Good afternoon, and thank you for joining Lands' End for this fireside chat. Please 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 the company's SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and in the investor relations presentation we filed today 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'll now turn it over to Dana Telsey.
Thank you. Thank you very much, everyone, for joining us today. I'm thrilled to be here with the senior management team of Lands' End. Andrew McLean, the CEO, who has been with Lands' End since November of 2022. Bernie McCracken, the CFO, who's been there for over 10 years now and was most recently appointed as CFO. There's a lot to talk about with Lands' End because there's a lot of change going on. Now, it's an iconic, digitally developed solutions brand that has attributes that we all like: a customer who stays with the brand a long time, that has focused on expense reduction over the past few years, and now with the initiatives on margin enhancement in the go forward.
To tell us a little bit more about it, Andrew, tell us a little bit about consumer sentiment, what you're taking, and what we'll be talking about here next year to move Lands' End forward.
Sure. Thank you, Dana, and thanks, everyone, for coming. I know it's 3:00 P.M. on a Monday afternoon, and it's hard to keep it going, so we appreciate you all being here and supporting Lands' End. You know, let's talk about the consumer. I've been asked that a lot today, and so it's getting out there. We thought the consumer seemed relatively strong during our third quarter, and as far as we got through our fourth quarter with reporting, which was actually past Cyber Monday. Well, we felt good about it. We felt good about the direction they were going, but we made some changes. We put some changes in place. One of the things we did, interestingly enough, Lands' End, one of our big businesses, one of our solutions businesses, is outerwear.
Well, we took a decision earlier in the year to weatherproof our outerwear, and that's, like, it's a funny thing to say given it's outerwear, but we traditionally have... We're from the Upper Midwest. We've sold those heavy, fur-lined jackets, and it's, like, full of down. And we found that over the last few years, we've been giving up a lot of margin on them. It's been getting warmer, and so this year, we weatherproofed by having a lot of transitional outerwear that just carries the season in earlier and carries it out later and creates balance and gives us margin opportunities, and we were really able to lean into that and leverage that as we came through September and then into the holiday season, as far as Cyber Monday. Beyond that, the lawyer will tell me I can't say anything.
The truth of it is, though, for our business, it's like we're reframing our consumer relationship. We're actually putting the consumer at the center of our B2C relationship. We feel very strongly about that, and we're playing to our strengths, and obviously, one of the strengths we've had is outerwear. We have a top five market share in it. It's really important to us. We don't really brag. We've not been braggarts about it, but we think it's a business that you can build a solution around. It's full of solutions, and it's, like, from waterproofing to warmth to fabrications. Incredibly important, and then to add style and fashion to that, there's been a lot of momentum that we've seen in that product.
The business that carries us through the front half of the year, and arguably is even more important to us, is our swim business, where we have a leading market share. In fact, for customers over 40 years old, the only company that outsells us in the United States is Amazon. So we're the largest brand, and for that, that's a business that we've leaned into that leading market share and redefined our relationship. So where we had product that we've had in the line for 30 years, our Tugless one-piece swim solution, you know, we took it, and we thought, "Let's make a franchise out of it." So we actually built it, different leg holes, you know, it's like different colors, different textures, like, put pattern on it, and it's got gauze holes.
All of the pieces that the customer is looking for the solution for their life, and we've really built it around that. So what you're seeing is us being able to explode these concepts that have made Lands' End successful and build them, and in doing that, we've really engaged the consumer.
When you think about the channels of distribution, you have different businesses within some of those channels. U.S. e-commerce, what you're doing with your marketplace business, the Outfitters business. How do you see the opportunities for those channels?
Yeah. Thank you. We spun the flywheel a little differently. My predecessor built new channels and sort of, like, moved customers from the center of the organization into those. So if you were a LandsEnd.com shopper, you know, you might find it was more engaging to be on our website and the marketplace on Kohl's. And what we actually did is we looked at it and thought, "Let's spin it the other way. Let's try and build lifetime value in the customer file in the dot com business. We'll make that the principal catalog for us." And then we, really coming off the back of that, we built journeys, and the first part of that journey was about assortment. So, you know, if it's Macy's, it gets a particular assortment.
