Second-quarter net revenue at Lands’ End declined 8.6 percent to $351.2 million on a net loss of $2.2 million, as the company attributed the slip to supply chain delays and lower in-stock inventory.
While the tepid results beat the company’s initial expectations, as well as consensus estimates from Wall Street analysts, Lands’ End stock fell more than 12 percent in Thursday morning trading.
The retailer is banking on third-party channels to drive sales growth, with net revenue through online marketplaces—including Kohl’s, Amazon and most recent partner Target—increasing 42.9 percent to approximately $27 million.
In a Nutshell: The lifestyle apparel brand appears to be buoyed by consumers’ return to office, school and travel. Top-selling men’s categories include linen and no-iron dress shirts, no-iron chinos and Supima cotton polos. For women, top categories include no-iron woven shirts and performance tops, while the company is also encouraged by the sales of its wear-to-work and fall outerwear collections.
In an earnings call, Lands’ End CEO Jerome Griffith touted the company’s third-party partnerships, indicating that the brand will be in 500 Kohl’s stores by this fall. While its business on Amazon “continues to grow and drive new customers to the brand,” Lands’ End debuted products on Target’s e-commerce site for the first time.
Lands’ End’s Outfitters business is driving early back-to-school demand for uniforms, Griffith said.
“During the quarter, we witnessed parents purchasing uniforms earlier than usual, most likely to avoid the supply chain-related delays they experienced last year,” Griffith said. “As a result, we saw a shift in school uniform demand from the third quarter into the second quarter. As supply chain delays normalize, we believe that our customers will return to historical buying patterns.”
Griffith also said Lands’ End remains in the process of its multi-year warehouse management system implementation, which also encompasses transportation management. The company is deploying solutions from Manhattan Associates across its U.S. distribution centers to improve supply chain execution.
Jim Gooch, Lands’ End’s president and chief financial officer, said the company has closed its Japan operations, citing unprofitability.
Net inventories totaled $569.2 million as of July 29, 2022, up 22.6 percent from the $464.3 million as of July 30, 2021. The increase is primarily driven by early receipts in in-transit shipments for the upcoming fall and holiday selling seasons.
“We expect our inventory to remain elevated for the next couple of quarters as we’ve expanded our seasonal product calendars to account for the longer supply chain lead times,” Gooch said.
Gross margin decreased approximately 530 basis points (5.3 percentage points) to 41 percent, compared to 46.3 percent in second quarter of fiscal 2021. The gross margin decline was attributable to an incremental $11.7 million of transportation costs as a result of global supply chain challenges, in addition to increased promotional activity and margin mix from growth in its third-party business.
Lands’ End downgraded its earnings guidance for the full year, and now expects $16.5 million to $23.5 million in net income, compared to the prior expectations of $20 million to $29 million. Diluted earnings per share is forecasted to be between 49 cents and 70 cents.
Adjusted EBITDA is now projected to range between $95 million and $105 million, instead of the prior-year’s $100 million to $112 million.
Net revenue is anticipated to be between $1.6 billion and $1.64 billion, which would range from a 2.4 percent decline to flat compared to last year. Capital expenditures are expected to be roughly $37 million.
This full-year outlook assumes approximately $35 million of incremental transportation expenses due to the global supply chain challenges and gross margin improvement in the second half of the year, as higher supply chain costs are lapped.
For the third quarter, Lands’ End expects net revenue to be between $375 million and $390 million, which would represent flat growth to 3.8 percent growth.
Net income would be between $1 million and $4 million, while diluted earnings per share are expected between 3 cents and 12 cents. Adjusted EBITDA is anticipated to range between $20 million and $24 million.
Cash and cash equivalents were $23.5 million as of July 29, 2022, compared to $39.2 million as of July 30, 2021.
At the end of the second quarter, the lifestyle brand had $135 million of borrowings outstanding and $126.2 million of availability under its credit facility. The company also had $250.9 million of debt outstanding.
Net Sales: Second-quarter net revenue decreased 8.6 percent to $351.2 million compared to $384.1 million in the 2021 quarter. U.S. same store sales decreased approximately 1 percent from the year-ago period.
Global e-commerce net revenue decreased 16 percent for the second quarter. Net revenue in U.S. e-commerce fell 14.4 percent and international e-commerce declined 23.9 percent, both driven by delayed receipts of key products due to supply chain constraints and continued macroeconomic challenges.
Outfitters segment net revenue increased 7.7 percent, attributed to stronger demand within school uniform households and national accounts.
Net revenue through third-party channels increased 42.9 percent, primarily attributed to growth in the Kohl’s online marketplace, and growth in other new and existing online marketplaces.
Net Earnings: Net loss was $2.2 million in the second quarter, or 7 cents loss per diluted share. This is a decline from the $16.2 million in net income or $0.48 earnings per diluted share in the year-ago period.
Adjusted EBITDA decreased to $15.8 million compared to $41.4 million in the second quarter of fiscal 2021.
CEO’s Take: Griffith addressed the company’s inventory strategies ahead of the fall and winter seasons, noting that basics represented 38 percent of Lands’ End’s business.
“On the promotional side, we didn’t really want to carry anything over from spring/summer into fall/holiday on anything that’s going to be more fashion-oriented,” Griffith said. “We have no problem just holding basics…as long as we can maintain a decent stock level on those products, we don’t mind if things slow down. We just carry them to the next quarter. When it comes to pack and hold, there are a few things from spring and summer that we’re going to carry over until next year. There is no real sense [in] marking them down. But when you go into the back part of June and July, we wanted to take advantage of the promotional activity out there.”