July 22, 1996
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we
are transmitting herewith the attached Form 8-K dated May 23, 1996.
Sincerely,
KATHY GIES
Lands' End, Inc.
One Lands' End Lane
Dodgeville, WI. 53595
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 23, 1996
LANDS' END, INC.
(exact name of registrant as specified in its charter)
DELAWARE 1-9769 36-2512786
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification Number)
of incorporation)
Lands' End Lane, Dodgeville, Wisconsin 53595
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 608-935-9341
including area code
INFORMATION INCLUDED IN THIS REPORT
Item 5. Other Events.
Attached as exhibit (28)3 to this report is a summary
transcript from a Lands' End meeting with members of the financial
community in New York, New York, on Thursday, May 23, 1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, its duly authorized officer and
chief financial officer.
LANDS' END, INC.
Date July 22, 1996 By: /s/ BRADLEY K. JOHNSON
-------------------
Bradley K. Johnson
Senior Vice President,
Chief Financial Officer &
Chief Administrative Officer
Attached is a summary transcript from a meeting with members
of the financial community in New York, New York, on Thursday,
May 23, 1996.
LANDS' END, INC.
9TH ANNUAL UPDATE FOR
PROFESSIONAL INVESTORS
New York, New York
May 23, 1996
(edited transcript)
MIKE SMITH
I want to welcome all of you to our annual financial analyst
meeting. I'm glad we've had a chance to visit. I'm also glad
you've had the opportunity to meet Brad Johnson who has joined
Lands' End about a week ago as our new chief administrative officer
and also as chief financial officer. Chip Orum, who is our
executive vice president and chief operating officer is also here
today, and we'll start with Chip's presentation.
CHIP ORUM
Thanks, Mike. I'd like to review the results for fiscal 1996,
ended February 2, 1996, and for the first quarter of this year,
ended May 3, 1996. Copies of the slides are in your packets.
*****************************************************************
Chart #1 Net Sales (in millions)
FY-1992 -- $683 1QFY-1996 -- $207
FY-1993 -- $734 1QFY-1997 -- $212
FY-1994 -- $870
FY-1995 -- $992
FY-1996 -- $1,032
Sales totaled $1.032 billion in fiscal 1996. During the year
we saw good growth in our international, new and specialty
businesses, which were the primary contributors to the $40 million
sales increase. As you know we have two foreign-based businesses:
the U.K. and Japan, and fiscal 1996 was the first full year of
operations in Japan. These two businesses still represent less
than 10 percent of our sales. While we saw growth in the Kids,
Coming Home, Territory Ahead, and Corporate Sales businesses in
addition to international, the core monthly and prospector catalogs
were below the prior year. These core books represent about two-
thirds of our business, and their decline had a significant impact
on our overall 4 percent growth.
For the first quarter of this year, sales were up 2 percent to
$212 million. The sales growth came from the specialty and new
businesses. The core catalogs were relatively flat on fewer pages
mailed. Liquidation sales were down principally due to the timing
of the fall/winter clearance broadside, which caused more sales to
fall into January, whereas in the prior year, more sales fell into
the first quarter.
*******************************************************
Chart #2 Catalogs Mailed (in millions)
FY-1992 -- 123
FY-1993 -- 136
FY-1994 -- 155
FY-1995 -- 191
FY-1996 -- 200
In fiscal 1996 we mailed about 200 million catalogs, which was
up about 5 percent. The increases were principally in the
specialty and new businesses and also in international.
*******************************************************
Chart #3 Customers -- 36-month Buyer/Housefile Names
(in millions)
FY-1992 -- 6.3/14.1
FY-1993 -- 6.8/15.6
FY-1994 -- 7.4/18.1
FY-1995 -- 8.2/20.4
FY-1996 -- 9.0/23.1
At the end of last year we had over 23 million names on our
mailing list. Of these, we had about 9 million customers who made
at least one purchase during the past 3 years. However, due to the
softness in our core books during fiscal 1996, these buyers at
year-end were, on average, not as strong in terms of recency of
last purchase.