If it's Target, it gets a particular assortment. Same with Kohl's. But it's just a fraction of a look so that we entice the customer to take that step to come to our site. Now, we didn't just throw it up against the wall and hope that worked. We do generate tremendous amounts of data in our business, and we looked at the positioning that we wanted in each of those businesses and then really wanted to see what's the journey that we're creating and make sure that we're not just having a simple journey where it's like, I go online, I go to the site. It might be, I start off on Kohl's, and I end up in LandsEnd.com. I might process a return at one of our stores. I might shop from our catalog because I get onto that particular part of the mailing list.
There's a fairly sophisticated algorithm in there that we've begun to personalize now so that the website that you see when you log on to LandsEnd.com might be different for each of you. Now, it's only a couple of cuts at the moment, but we do believe that personalization, much as I talked about in product, is gonna be a big differentiator for us as we wrap around this customer relationship.
When you talk about that customer relationship, you've mentioned the customer, the resolver, the evolver. Tell us a little bit about more of that customer?
Sure, absolutely. I was curious, an engineer by trade. Funny how I ended up in this business, but it sort of fits. There's a lot of data that you can really get to grips with, and one of the things that struck me when I first joined the company was we just talked about demographics. And, you know, I see a lot of presentations on demographics, and we were saying we had a 57-year-old customer who'd been with us 18 years, and she was a coastal grandmother. And yeah, that's true, that's the mean, average customer. But, you know, there could be eight of them. It's just a bell curve. It's a solve. And even sort of like casually looking at the data and eyeballing it, we could see that there were...
If you took the mode, there were four or five different groups that were interesting, and that's where we started to lean in and look at our resolver and evolver. We have 7 million people in our customer file. It's a really strong customer file. The vast majority of them are resolvers. What's a resolver? A resolver is a customer who just has been with a brand a long time, and they shop for the same items, and they use them up, wear them out, and come back and buy it again. And it's a very loyal customer, and they engender so many positive qualities in the company. But we saw an evolver customer, and in particular, was coming out of our B2B business. We kept looking at what was going on with the schools business.
We have a big school uniform business, and we kept seeing mom coming across and shopping school uniform. And as we leaned in, we saw a huge opportunity for growth into a 35- to 45-year-old customer who knows our business, they know the quality we provide, and they just want a little more fashion, and they want to be led a little more on trend. So when we are designing our product, it's data-informed. It's not data-driven. We're taking all that data, we're putting it up against where we want to take our customer on the journey, making sure that the two of those components fit tightly together, and using that to leverage a whole new customer. And that opens us up to a market which we've put at over 100 million customers as potential for us.
Now, opening it up to both of you, tell us a little about the numbers. What does the financial algorithm look like? You've talked about margin enhancement being an opportunity for this year and going forward. Put the framework together.
So I'll start, and Andrew will finish 'cause he's good at that. But all the strategies that we've been working on this past year are enhancements to our balance sheet, making our balance sheet more efficient. When Andrew talks about marketplaces, what most people don't realize when you're buying on a Kohl's marketplace, you're still shipping from our Lands' End inventory in our warehouse. So by that fact, we're de-risking that inventory, and we're using it for its best purpose. Target has been better in swim and kids. Macy's has been better at driving some of our higher-priced items. Kohl's is down the middle. So this area of de-risking our balance sheet, Kohl's, it goes against a few of our initiatives. Our inventory was down 25% at the end of the third quarter. That's not by accident.
In the past, we tended to buy a little heavy, our inventory, so that we didn't disappoint any customers at the end, and it just really degraded margin at the end in trying to liquidate that inventory at the end. This year, as we had our 700 basis point improvement in the third quarter, 'cause we like to say that a lot, you know, it was driven. You know, if you looked at our numbers for the first six months, we had a couple hundred basis points improvement margin. That was strictly what most of the industry was seeing in transportation cost savings. What you see in that third quarter is our first initiative as we brought in lower inventories. Andrew has a new merchant team. This is a bit of their first inventory.
It'll be fully fledged out in the spring. But we had also lower AUCs as we've gone back and looked at our manufacturing base and consolidated for price savings. And then we've also had lower discounting. With new, more new product, with better product and less product, we're able to sell our product at higher margins, have higher-quality sales, and we basically got rid of the low-quality clearance sales that we'd previously experienced.
You know, one of the things you've got to do when you're our size of business, we're around $1.5 billion, you've got to focus. And if you don't focus, the distractions will just come and eat you alive. And trying to be in stores, in wholesale and like so many categories became progressively harder for us, and I felt it was, I felt it was holding us back from focusing on our best stats. And our best stats, you know, really, I look at swim, we've talked about, we've talked about outerwear, men's and women's product, really, really strong for us. But we're also trying to be in other categories like kids and home, and we're trying to address some wholesale markets with the clubs.
