Good day, everyone, and welcome to the Lands' End Second Quarter Earnings Call. [Operator Instructions] Please note, this call will be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Bernie McCracken, Interim Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining the Lands' End earnings call for a discussion of our second quarter 2023 results. which we released this morning and can be found on our website, landsend.com. I'm Bernie McCracken, Interim Chief Financial Officer, and I'm pleased to join you today with Andrew McLean, our Chief Executive Officer. After the prepared remarks, we will conduct a question-and-answer session. Please also note that the information we're 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'll 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 website at landsend.com. With that, I'll turn the call over to Andrew.

Thank you, Bernie. Good morning, and thank you for joining us today. Before I dive into a review of our second quarter performance, I want to take a moment to highlight a few key callouts for the period. We successfully injected newness across our assortment. We gained market share in our solutions-based swim category. We strategically rightsized our inventory position, ending the quarter well below prior year levels and a strengthened quality and content position, paving the way for greater levels of newness to come. Leveraging our buyer file, we have identified and are prioritizing two key high-value cohorts. We began executing on our expanded focus on licensing and entered into a new licensing agreement for footwear as well as the license for the Costco channel we mentioned in our last call. We developed a model to deliver a swim capsule for wholesale partners. In outfitters, our school uniform business performed well, and we began our work for a new partnership with Santander. In our third-party marketplace business, we took a conscious decision to curtail short-term discounted demand at Kohl's in favor of long-term brand profits and positioning. And most important, we generated strong net cash from operations. Our results for the quarter reflect our considered approach to executing our strategic plan and delivering results that drive shareholder value. Our revenue of $323 million and adjusted EBITDA of $16 million are within our guidance range and demonstrate the concerted effort we're taking to increase cash flow, reduce inventory and lower our debt levels. Fundamental to these improvements was a focus on growing gross margin that saw us deliver a 220 basis point improvement from a combination of more valuable transactions and continued improvement in supply chain costs. Commercially, this quarter was characterized by our solutions-based customer focus that put a…

Thank you, Andrew. For the second quarter, total revenue performance was within our guidance range at $323 million, a decrease of 8% compared to last year. Our U.S. e-commerce business saw sales decrease 4% compared to the second quarter of 2022, driven by continued promotional effectiveness within swim and our adjacent product categories, offset by lower markdown inventory sales. Critically, as Andrew mentioned, we achieved strong bottom line performance and improved overall gross margin in U.S. e-commerce. Our Europe e-commerce business in the quarter was down 21% year-over-year, reflecting product assortment editing focused on key categories and continued macroeconomic challenges. It's important to note that we are beginning to see some stabilization in the market as we saw sequential improvement compared to the first quarter. Global e-commerce sales decreased 9% from 2022 or 6% when adjusting for Japan, which closed last year and accounted for $8 million of revenue in the second quarter last year. Sales from Land's End Outfitters were down 4% from the second quarter of 2023. Excluding the $5 million difference in year-over-year revenue from Delta, the Land's End Outfitters business was up 4%, primarily driven by high single-digit growth in our school uniform business. Revenue for our third-party business was down 11% compared to the prior year, primarily driven by weaker-than-expected online performance at Kohl's, partially offset by strong performance at Macy's, Target and Amazon. Women's Swim continued to be a winning category for us overall, and that included selling swim inventory through these important partners. Our newly launched Macy's Marketplace has been performing better than planned, driven by strong sales in women's knits and bottoms and we look forward to seeing more to come from this partnership. Gross margin in the second quarter was 43%, an approximately 220 basis point improvement from 2022. The margin…

