Ladies and gentlemen, thank you for standing by. And welcome to the Lands' End Fourth Quarter 2019 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference may be recorded.

[Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Bernie McCracken, Chief Accounting Officer. Thank you. Please go ahead, sir..

Good morning, and thank you for joining the Lands' End earnings call for a discussion of our fourth quarter and full year fiscal 2019 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 President; 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. 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 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 measures can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relations section of our Web site at landsend.com.

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

Thank you, Bernie, and good morning. Before we begin, I wanted to note that we are closely monitoring the coronavirus situation and our thoughts are with all of those affected. We are focused on ensuring the safety of our team members and customers.

As we navigate through this challenging environment, we will remain focused on executing on our long-term strategies. Jim will speak a bit more on the supply chain situation and consumer demand as we see it today. With that, I will turn it to our operations.

We were very pleased to have delivered strong revenue and adjusted EBITDA growth for the quarter and the year. But before I review our results, I want to speak to you about our exciting announcement yesterday regarding our new partnership with Kohl’s.

We view this new relationship as our next step towards expanding our distribution, building brand awareness and growing our market share. As we have said in the past, our objective has been to make Lands' End product available to our customers wherever, whenever and however they want to shop.

We've enhanced the shopping experience through improvements to the functionality, speed and search capabilities of our Web site. We are expanding our retail presence, opening new stores offering a convenient customer experience, including kiosks, which should access to our full assortment online.

We will also provide an assortment of key items on Amazon, which continues to attract new customers to the brand.

Through our Outfitters business, we've outfitted the two largest airlines in the world; American, which I’m excited to say launched their uniform program earlier this month and Delta, as well as the largest bank in the United States Chase, and this fall we will have another channel through which Lands' End customers can shop our brand by expanding our reach on Kohls.com and in 150 select Kohl's stores.

Kohl's and Lands' End share a lot in common. We both have Midwestern roots and values with our headquarters just two hours apart in Wisconsin. Many of our customers are Kohl's customers.

And more importantly, given that the Kohl’s customer shares many of the same demographic features of the Lands' End customer, we have an opportunity to expose our products to many more potential customers who do not yet know our brand or haven't purchased Lands' End in a long time.

We view this as the logical next step in our distribution strategy and Kohl’s represents a meaningful opportunity to drive brand awareness and incremental sales. Turning to our financial results, we capped off a great year with a strong fourth quarter performance led by our eCommerce business.

We are extremely pleased to have delivered revenue growth of 9.4% and adjusted EBITDA growth of nearly 30%. In addition, we continue to deliver against our core strategic growth strategies across product, digital, unit channel and infrastructure. I will speak to each of these following Jim’s review of our financial performance and our outlook..

Thank you, Jerome, and good morning. We’re very pleased with the strong results we delivered in the fourth quarter and throughout 2019, as we continue to make progress across our strategic initiatives. For the fourth quarter, revenue increased 9.4% to 549.5 million compared to 502.3 million last year.

The significant revenue increase was mainly the result of the American Airlines launch, combined with continued strong eCommerce growth of 7.2%. This was partially offset by a revenue decline in Sears operations of 21.5 million directly related to operating 49 fewer Lands' End shops at Sears as compared to last year.

Our strong eCommerce performance was driven by customers continuing to respond favorably to our key item strategy as well as improved productivity on our marketing initiatives. For the quarter, we saw growth in both our U.S. eCommerce with a 7.4% increase and our international business which was up 6.1%.

We had an incredible sleepwear season which delivered strong double-digit growth as we built our assortment around our key volume drivers. We also saw strength across our expanded outerwear assortment as well as sweaters and knit tops. Our buyer file grew in the mid-single digits with increases across existing, lapsed and new customers.

While we continue to employ strategies to drive all segments of our file, we have amplified initiatives to drive repeat purchases from new customers. This is driving increases in our share of wallet as well as building brand loyalty.

As we expected, due to the significant number of Sears store closures, our overall retail sales decreased 44% from 36.8 million to 20.6 million. However, our U.S. company-operated store sales increased 55% driven by new store openings and our account store sales increase of 1.3%.

