. If you go through those numbers and you see that active, which is the biggest bucket was relatively flat. We did see growth in the new and we did see growth in the lapsed. So, those are encouraging for us, because even though they are smaller buckets, those are our biggest decreases in prior years.

So, we are really starting to see of our marketing specifically around some of the things we are doing in catalog and some of the things we are doing in digital that are very impactful to both of those buckets.

Some of the offsets, yes, we did see some declines in average market basket that offset those customer trends, but as we said on prior calls, I think for the long-term health, we are pointing to that buyer file as just a requirement to start to see stabilization and growth, and this is clearly the best quarter that we've seen over the last several years..

That's helpful, thanks.

And then, it sounds like you guys have a potentially a nice catalyst in the back half of the year with the Delta launch on the uniform side of the business, can you give us just a general sense of so far this year how the uniforms business has been trending relative to the rest of the direct business?.

Well, we gave some of that with the negative 7.5 in the first quarter, and the biggest driver of that is this shift in the national account. So, if you think of the uniform business in the first quarter, the largest part of that uniform business is going to be our national account business.

As we shift into the back half of Q2 and definitely into Q3, it shifts over to be more of a school business. And then in the fourth quarter, especially with the Delta launch, it will be a larger percentage to be the national account business. I think overall the national account business is strong.

Absent of that shift as we get into these next two quarters, you'll start to see how the school business - the early indications are, it appears fairly solid, but still a early read with very small numbers. We'll have certainly a better sense of that on our next call as we get into the back half of Q2..

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

Thank you. Our next question comes from Steve Marotta of C.L. King & Associates. Your line is now open..

Good morning, Jerome and James..

Good morning..

As a reference to the test and react model, do you have enough experience with that model to positively affect fall sell-throughs, or is this a tactic that's going to begin to be utilized in fall?.

Actually, we are beginning to utilize it already. The guys have started to look at different types of testing that we can do online. We've also started to look trying to move product a little bit faster than what we have been doing in the past so that we can get better reads on product.

I think you'll see particularly the product testing starting now ramping up a bit in fall, but really much more for '18 because quite honestly our buys for holiday are already done. So what's done is done. And I can't jump in faster with newer product right now.

But we are planning on doing that for spring '18 and a lot more back into the back half of '18..

You know, Steve, and I think we have talked about this in prior quarters before Jerome arrived and the test and learn was more about promotions and catalog and promotional pricing.

And now what we are starting to put into place is more product and that's at the beginning stages which Jerome referenced, I think that's what we are very excited about as we go into fall..

Great. That's very helpful. And as it relates to the inventory composition, James, you mentioned that you're comfortable with it.

Can you peel that onion back one more layer? Can you talk about I guess aged goods as a percent of the total versus last year, or in season versus out of season? If you can give a metric or two to offer on the security you feel with the current inventory composition?.

Yes. If you look at overall, it's obviously fairly flat. And I would say across all those metric that you said, we feel very good with the exception of a couple of buckets. We are still sitting on a little bit of canvas inventory.

We are sitting on a little bit of Leo with some of the timing on national accounts, but all that inventory is protected account by account.

And then in a couple of categories that I highlighted that we are a little bit soft specifically footwear and in kids, we have a little bit of excess inventory, we are moving through some of that, and that's why I highlighted specifically those two categories as negatively impacting us from a gross margin rate.

Outside of those four buckets, I would say everything else we feel very good about year-over-year across all those metrics..

Okay, that's very helpful. Thank you..

Thank you. And that is all the time we have for questions. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day..