Thank you, Bernie. We're confident that our actions to transform the business are positioning us to drive shareholder returns in the second half of the year. Our vacation solutions business is continuing to develop with the core swim offering seasonally replaced with our long-held authority in outerwear. Our packables line of outerwear, using our Wanderweight fabric, a new solution, has already begun performing ahead of expectations in both the U.S. and Europe. We're not content to rest there. Building on related a long-held authorities in knits, especially supima, and bottomed to outfit our customers for their vacation and allow them to own their destination. Before we open it up for Q&A, I'd like to reiterate a few key takeaways from the second quarter. First, we're focused on ensuring the customer is at the center of all decision-making, and we'll continue to lean into our competitive advantage as a solutions company with strong customer loyalty. Second, we plan to continue to take actions to drive margin expansion across our business and improve the overall efficiency of the enterprise. With a talented leadership team in place, we're poised to execute against these initiatives. And third, we believe we are well positioned from our enhanced cash flow to thoughtfully invest in our business to drive growth and value creation for our shareholders and other stakeholders. That concludes our prepared remarks. We look forward to your questions.

[Operator Instructions] Our first question comes from Dana Telsey with Telsey Group. Please go ahead.

Hi, good morning, everyone. Nice to see the improvement on the gross margin. As you unpack the quarter in the current macro environment, how much of what's happening on the sales side would you say is the macro and consumer health? How much are adjustments that you're making to the internal business? And beyond swim, what other category -- what did you see from other categories during the quarter? And with the exit rate of the quarter, how was the cadence for the quarter? And then I just have a quick follow-up.

Okay. I'm just writing them down. Hi Dana, how're you?

Hi. Good. How're you?

I'm good. I think we understand our customer really well. We really got to grips with the database. And I think that as we looked at it from our perspective, it's not just about the demographics, it's about really understanding the cohorts of the customer. And we put a lot of time and effort into looking at really the largest cohort which we serve, which is the resolver. It continues to be strong for us, but we're seeing a growing category, which is the evolver. And it's tempting to categorize them as younger or different, but really, they're are an adjacent category to us. They live in that sort of Gen X, boomer world, late millennials. And it's like we're able to tap them. And when you ask me about the sentiment of that consumer, we've got 7 million customers in an available market with adjacencies of 120 million to run after. So there's plenty of room for us to lean in and take share and take new customers. So the actions that you saw and the numbers that come out of the quarter are really actions we took to right the business. We didn't want to chase that last dollar of demand. We wanted to be known for our newness, we wanted to be paid for our newness, and we wanted to be disciplined in what we've got and actually get to the point where we ran out of items, versus sort of having an endless stream of product that you're just finding ways to sell progressively through the season. So there was an operating discipline that really dominated this conversation. In terms of other categories -- I'm happy to come back to the first part. But in terms of other categories for us, what's been just amazing to…

Well, just I'll throw in, Dana, that the cadence that you asked for on how the quarter progressed. Our business improved sequentially each month and got better each month and through July. And that has continued into August.

And I think just to pick up on that for you, Dana, is that we're seeing a natural transition going on as swim begins to ebb, we come towards the end of the season. And it's like what we've really seen is the outerwear categories start to pick up the pace, that pick up the ownership. And we've changed our assortment for the back half of the year. I talked about this in the last calls. But we're really -- we would traditionally focus on heavier outerwear pieces. And I think as we look at climate change, we look at the fact that we're probably going to have an El Nino winter, we think it's going to be about layering, we think it's going to be of a rainwear, and we really wanted to get behind those and we've implemented new fabrications. Our Wanderweight fabrication and our packables, they're absolutely fantastic products. I can't wait to show them to you. I wish we were on video right now. But I think they are really going to help us carry through Q3 and build it into a strong Q4.

Got it. Thank you. And then two other quick things. On the gross margin, drivers of sustainability to see the continued improvement. And then on the piece with Kohl's, what steps are being taken to improve that business? And how do you see that unfolding? Thank you.