We took the decision to outsource some of the non-core so that we could concentrate our best assets, our people on our best assets, and make them so much better and amplify them, and in doing that, we moved to licenses. And the licenses are interesting because what we're actually doing is, you know, as we go out, it's not a license from scratch. We've just licensed our kids business. There's a substantial kids business that we already have, so that comes ready-made for the partner to step into, and we're going to have them consign their inventory into our distribution center, and there'll be a fee associated with that on top of the royalty. So the inventory comes down, there's balance sheet efficiency, we can focus resources where we need to, and the customer still gets the same breadth of choices.
I think these are some of the trade-offs that you make in a company like ours in order to drive return on invested cap and ultimately the stock price up.
And when you think about that balance sheet, talk about the enhancements that you've had this year, Bernie?
Yeah, so besides reducing inventory, as the company has recovered from the supply chain disruption that was severely impacting the whole industry, we've been able to reduce our debt significantly. In the last couple of weeks, we actually have gone out and gotten a new term loan, which will reduce our interest going forward. But most importantly for me and Andrew, is it provides more flexibility to run the business the way we'd like to run the business, and be able to start generating some of the strategies that we had in line, but were more restricted by our current term loan. So not an easy process for a retailer.
We were able to work with the markets and find a really nice deal that will allow us to run the business as we like, but with a high- with a headline that it will reduce interest going forward.
Yeah, a year on, I think we're in a much better shape with our balance sheet. The inventories are down, we cleaned up goodwill. You know, got that— got some of those legacy attributes off the balance sheet. We've got the new debt in there. You know, all of a sudden, you're looking at it from an ROIC standpoint, and the opportunity is to work on the invested cap side, just as much as it is to work on the whole P&L. And actually, to that point, I would add, we've traditionally always been Adjusted EBITDA. One of the disciplines we're instilling in the company, and more going forward, is really we're gonna be an EPS company.
We see a very strong path with the changes we've made and that we've just discussed over the last 20-odd minutes, you know, to start to drive EPS now, and I think that's a more holistic approach. It's better for the teams that work for us, it's better for the shareholders, and I think it's just gonna—i t's a better overall story for us to tell.
With some of these initiatives to drive EPS, you had mentioned licensing. Talk a little bit about the accretion that licensing may have and what category opportunities there could be there.
Do you want to do the accretion?
Yeah. Licensing is such a big benefit for us, especially in this high interest rate environment that we're dealing with, and it's part of our strategy to lower inventories. It has not been in effect yet. Our licenses that we have already signed up are for kids and for shoes. Those will take effect in early 2024. In early 2024, we'll start to have the balance sheet diminish, the inventory diminish off our balance sheet. We also licensed out the channel for clubs. Now that's just a place where we can go out and get new customers. All of these agreements have a minimum royalty, and as Andrew said previously, we already have a business that this will blend into. We will process those shipments with our regular shipments.
The licensee will reimburse us for the cost to do so. So where this does is then we'll just be getting royalties without any real gross margins, and we'll be able to drive better margins. We'll have lower interest costs because of this, and it will, it'll just drive higher gross profit along the line.
So the way I think about licenses, it's— I have a licensing background, and it's like, you know, you have channel licenses, so wholesale, very complicated calendar for us. We work on a digital retail calendar, right? Trying to work a wholesale calendar can be hard for us, so we licensed the clubs away. And I think that's, you know, that gives us some insight into what wholesale would look like in total. Non-core categories, we've got product, kids, and shoes. Bernie's already mentioned we can get our teeth into that. There are others out there. We're looking at parts of our home business, we're looking at fragrance, we're looking at beauty, we're looking at—y ou know, you can potentially, the sky's the limit. You can look at furniture.
And then the last part is really the international side of it, where it's easier for us to grow than pioneering into new markets, where a lot of expense comes ahead of the profits. It's easier for us to find a partner who's got that expertise, and we've got great brand IP. I would say this, in terms of overall licensing, between 1 license and 1,000 licenses, it's gonna be closer to one license. There's a sweet spot that you usually find between 10 and 20 licensed partners. That's a good place to be, and that creates a good balance, and gives you negotiating leverage as you get into it without it being too fragmented, or 1 license, or having too much power.
