Good morning, and thank you for joining the Lands' End earnings call for a discussion of our second quarter fiscal 2020 results, which we released this morning and can be found on our website 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'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, quarterly reports on Form 10-Q, and Form 8-K dated June 2020.

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. Of note, in this respect, the COVID-19 pandemic continues to have a significant impact on our business and its duration can materially alter our outlook.

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 will turn the call over to Jerome Griffith.

Jerome Griffith - President & CEO

Thank you, Bernie. Good morning and thank you for joining our second quarter earnings conference call. I hope that you and your families remain safe and healthy. Before we begin, I want to extend my deepest gratitude to all of our team members for their hard work and contributions as we continue to navigate this highly complex and challenging environment.

Looking at our business, since I joined Land's End in the spring of 2017, we prioritize investments and resources that would enable us to capitalize on our eCommerce led organization. We focus on product assortment through our key item strategy, data analytics capabilities, our global eCommerce platform, including websites presentation and functionality, marketing strategies, and business processes and infrastructure. The work we have done across these areas enabled us to drive momentum in our global eCommerce business and delivers strong growth in the second quarter of 2020.

We remain well positioned to manage through the challenges presented by COVID-19 and to deliver long-term profitable growth when we emerge from this crisis. My confidence is due to several factors. First, our organization is a digitally driven business with over 96% of total revenue from eCommerce. Second, we offer key item basics as a great value with great service. Third, we have demonstrated the agility and discipline necessary to align our cost structure to the new normal. And lastly, we have a number of strategies in place to further expand our customer base, including the plan launch of Land's End on Kohls.com and in 150 Kohl's retail stores in late September, as well as brand collaborations, and the introduction of our third-party marketplace. I will speak to these initiatives in just a bit.

Looking back, our second quarter total revenue grew 4.6% and our global eCommerce business increased approximately 23% ahead of our expectation of high-single digit business unit growth. We more than tripled adjusted EBITDA to approximately $24 million through margin expansion, attributable to more discipline promotions and reduced expenses. Importantly, we also took steps to enhance our liquidity position. Jim will provide details on our financial results shortly.

Diving a little deeper into our global consumer eCommerce business, our strategy remains to emphasize comfort and value across our eCommerce sites, in our catalogs, and throughout our communication strategies. Marketing programs focused on our let's get comfy campaigns resonated with both existing and new customers. We use data analytics and search engine optimization program to capture new customers globally with high intent to purchase, resulting in 34% growth and new customer acquisition. At the same time, we leveraged data on existing customers to deliver more personalized messaging. The number of repeat purchases improved in the second quarter, as we continue to tailor our messaging to customer preferences, our re-buy rates reached nearly 60% for existing customers and nearly 30% for new. These are the highest in our company's history and we believe are among the best-in-class.

Our product offering provides the comfort and value proposition that perfectly matches the work from home lifestyle. Our swimwear was the top performing category in the quarter. We saw a strong response to the versatility in our assortment with board shorts and UV-protected swim tees, both particularly strong performers. Emphasis on a one closet strategy, enabling customers to mix and match key items also resonated. In addition to swim, sleepwear, especially men's and knits, both performed very well. Home also continues to be an area of strength as we extend our comfort messaging into the living space.

Turning to our Outfitters business, results were severely impacted by COVID-19, partially offset in growth in our direct-to-consumer eCommerce business. As we discussed last quarter, many of our national accounts operate in highly challenged travel-related industries, while our small-and mid-sized businesses were also negatively impacted by the pandemic. Our school uniform business declined double digits in the second quarter, while we expect continued pressure in Q3, due to delayed school openings. We are seeing trends improved sequentially. Jim will provide more details on this business in his remarks. While we continue to face macro-related headwinds in our Outfitters business, we're extremely pleased with our direct-to-consumer eCommerce business.