During the fourth quarter, we opened up three stores and one additional store in February bringing us to a total of 26 U.S. locations. And as of the end of the fourth quarter, we had completely exited all of our Lands' End shops at Sears’ locations. Within outfitters, our sales increased 58%.

As we’ve previously discussed, we launched American Airlines with shipments during the fourth quarter totaling approximately $40 million. We expect to ship an additional 5 million to 7 million in the first quarter and that will bring total shipments for the launch to 45 million to 47 million.

Gross margin in the fourth quarter was up approximately 90 basis points to 39.8%. The gross margin increase was primarily driven by our improved promotional strategies and continued use of analytics to optimize markdowns. Selling and administrative expenses were 30.8% of revenue compared to 31.3% in the fourth quarter of last year.

The decrease in the SG&A rate is largely due to our continued disciplined approach to expense management driving improved scale. Interest expense decreased to 5.8 million as compared to 7.7 million, largely due to the voluntary prepayment of $100 million of our term loan that took place in the first quarter of 2019.

Income tax was an expense of 8.8 million compared to 8.1 million last year. Net income for the quarter was 25.5 million or $0.78 per diluted share compared to net income of 16.2 million or $0.50 per diluted share last year.

In addition to the GAAP measures that were outlined above, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was 49.3 million. That’s approximately a 30% increase versus last year and that was at the high end of our guidance of 46 million to 50 million.

Turning to the balance sheet. Total cash at the end of the quarter was 77.1 million compared to 193.4 million last year. The cash balance reduction was primarily due to the voluntary prepayment of our term loan and to a lesser extent an increase in inventory.

Looking at inventories, at the end of the quarter were at 375.7 million compared to 321.9 million a year ago. This increase was related to approximately 30 million in American Airlines inventory that we hold in continued support of the ongoing business.

We also strategically increased the level of core items in women's basics to meet the growing demand. While we did have some excess seasonal inventory at the end of the quarter, the overall health of our inventory remains very strong. Turning to IT initiatives.

We will deliver additional phases of our enterprise order management system in early 2020 which we expect will help increase our inventory productivity and improve our ability to offer and fulfill orders through additional channels. This should result in opportunities for both top line growth and working capital improvement.

I now want to take a few minutes to discuss the coronavirus and our experience in the current environment. First and foremost, our thoughts and prayers are certainly with everyone who’s been impacted.

In terms of our business, we don't anticipate a near-term inventory or supply chain impact from the virus as our spring and summer shipments were in route prior to the outbreak and the vast majority of fall holiday product is still projected to arrive on time.

We’ll continue to monitor the supply chain as the situation in our countries of manufacturing remains fluid. We decided to close our 26 U.S. stores for the next several weeks as part of the societal response to the current situation, so expect to see some near-term revenue impact associated with these stores.

However, as a reminder, retail makes up approximately 5% of our overall business as over 90% of our business is transacted online and we’re still offering our customers our full eCommerce and customer service experience.

That said, we've seen a negative impact on customer demand over the past week as we expect our customers’ attention is understandably elsewhere. If the economy experiences a drop in consumer confidence as part of the health crises and stock market fluctuations, our online traffic and sales could continue to be impacted.

Given all the uncertainty and the rapid changes in the U.S. to business and personal behaviors in response to the coronavirus, we're choosing not to issue 2020 guidance at this time. We’re hopeful that we’ll be in a position to provide guidance on our next earnings call as we operate through the next few months and the future becomes a bit clear.

Lastly, we have begun the process of refinancing our term loan due in April of 2021 and we’ll provide more details once the transaction is complete. And with that, I will turn the call over to Jerome to discuss the progress on some of our growth strategies..

Thanks, Jim. I’d like to take a minute to review our forward vision as first outlined in our five-year plan presented at the end of 2017. You have all heard me speak of our financial goals to grow to between $1.8 billion and $2 billion in revenue with EBITDA margins in the high single digits.