Okay. I'll take Kohl's, and I'll let Bernie take gross margin. We like our relationship with Kohl's. It's another Wisconsin company. We've been together for a long time. We really introduced this new journey with them in our sort of digital ecosphere. And it's been very powerful and it's grown well. We find ourselves in the quarter faced with a dilemma, that as we continue to improve our margins and our pricing and our quality and our newness in our core business, Kohl's was still at a point where they really wanted to be focused on an older strategy which involved more discounts. And we made a decision that we wanted to put our business and our customers first, saying, let's put the customer at the center of everything. We like the product strategy that we have, we like the pricing architecture that we're building and we're going to do whatever it takes to protect that. With Kohl's, we see a long-term opportunity here with Kohl's. This isn't something that is going to be on the wane forever. They are at an inflection point, we are at an inflection point. We wish them really well, they are a great group of people, for the future. And we will find a way to continue our partnership, evolve it, and build it. Clearly, as we put Q3 and Q4 together, you can see it in the guidance, which we feel good about, we've got other routes to building the EBITDA number and to our profitability, to building shareholder value. And we'll continue to layer those in. Specifically to marketplace, we feel really good about where we are with the growth in Target, the growth in Amazon and the growth in Macy's. And I think it's only a matter of time before we really start to see that growth come back because I do think the strategy that Kohl's is going to go after will support and need the brands like Land's End.

And then I'll add on to Kohl's. One of the important features of our marketplace strategy is that it's a single-use inventory. We fulfill for all our marketplaces, so it allows us to diversify and sell through other distribution channels without having what a normal retailer's risk would be in single in inventory, just specifically for that distribution channel. So it really derisks our overall use of the inventory, and we can sell it through other distribution channels. And then Dana, going on to the gross margin. We really benefited in Q2 from our authority in our swim and its halo effect on the adjacent categories. Our reduction in markdown inventory, which was down 10% over last year and will continue to improve throughout the rest through the back half. And then also, we're continuing to benefit from supply chain costs. And each of these areas is going to support a gross margin expansion through the rest of the year. And then as Andrew discussed, our consolidation of our supply chain and our reorganization of our sourcing group. Those are benefits that will benefit us in 2024, that -- you would know our sourcing department is capitalized in our inventory, so those savings will more lend towards the 2024 benefit.

Thank you.

Thank you. We'll take our next question from Alex Fuhrman with Craig-Hallum Capital Group.

Hi, guys. Thanks for taking my question. Just a quick one for me. I mean, it seems very impressive that you're able to raise the EBITDA guidance for the year at the midpoint, even as demand is probably not as strong as you had hoped for. What's kind of the outlook for the next couple of years, just from a high level, in terms of margin recovery? Do you feel like there's more room to go based on the levers you have to pull at this current revenue level? Or do you really need some more significant revenue growth to start to see substantial margin expansion?

Alex. We're going to continue to grow our gross margin. This business and its future is contingent upon growing its gross margin, managing its inventory and delivering cash flow, and we see running room to do that. We see right now that we're we benefited at cost this year, particularly in Q1, from tailwinds in shipping costs. But really, we're really getting to grips with our manufacturing base, our sourcing base, our own sourcing organization. And we see opportunities to really leverage the AUC before we even get to the conversation around fashion. And once you start to layer the newness on top of that, I think you've got another upside opportunity that can continue us over the next three to five years of upward motion and trajectory on our gross margin. And that is going to come through in gross margin dollars, it's going to come through in increased operating profits for the company, and it will come through in a more flexible balance sheet for us as we see turn continue to increase as we move that inventory faster, and we'll really put our inventory to work versus our cash to work. So we do see this as an inflection point in how you probably think about your model and recognize that it's changed, but I think it's change that's necessary as we build that. And we see those increased AURs, the sales and the demand will come. We want to think about it this way. We're profit- and cash-led versus demand-led, whereas we used to be demand-led and then the profits would follow. Now I think that's a conscious decision on our part. It's a conscious decision to sort of wrap ourselves around the customer.

Great. That's really helpful. Thank you.

You're welcome.

Thank you. And at this time, we have no further questions in queue. This will conclude the Land's End second quarter earnings call. You may disconnect your line at this time, and have a wonderful day.