As we think about the second half of the year, we will continue to leverage our eCommerce capabilities and advance our growth strategies, while carefully managing inventory and cost to enhance liquidity and protect our business in the face of continued uncertainty regarding the pandemic. Longer term, we remain confident in our positioning within the new landscape, given our dynamic eCommerce foundation, limited bricks-and-mortar exposure, key items basic business that offers an attractive value proposition and being an operating structure. I will speak more on our longer term strategies following Jim's remarks.

With that I'll turn the call over to Jim.

James Gooch - EVP, COO, CFO & Treasurer

Thank you, Jerome and good morning. As Jerome mentioned, we're extremely pleased with the performance of our global eCommerce business in the second quarter. As expected, our Outfitter business remains challenging. While there continues to be uncertainty in the marketplace, we'll remain focused on executing our strategies as well as maintaining disciplined expense and inventory management and enhancing our liquidity. While the pandemic continued to impact our business, our strong results reflect its resiliency.

Total revenue increase 4.6% to 312.1 million compared to 298.3 million last year. In our US e-Commerce business, sales increased approximately 26% while sales in our international eCommerce business increased approximately 9% for the quarter. We saw strength in a number of categories in the second quarter, including swimwear knits and lounge wear as well as in our home categories. These categories delivered strong double digit growth in the quarter as we continued to emphasize comfort in our product assortment and marketing strategies with many consumers working from home. Partially offsetting the strong global eCommerce growth, sales in our Outfitter visits were down approximately 43% due to continued pressure as a result of COVID-19 within our large national accounts approximately half of our partners operating travel-related industries, including airline, hotel, and car rental businesses.

Our small-and mid-sized businesses are reopening, but in many cases with a reduced number of workers. Although, we've seen improved trends in recent weeks sales in our school uniform business was down double digits in the second quarter due to the uncertainty of schools reopening. We expect continued pressure on our Outfitter business at least through the remainder of the year, which I'll speak to you shortly.

Moving to our retail business which I remind you represents less than 4% of our total business. Our U.S. retail sales decrease approximately 51% in the second quarter to $4.3 million. As Jerome mentioned, we completed the phased reopening of our 26-stores by the beginning of August and we've also opened four new stores during the first half of the year. Since reopening, sales productivity levels at our stores are tracking at approximately 70% to last year.

Gross margin in the second quarter increased by approximately 10 basis points to 43.4%, gross margin benefited from her improved promotional strategies and continued use of analytics. This was partially offset by the liquidation of seasonal inventory as we've reopened our retail stores.

Selling and administrative expenses declined approximately $10.8 million due to strong controls across all of our expenses as well as actions previously announced in response to COVID-19. As a percentage of sales, SG&A improved by approximately 530 basis points to 35.7% compared to 41%, in the second quarter of last year. Income tax was an expense of $600,000 compared to a benefit of $3.2 million last year.

Net income for the quarter was $4.4 million or $0.13 per share, compared to a net loss of $3 million or $0.09 per share last year. In addition to the GAAP measures that were outlined above, adjusted EBITDA is an important profit-building measure that we use to manage our business internally. For the quarter adjusted EBITDA was $23.9 million that's $17.1 million increase according to 3.5 times last year's adjusted EBITDA, a $6.8 million.

Turning to the balance sheet, inventories at the end of the quarter were $441.5 million compared to $405.8 million a year ago. This increase was entirely driven by our Outfitter business and specifically to inventory to support the new American Airlines business going forward. In our global eCommerce business, strong sell-through of our spring and summer inventory enabled us to end the quarter with lower inventories in our healthy and lean position headed into the fall.

As for Jerome discuss, we're focused on maintaining our financial flexibility through this challenging environment. Regarding our term loan, which matures in next April, we'd like to provide an update on the progress we're making on refinancing.

As you know, the COVID-19 pandemic impacted the financial markets, and as a results, the timing of our refinancing. We've received non-binding terms sheets from multiple investors for transactions that would allow the Company to refinance the term loan and are in active negotiations regarding our refinance. Our debt structure is expected to be comprised of our ABL line, which has been upsized to $275 million, effective when we close the refinancing, and approximately $275 million of additional debt secured by our non-ABL assets.