Additionally, you have heard our key strategies to achieve these goals, get the product right, be a digitally-driven company, execute a unit channel distribution strategy and improve our infrastructure and process. We have made significant strides in the last couple of years riding this ship.

In a difficult retail environment with several headwinds, we are pleased with the progress we have made and we feel we were on the right track to reach our stated goals. And here's why? As you know, concerning product, our main product objectives remain own the water; own the weather; layers, layers, layers; and we fit everybody.

This focus is working very well for us. We have greatly improved our product offering both quantitatively and qualitatively. First, we continue to improve our use of data in defining our product offering. As a current example, data showed us that our swimwear customers want product year round and that she wants key items that she can mix and match.

We use this data to write the size of the product offering by season over the year. Second, innovation and newness are important to our customer. We use our data to determine how much innovation and newness our customer wants to see in our line.

As an example, we will be introducing chlorine resistant swimwear for spring which we believe will be well received by our customers as we continue to enhance their lives with functional product. And we have reintroduced certain types of prints and patterns to which she responds favorably.

Within digital, we continue to accelerate the use of our comprehensive data across the organization. Our insights and former product decisions drive our promotional strategies and refine our customer acquisition and retention initiatives.

We’re fine-tuning our approach with an increased focus on driving repeat purchases across our customer base while continuing to target new customers.

As we acquire new customers, we are expanding the application of our predictive analytics efforts to drive their next purchase effectively ramping up our efforts to convert them to highly valued repeat customers.

Essentially, we look for similar shopping behavior patterns between new customers and existing customers in order to create comprehensive and integrated digital campaigns.

While this application is being applied to new customers, it is still in early stages and we are beginning to see higher repurchase rates from these new customers and greater dollars spent.

We also continue to benefit from our strategies to stay relevant in online searches while also leveraging media, including Facebook, and connected TV smart devices to highlight our brand messaging.

Within our promotional and markdown strategy, we are taking a more disciplined approach to promotions as evidenced by approximately 90 basis point expansion in gross margin this quarter, despite a highly promotional environment.

We continued to use AI to test and learn and are gaining further traction in improving the effectiveness and profitability of our promotions and markdowns. Our successful price clarity program has contributed to higher conversion.

We will continue to test and learn in order to drive profitable growth as we better understand our customers’ purchasing motivations. I've already touched on our unit channel distribution strategy at the beginning of this call. Our goal is to serve our customer no matter how and where they shop us.

We remain committed to enhancing the shopping experience across our business, whether it's in our digital or physical channels. Our mobile experience remains an important priority, as we know this is our customers preferred way to shop.

We are upgrading the mobile experience particularly with navigation, checkout and payment processes, all with increased speed. Our retail stores serve as an important extension of our eCommerce business where we can improve convenience and personalized service, as well as further expand our brand awareness.

We know our customer appreciates the store experience as she wants to feel and touch product as well as receive personalized service. In addition, our stores are customer service centers that are part of our customers’ interaction with the brand.

Building on a successful in-store kiosk launch, we are adding kiosks as well as ways for customers to connect with service specialists while in stores. We continue to take a disciplined approach to expanding our footprint with plans to open 10 to 15 locations in 2020.

We will continue to target convenient, open air locations that are adjacent to other stores our customer shops frequently. We also look for ways to expand our reach across other marketplaces and through strategic relationships and collaborations.

Amazon has been a great distribution channel where we have seen approximately 50% of our total purchases driven by new customers and more than one quarter from lapsed customers. We are also looking to selectively enter into licensing agreements in categories where there are benefits to be gained with partners.

We are currently exploring footwear and men suits along with other opportunities. And as we shared last quarter, we are introducing a swimwear collaboration with Reese Witherspoon's apparel brand Draper James. This collection will be available on eCommerce on March 20 and in retail locations on April 1.

We believe this is a meaningful branding opportunity and we’ll continue to explore other collaborations as we look to drive incremental growth and brand awareness. While these new initiatives are in early stages, they provide exciting opportunities to leverage our strong brand heritage and production capabilities to build long-term growth.