Please note that the fiscal 1996 numbers have recently been
updated and may differ from what you have seen previously.
*******************************************************
Chart #4 Gross Profit Margin
FY-1992 -- 42.2% 1QFY-1996 -- 43.8%
FY-1993 -- 41.8% 1QFY-1997 -- 44.7%
FY-1994 -- 40.9%
FY-1995 -- 42.4%
FY-1996 -- 43.0%
Gross profit margin in fiscal 1996 was 43.0 percent, a 60
basis point improvement from the prior year. We continued to enjoy
margin increases due to merchandise sourcing improvements as well
as a greater proportion of our sales coming from higher margin
businesses. Those sourcing changes include a higher percentage of
direct imports as well as an increase in the amount produced in the
Caribbean area by our U.S.-based vendors under their 807 programs.
For the first quarter of this year, margin improved,
principally due to lower levels of liquidation.
*******************************************************
Chart #5 SG&A Ratio
FY-1992 -- 35.0% 1QFY-1996 -- 42.8%
FY-1993 -- 34.2% 1QFY-1997 -- 41.1%
FY-1994 -- 32.8%
FY-1995 -- 36.0%
FY-1996 -- 38.0%
Last year, our selling, general and administrative expense
ratio increased to 38.0 percent of sales. Higher paper prices and
postal rates and lower sales productivity in U.S. catalogs
accounted for this increase. The higher paper prices and postal
rates were about a $20 million increase for us, which was about 2
percent of sales.
For the first quarter of this year, SG&A decreased 2 percent
in dollars and was 41 percent of sales. The 170 basis point
improvement from the prior year in the SG&A ratio came from an
increase in sales per page mailed, especially in the Kids and
Beyond Buttondowns catalogs, and also from relatively lower
fulfillment wages and shipping expense.
*******************************************************
Chart #6 Pretax return on sales
FY-1992 -- 7.0% 1QFY-1996 -- 1.1%
FY-1993 -- 7.4% 1QFY-1997 -- 3.5%
FY-1994 -- 8.0%
FY-1995 -- 6.0%
FY-1996 -- 4.9%
Pretax return on sales declined to 4.9 percent for fiscal 1996
due to the higher operating costs.
For the quarter, pretax margin was 3.5 percent, reflecting the
improvements in catalog and fulfillment expense ratios.
*******************************************************
Chart #7 Net earnings per share
FY-1992 -- $0.77 1QFY-1996 -- $0.04
FY-1993 -- $0.92 1QFY-1997 -- $0.13
FY-1994 -- $1.18
FY-1995 -- $1.03
FY-1996 -- $0.89
In fiscal 1996, earnings per share were $0.89 compared with
$1.03 in the prior year. In both fiscal years, we had charges
related to the sale of MontBell. Without giving effect to the
charges, per share earnings were $0.92 in fiscal 1996 compared with
$1.09 in the prior year.
Earnings per share for the first quarter were $0.13 versus
$0.04 cents last year. The earnings improvement was a result of
both improved gross profit and lower expenses.
************************************************************
Chart#8 Year-end Inventory/First Time Fulfillment
(dollars in millions)
FY-1992 -- $123/87%
FY-1993 -- $106/87%
FY-1994 -- $150/85%
FY-1995 -- $169/88%
FY-1996 -- $165/90%
I'm very pleased with what we've done over the last year and
a half to keep our inventories in check while improving our first-
time fulfillment rate. Year-end inventory was $165 million, down
slightly from the prior year. I thought this was a pretty good
accomplishment for our inventory people in light of soft business.
One of our customer service goals is to ship 90 percent of the
items ordered at the time the order is placed. Last year we
shipped about 90 percent. So far this year, we are off to a good
start in this regard.