We're targeting to conclude a transaction before the end of the third quarter. We recently completed the implementation of our Enterprise Order Management system, with the new systems in place. We expect to drive higher inventory productivity and improve our ability to fulfill orders placed on third party sites like Amazon and kohls.com. Our CapEx projection for the years expected to be approximately $25 million.

Turning to our outlook, with our business stabilizing in the second quarter, we feel comfortable providing sales guidance for the remainder of the year. For the third quarter, we expect net revenue to be down low-single-digits for flat versus prior year. This assumes a low-double-digit growth in our global eCommerce business, offset by decreased revenue in our Outfitter business and lower sales in our retail stores as compared to last year. While we're very pleased that our school uniform business has some signs of improvement and has delivered sequential improvement in August, we still expect to see headwinds in the third quarter as fewer students are returned to school in the fall.

Gross margin is expected to be fairly flat for the quarter. For the fourth quarter, we expect net revenue to decline in the low-single-digits versus prior year. We expect a low-double-digit growth in our global eCommerce business driven by continued progress we're making on our strategic priorities. However, as a reminder, we'll be lapping the largest portion approximately 40 million of our American Airlines launch during this period and continue to expect a slower recovery in the overall Outfitter business.

In addition, despite continued benefit from our more disciplined promotional and marketing strategies, we expect gross margin pressure due to shipping surcharges being implemented by carriers around the holiday period. Lastly, we expect that our continued focus on managing our expenses will allow us to maintain our SG&A rate, that historical percentages for the remainder of the year.

And with that, I'll turn the call back over the Jerome to discuss the progress on our core growth strategies.

Jerome Griffith - President & CEO

Thanks, Jim. While uncertainty in the environment remains, we believe we are strategically well positioned to manage through the crisis and maintain our strong competitive position within the evolving retail landscape as we continue to operate in this unprecedented period. As I stated earlier, the strategic initiatives we have developed and executed over the past few years, were driving momentum in our eCommerce business, and enabled us to deliver exceptional growth in the second quarter of 2020.

Our four core strategies, getting the product right being a digitally driven company, implementing a unit channel distribution strategy and enhancing our infrastructure and processes remain our guiding principles. We're very pleased with response to our product offering as we emphasize comfort across our categories. We attribute the strong customer response to two main factors. One, our key items strategy focus on owning the water, owning the weather, layers, layers, layers and we fit everybody. And two, the work we have done leveraging our data to gain insights in the consumer preferences and to inform assortments.

As we look ahead to the fall season, our let's get comfy messaging will remain a major theme as people continue to work from home. Our fall assortment more heavily reflects wear-now items including fleece and layers, sleepwear and home. We will also continue to optimize our assortment of women's knit tops which generate high re-buy rates. We plan to expand this offering with soft fabrications and comfortable silhouettes.

Within digital, we continue to expand and analyze our comprehensive database to gain greater insights into our customer preferences. These learnings will guide decisions on both product assortments, marketing programs and messaging in future seasons. Through the leveraging of data analytics and machine learning, we're improving our search engine optimization capabilities and driving customer outreach by identifying where to show up and when.

In terms of our marketing spend, we're maintaining a flexible approach to digital and catalog settings to take advantage of opportunities in the marketplace. Our promotional and markdown strategy continues to leverage AI to effectively promote products by determining optimal prices and driving conversions. These efforts enable us to better understand consumer behavior and drive higher gross margins despite aggressive competitor promotions. As we advance our test and learn strategy, we will continue to utilize our database to deepen our understanding of customer motivations.

Turning to our retail business, our brick-and-mortar stores have opened with a priority of health and safety. While some customers are still cautious to shop, we believe that our retail stores represent an important component of our customer service. That said, we first and foremost remain an eCommerce company and our retail expansion strategy remains fluid based on the environment and customer behavior going forward.