We look forward to updating you on our progress across these opportunities. Finally, on our business process, we are committed to driving profitable top line growth across our business and leveraging our SG&A expense to accelerate our EBITDA growth.

We continue to see opportunities to reduce costs through better leveraging of our IT investments, particularly with our order management system which we are currently in the process of implementing. We're also looking to other areas to improve costs and drive efficiencies in our process.

We are selectively using avatars in place of live models for some of our Web site photos. This will allow us to update the Web site faster, expand the number of available photos and drive cost efficiencies. We're utilizing 3D digital modeling in our sourcing process which increases speed to market and lowers production costs.

We will also benefit from the opening of our own buying office in Hong Kong as we no longer leverage Sears resources. We expect this transition to drive cost improvements next year as the new team become fully operational by the end of April. And with that, we will open it up to questions..

[Operator Instructions]. Our first question comes from Alex Fuhrman with Craig-Hallum Capital Group. Your line is now open..

Great. Thank you everyone for taking my question. Congratulations on a really strong year and I certainly hope that you and all of your employees are doing well in these challenging times..

Thank you, Alex..

A couple of questions I wanted to ask about. One is certainly the Kohl’s partnership seems like a very interesting announcement.

Can you give us a little bit more color on how those shops will operate, and can you maybe compare and contrast what those will look and feel like compared to the shops that you’ve operated over the years with Sears?.

Sure, absolutely. I think the biggest opportunity right now with Kohl’s is going to be having our full line of product up on Kohls.com, so that’s going to get a lot of eyeballs. And in-store, there are going to be very small stores focused on key items and focused on seasonal products. There are a couple of our strengths.

Alex, you already know that on the water is a direction for us and a big product strategy and on the weather. So you’ll see swimwear collections in there, seasonally appropriate; you’ll see outerwear collections in there, seasonally appropriate; and a small selection of our best key items.

If you contrast that with Sears, there’s a couple of differences. One is, there was never a big crossover with the Sears customer and the Lands’ End customer. When you looked at the demographics, they weren’t similar but there is with Kohl’s. We see that a lot of Kohl’s shoppers have the exact same demographics as what we do.

So that’s a big plus for us. And I think the other thing is we’re going to be sized appropriately. Our Sears shop-in-shops were absolutely huge which cost a big inventory investment. In this case, we’ll be much more focused with just best sellers from our lines, both annually and seasonally..

Okay, that’s really helpful. Thanks. And then just thinking about the recent weakness, not surprising to hear that things have slowed down. Lately, I’m sure that’s the case for every retailer out there.

Can you talk to us a little bit just about the balance sheet, if things stayed at these levels for months instead of weeks, what steps might you be able to take to shore up the balance sheet that you have any debt payment coming up that we should be aware of, just curious how you’re thinking about your finances if these couple weeks of weaknesses turn into perhaps a longer period?.

Yes, Alex, I think we’re out there running scenarios just like everyone else. I think for us on the positive side, we’re coming up, like you said, a great year and a great quarter. So we’re not trying to dig ourselves out of any prior holes. In fact, we started off the year very strong.

Our first four to five weeks were every bit as strong as what you saw in the fourth quarter. So we had great business trends going in. We didn’t have any underlying issues going in. And so we have seen some softness I think just like everyone else over these last couple of weeks with some consumer demand.

And we’re looking at right now the biggest thing for us is looking at inventory flow and depending on how long this goes if we reach out into the next season and adjust future receipts.

A couple of positives we had, not only do we have such a small percentage of our business that’s done out in brick and mortar, but the fact that all of our inventory sits basically in one location in the DC, so we don’t have the challenges that I think everybody else is going to have where they have that aged inventory, that markdown inventory sitting out in all their stores and they’re going to have to react to that.

I think that makes our – what we need to do in our flexibility much easier than most of the market..

Great. That’s really helpful. Thank you very much and again, all the best to you and your employees..

Thank you, Alex..

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..