Inventory at the end of the first quarter of this year was
down about $28 million from a year ago. We intended to bring
inventories down during the spring as we felt we had more than we
needed last year.
Inventory and fulfillment will continue to receive attention
from our continued effort to improve worldwide inventory
management.
*******************************************************
Chart #9 Return on average Shareholders' Investment
FY-1992 -- 23%
FY-1993 -- 25%
FY-1994 -- 28%
FY-1995 -- 20%
FY-1996 -- 16%
Return on equity declined to 16 percent in fiscal 1996 due to
the lower level of profits. We continue to operate the business
without any long-term debt and to use excess cash to repurchase
shares.
In summary, in fiscal 1996, the paper and postal increases and
a lackluster retail apparel environment hindered us in our efforts
to improve our financial results. I believe that the Lands' End
franchise is quite strong and the opportunities to improve and grow
the business are there.
Now I'll turn it back to Mike. We'll have plenty of time
later in the meeting for your questions.
MIKE SMITH
Thanks, Chip. Last year when I met with you, I outlined
Lands' End's philosophies and principles of doing business. I
spoke about our focus on the customer, on the product and on ideas
and innovation. These are the fundamental areas that will
determine our success in the future.
One of the things I'd like to do this year is to define for
you what I see as my responsibilities, and by the way, I believe
these are shared with other members of top management. I believe
I have two primary responsibilities. The first is to produce
results, both financial and service measures. The specific targets
that we set each year may vary, but the measures we use remain
fairly constant - pretax return on sales, net sales, returns, and
initial product fulfillment are some of the key measures we track.
I see my second primary responsibility as preserving those
Lands' End principles and philosophies that I talked about a year
ago -- preserving those things that make Lands' End different and
special -- preserving what is often today called the company
culture. I want to ensure that the Lands' End of 5 years from now,
or 10 or 20 years from now, is the same special and unique company
you see today. Not that we'll be doing things the same way or that
we'll look the same, but that we will still have those qualities
that separate us from others and make Lands' End a great place to
shop and a fun place to work.
There are two reasons that these are important for you to
know. The first is that I define my role very broadly, and my
attention will be focused on whatever aspects of the business will
contribute most to those two responsibilities. It could be
product, marketing, planning -- whatever areas need the most
attention.
The second reason it's important for you to know is that I
won't be spending much time on things that are outside of those
responsibilities.
What I'd like to do now is to briefly review the past year.
We've had a lot going on and have made a fair amount of
progress. Last year at this time I identified product quality,
which includes the issue of fit, as one of our top priorities.
This year, I'm happy to note that we've made good progress in this
area. We've evaluated all of our key core products and are in the
midst of upgrading and introducing them. Our customer has
responded favorably to the upgrades introduced so far. In addition
to the core product upgrades, we've evaluated our methods of
ensuring quality, and made changes to our standards and procedures.
And, maybe most significantly, through our actions we've sent a
clear message throughout the company that we will not compromise
product quality for any reason. We've made costly, but necessary
decisions that reinforce this message.
These initiatives have made a strong contribution to customer
satisfaction as our product returns are near a five year low.
We've also seen changes in other areas.
We've been developing and are in the process of introducing
some higher-end products -- products that offer the customer
something special, at prices higher than our core product, but
generally much lower than they can find elsewhere.
We're focusing on new product and new colors -- ways to make
the product more exciting and interesting.
We've developed and refined our reporting, so we have
reporting of all key performance measures by business unit and at
lower levels, such as category and line.
We've established an area focused specifically on customer
acquisition, including the merchandising, creative and marketing
disciplines within the group. This gives undivided attention to
this critical area. This group will also be an entry point for new
employees. They will learn about Lands' End, our philosophies and
our approach to business, before they get thrown into the day-to-
day pressures of their respective specialties.
We had our best year ever in overall inventory management, at
a time when the business is more complicated than ever. Our first-
time fulfillment was at its second highest level ever, and on
average, we had fewer weeks of inventory on hand. And we're
currently running ahead of last year's pace in first-time fill.