Is there any number you'd want to put on that Adjusted EBITDA margin in terms of what we could look for in the future?
Yeah, I—w e're not ready to start hitting numbers exactly. I think we're looking forward to the end of this year, and starting to provide our guidance for next year, and show how we're gonna trajectory-drive this business differently, and then we'll definitely start looking to put long-term targets out at that time.
I mean, historically, it was a business that could see its way to double-digit Adjusted EBITDA margins. Trying to get away from EBITDA, Adjusted EBITDA, but you know, it's within the realms of possibility, particularly as you book the licensing, right? It's like it just comes in as the license fee and just sort of falls right down through the P&L at a very high rate.
The other question that's been coming up, obviously, you touched on consumer sentiment, but what's happening in China, the Red Sea? What's happening with shipping and transportation?
Yeah, I mean, we were talking about that. We think it's not a problem for our U.S. routes, right? It's like, so that's the balance of our business. Our European business, we think it's gonna cost us about a week, maybe a little less, maybe a little more. I mean, what we've effectively said is our supply chain still runs longer than we would like it to, so we believe that there's enough, ultimately, there's enough fat in there that we can cut and then lean it down and actually not feel it, even if we have to continue shipping around Africa versus going through Suez. It's not material. We're not feeling it's material to us.
Actually, I don't want to use that as an excuse. It's like, for our teams, I don't want it to be about some external factor. It's like, we own the damn customer relationship, and we're gonna deliver on it.
The reach of Lands' End is very wide. The other part that we had talked about earlier, when we were all together, is the Outfitters business and uniforms, private schools. What do you see as that opportunity?
So we have a fantastic B2B business. We cover a range of businesses. About a third of the business is school uniforms, about a third of the business is very large customers, like an American Airlines, and a third is sort of like small and medium-sized businesses that typically get served through a bespoke website that we create for them. The business is fantastic because it's got recurring revenues. Contracts run long, and the margins on it tend to be a little higher than we would necessarily get out of our B2C business, and we love all of those facets. It's sticky business as well. If you think about the schools business, you've got the PTA making a decision on new uniforms.
It's like, you don't wanna be the head of the PTA who switches to another uniform provider, and it goes to hell in a handbasket, so there's a certain stickiness to it. Now, we have seen, as a couple of our competitors have stumbled over the last year, opportunity in there, and we're growing our market share in school uniform that currently stands at 12% of the private schools in the U.S., so that can grow. In terms of the big customers in the business, that's becoming more of a focus for us.
We think there's a lot that we can do there, both innovation in terms of the technology we bring to the experience, but also we put a new head of business in, we put a new head of sales in, and we put a new head of business development in, and we're, like, really starting to prime the pump on growing that business. And there's great connectivity and crossover between those, that B2B business and B2C. We see the customer migrate, and it's very, very powerful, and the whole business amplifies when we make that work.
If we had to say, as we're moving through 2024, and we're sitting here a year from today in 2025, what would each of you say would be, "Here's a hallmark of what made 2024 a success?
I'll start, and I'll go with gross margin, gross profit dollars. Our goal is to drive incremental gross profit dollars. We're gonna drive that through greater gross margin, lower AUCs, lower discounting. When we show that for another full year, I think that really has strong meaning for the company.
We leveraged the power of our customer and put them right back in the center, and gave them a great brand and gave them great product. That's that underpins everything that Bernie's saying.
Got it. Any questions?
How about the competitive landscape? I mean, obviously, a similar message in the retail sector, right? But just being very focused on Lands' End, does that impact your... How your comment there about where you're going, is the focus on brand itself?
Yeah, it's on the— the question is, is like, you know, given the competitive set, is the focus on the brand itself? And, yes, absolutely. With everything we've laid out in terms of how we think about, you know, our sourcing opportunity, for one thing, we just think there's tremendous running room within what we have right now, before we have to step out and really look for share. I think we've probably overburdened ourselves by going out and getting share that was perhaps lower margin than we wanted, and so by fixing, you know, internally, all those components and driving margin, that's like there's tremendous leverage to the bottom line. There will come a time when we'll be going after share, but we'll have built a fantastic brand up around that by then. It's a great question, thank you.
Any others? If not, I wanna thank Andrew and Bernie for joining us today to share the story of Lands' End, and we look forward to seeing, in 2025, sitting here, the accomplishments.
Thank you.
Thank you very much.
Thank you, Dana.