I would now like to spend a few moments discussing some of the growth opportunities we see beyond our own channels and brands. First, we remain very excited about our plan launch on Kohls.com and in Kohl's stores later this month, as we believe the Lands' End brand will resonate with Kohl's customer. Second, we remain pleased with the continued success of our Amazon business. With the completion of our ERP implementation, we now have the capability to fulfill orders from our own distribution center for Amazon and for Kohl's. Third, with regards to the lands and marketplace, we are still in the early stages. We now have seven third-party vendors selling product on our website, and we're in the process of on-boarding additional third-party sellers with the goal of reaching 25 before holiday peaks.

And lastly, turning to our collaborations, the launch of our swimmer collaboration with Reese Witherspoon's apparel brand, Draper James, surpassed our expectations. We are highly encouraged by these results, and we will continue to explore similar opportunities to drive awareness.

In summary, we recognize that the challenges we faced today will likely extend well into 2021 and we are taking a cautious approach to driving our business. That said, we are no less excited about our future. We will continue to build on a robust eCommerce foundation and offering a high quality value oriented product assortments with growth initiatives that expand our customer reach.

We remain confident that we are strongly positioned within the new retail landscape, and the strategies we have in place will enable us to deliver on our long-term growth outlook when we are past the pandemic. We look forward to updating you on our progress in future quarters.

Before I turn it over the Q&A, I want to take a moment to discuss our actions in response to the tragic events related to racial inequality. As we continue to strive to be a great place to shop and work, we're making diversity and inclusion a strategic priority, and to that end, we have had many conversations around these topics. We know we can do better, we want to do better and the opportunity exists for us to continue to learn, grow and be stronger together. We know the dialogue must continue and based on the discussions to-date we have outlined the diversity and inclusion strategy along with several initiatives to get us started and support our ongoing commitment.

With that, we'll open it up for questions.

Question & Answers

Operator

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

Alex Fuhrman - Craig-Hallum - Analyst

Congratulations on putting up such strong results, certainly with all of the disruption out there in your business, that's quite an accomplishment. I wanted to ask about a couple of things, but to start with you, it sounds like the reorder rates have been really strong over the past couple of months. Can you talk about what's been driving that? And do you think you can sustain that level of retention, as we get into the holiday season and into next year?

Jerome Griffith - President & CEO

Hey, Alex its Jerome. Good to hear from you. I think that what we're seeing is, just a very high demand rate and one of the things that we enjoy as Lands' End is, a customer that is extremely loyal. Our customer has been with us for, upwards of 17 years, and they end up coming back and re buying from us. We've seen high re-buy rates. I think it's also partially because it's the right product at the right time. We sell basics, we're more of a basics company or key item company, and that's what customers are looking for at this point in time. They're looking for comfort. We have the let's get comfy strategy going on right now, and it's really resonating with the customer demand that you see in the marketplace right now.

Alex Fuhrman - Craig-Hallum - Analyst

That's great. Thanks for that. And then, talk a little bit about the Outfitters business and obviously demand, has been weak this year. Can you talk about the health of the business otherwise? Have you continued to see good retention rates with your key customers? Are there perhaps opportunities, heading into next year to perhaps win new business given your robust product assortment?

Jerome Griffith - President & CEO

I think you have to look at it, break it down in three parts that we have. You've got school uniforms, which parents have been through the middle of the summer towards the end of the summer, a little bit reluctant to buy because they didn't really know what was going on with the school systems. But what you saw is, as Governor Cuomo said that New York is coming back, so - and New York is a very large state for us, you could see spikes in the business. And as we've gotten closer to schools opening and parents getting more clarity with what's happening with their school systems, you start to see sequential improvement week on week. And the good thing about that business is, again, it's a basics business, the product doesn't go down. I just think that as the back to business is going to be more drawn out than what it's been in the past where it's been just a short few weeks.