And finally, one of our key goals at the beginning of the year
was to make the necessary changes to have an impact on the critical
fourth quarter. That's where the majority of our profits come from
in good years. In fact, last year, almost 85 percent of our net
income came in the fourth quarter. Everyone worked very hard to
make the catalog as strong as possible to make that fourth quarter
successful and they deserve credit for the results.
So there are many things to feel good about. But there were
some real disappointments as well, and areas where we didn't make
as much progress as we would have liked. The most significant of
these was our disappointing financial results. We hope to improve
on those results this year.
There were some other areas where we didn't perform as well as
we would have liked. One was that we pulled back a little too far
in terms of SKU reduction in fall '95, which somewhat hurt our
sales. Another was that we devoted too much space to unproven
specialty and new products that produced low profits and created
some inventory problems. We lost some momentum in terms of the
customer file. We didn't have that big idea or ideas to make up
for lost ground due to lower performance and less prospecting. So
we've made some good progress overall, but we clearly have plenty
of work ahead of us.
This year, I see a continuation of the efforts that were
initiated last year. We'll continue to focus on improving product,
on improving our pretax profit level and on better positioning
ourselves for the future. I outlined five general areas of
emphasis for the year in the annual report which you can refer to
for more detail.
So what about the future?
One of the questions I often get is, "Where do we see our
growth coming from in the future?" I'd like to spend just a few
moments outlining, in general terms, my thoughts on future
opportunities and growth.
As we've said, our first priority is on improving our pretax
return on sales, and our second priority is sales growth. I
believe we should try to grow as fast as we can manage and as we
can profitably grow. I believe we must grow to remain vital and to
attract and retain good talent. Last year we pulled back on growth
to focus on profitability and to focus on improving the way we
manage the business. Since then, we've begun to make progress on
performance and on managing the business.
So where are the growth opportunities for Lands' End? I see
growth opportunities in our current business. We have several
businesses that I would categorize as new or young businesses.
Even businesses like our children's business has not been around
for all that long. We've also got Coming Home, Corporate Sales,
the UK, Japan, The Territory Ahead, and Willis and Geiger. These
all have strong growth potential. Even our core catalog, which is
certainly more mature than the other businesses, has room to grow.
In terms of new product areas, we use some simple criteria to
evaluate growth opportunities or new businesses.
These new areas must fit into the definition of who we are.
We are direct merchants of unique and distinctive, high quality
products. We need to have an edge, or reason for being, in any
market, business or product area that we choose to enter. If we
enter a new market, our customers can shop with confidence that
we've done our homework and have produced a product that they can
feel good about and that is not easily found elsewhere: i.e.
products that are proprietary.
These businesses also need to have some longevity to them. We
will not pursue fads or short term trends no matter how attractive
they look today.
And we must be able to develop and execute at our historic
standards of doing business, without negatively affecting our
current businesses. Last year, we had too much on our plate. So
we lightened our load and improved our capabilities.
We are now ready to begin to pursue some new areas. Two areas
we're very excited about are the launch of our German business
within the next 12 months and the introduction of our Men's Big and
Tall line. We feel that both of these have great potential and
that we bring unique positions to both markets.
I hope this gives you a flavor for what's happening at Lands'
End today. We've made progress in many areas, but realize that
there remains a great deal of work to be done. Most important, our
priorities are aligned where they should be -- with the customer
and with our people. Successful focus on these two areas should
lead Lands' End to higher profits, higher sales and a stronger
franchise for the future.
As I wrote in the annual report, this is all very simple in
concept. It is the execution that makes the difference --
execution with passion, creativity and commitment. These qualities
bring the catalog to life for our customer and make Lands' End more
than just a place to shop.
Maybe just as important, it creates an atmosphere of
excitement, of innovation and inspiration at Lands' End.