On the national accounts area, that's very travel related. You know, of course we have American and Delta, but we also have Avis rental car and Hilton hotels and Hampton hotels. So, we see that that's going to be continued pressure on that business for some time. And then in the small and midsized business category, retention rates are very good as it is in school uniforms are extremely high retention rates there. But that's going to depend, I think, a lot on what happens with small and medium sized businesses, going into the back part of this year and then into 2021. But I would say overall, while I think it's going to be a little bit longer recovery periods for the uniform business, we're pretty well set to take market share as companies want to come back into the full through our personalization opportunities.

Alex Fuhrman - Craig-Hallum - Analyst

Thanks, Jerome. And then, lastly, if I could just ask about the Kohl's launch, is that a big driver of the guidance in the third and the fourth quarter and just bigger picture. I mean, how big could something like that be? Do you think it could ultimately be in a lot more stores than that? Just anything you could help to decide that up would be great.

Jerome Griffith - President & CEO

Hi, Alex, it's Jerome. We haven't given a formal guidance on how large Kohl's opportunity will be. But keep in mind, it's just launching now and it's only going to be in 150 stores. So, we're certainly very excited about the full assortment will be available on Kohls.com. As far as going forward, we'll first get the one 50 stores open. I think we'll work out all the kinks and then we'll have conversations with Kohl's, and we will update you with any expansion opportunities.

Operator

Our next question comes from the line of Steve Marotta with C.L. King. Your line is open.

Steve Marotta - C.L. King - Analyst

Good morning, Jerome and Jim. You talk a little bit about third party, opportunities with other third party platforms? You mentioned that with a new ERP system that will allow you to with a little bit better ease, essentially drop-ship, but essentially fulfill out of your own e-c. Where can that business go? Are there additional platforms you can get on?

Jerome Griffith - President & CEO

One of the things I've always said, Steve, is that we're really a digitally native company. We started selling online in 1995. And one of the things that this company has really looked to do is to continue to advance the technological investments that we've been making over the last several years. Our ability to ship to other third parties, we're on their website, like a Kohl's or like an Amazon, is something that we're quite proud of. We're able to really service the customer. And the other thing that we're able to do now is bring on other third parties. We think this has a lot of legs. We did one as a test last holiday season. We're going to have about 25 new vendors of this holiday season. And I think as we see, what happens with consumer demand on our platform, we'll determine how big we think that can go, but we think it could be a significant part of growth for us in the future.

Steve Marotta - C.L. King - Analyst

That's helpful. Can you talk a little bit about potential product opportunities around the holiday season? If, let's say, dream a little dream, holiday comes in better than what you are currently expecting. Where do you think that growth would be driven from product-wise?

Jerome Griffith - President & CEO

We're concentrating right now on footwear accessories, home furnishings, and seasonal items for this for this back pat of the year.

Steve Marotta - C.L. King - Analyst

I understand. And lastly, you mentioned that search engine optimization is helping improve customer acquisition, customer retention. Can you delve a little bit into the current processes that you're utilizing there? And is there anything new technologically that might be coming on in the next six to 12 months that would enhance those capabilities as well?

Jerome Griffith - President & CEO

Well, we've been - first of all, we have a great team of people that we've brought onboard in the last couple of years that have been super helpful in making sure that we're content-rich and that we're employing the right strategies and going out for the right product categories. Secondly, we've been working with outside firms to use machine learning on how we're actually spending our dollars on marketing. And that seems to be working quite well for us. And if you combine that with the increase in demand as of late, what you're seeing is not just new customers coming onboard, but higher rebuy rates from those customers. And what you're also seeing is as we're transitioning into comfortable clothing, particularly knit wear, which we call layers, layers, layers, they have higher rebuy rates than some of our previous product categories that customers have known us for. And again, that brings on more customers and turns them into active customers.

Operator

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LANDS' END INC

Q2 2020

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