Thanks for your attention. We'll be happy to answer any
questions you might have.
*****************************************************************
Question and answer section:
Q: Can you talk a little bit about the German launch, what kind
of research you've done on the market, your cost commitment and are
you going to be hedging the currency?
A: SMITH: As for the German market, it's a very strong catalog
market. We think that it's somewhere between the strength of Japan
and the UK. Germany is a very well developed catalog country and
has two of the largest catalog companies in the world in Otto
Versand and Quelle. Customers are accustomed to shopping by mail
there, and they have a very strong infrastructure, which is
obviously important to us. Another thing that fits well is that
quality is very important to the people in Germany, so we feel very
good about that market. The apparel market is about $70 billion,
so it's a very large market as well.
ORUM: Our hedging strategy is typically employed when we are
sourcing merchandise outside of the local country. To the extent
that it's meaningful, we'd hedge those purchases so we can
stabilize our merchandise costs and therefore allow us to offer a
consistent price in the market. At the outset, we would not be
doing any significant hedging for Germany. We do hedge in the U.K.
and Japan, as those businesses are larger. Also, in some other
countries from which we source goods, we actually have some natural
hedge. For example, some of our products sold in the U.S., are
produced in Germany.
Regarding research, about a year and a half ago, we did a test
mailing into several European countries, and Germany and France
were two of those countries.
SMITH: Our investment will not be all that significant because
we're trying to leverage the business, particularly the U.K. We're
selecting products right out of our U.S. line. We're mailing
essentially a very similar catalog, and it will be in the German
language. We'll also leverage the U.K. business by shipping
product from our U.K. warehouse. So it will not be a significant
investment. Obviously, prospecting will be a big portion of that,
especially to start out with.
Q: Can you give us some sense of how the other international areas
are performing right now and what growth you expect in the future?
A: SMITH: We're in the U.K. and Japan, and both of those are
doing very well, particularly in Japan. We also have what we call
the pan-International business, which is mailed out of Dodgeville
and which we've had for years. That business has been hurt
somewhat by the strength of the dollar recently, so we have seen
some impact there. Our approach is to take it one country at a
time, to be able to handle the service aspects of the business.
When we went into Japan, we had some real problems in the customer
service area, and our fulfillment level was extremely low for
Lands' End. There were times when our initial fulfillment was down
in the sixty percent area, and that's absolutely unacceptable for
any Lands' End business. We're going to try to be a little bit
smarter with Germany. We've learned a few things, and we're very
optimistic about the international business in total and are going
to be continuing with our strategy.
Q: What do you feel is an acceptable level of operating profit
performance?
A: SMITH: Our operating margin has actually gone up and down
over the past eight or ten years. We had a low point in Fiscal
1991 where we were at 4.1 percent pretax, and last year we were hit
with the paper and postage increases and the slow market. I believe
there's a lot of upside potential, and it really comes down to how
well we execute. If we get the right product, present it properly,
strongly position it within the catalog--if we can get these other
things working, I see a lot of upside in terms of profitability.
It's going to come down to how well we execute.
At our peak, we were over 11 percent pretax profit, and that
would obviously be very difficult to do today. I'd love to be able
to say that we can do it, but it would take a lot of things going
right to hit those levels. It's hard to say how high is high, but
we do think that we have some upside potential from where we're at
today.
Q: What about your pricing this year versus last year?
A: SMITH: Our pricing has remained fairly constant over the past
eight years, with very low single digit increases. Most of the
margin improvement has come from sourcing and mix in terms of the
businesses, and I don't see that changing very much. One thing I
do see is the introduction of higher end products. In the recent
past, we've had more products in a fairly narrow range. The
natural instinct of product managers is if a product sells great at
$20, we need more products at $20; if a product at $100 doesn't
sell, we're going to get rid of it. We started to gravitate to
lower price, higher volume price points, which I think hurt
everything. What we're trying to do now is expand and offer some
terrific high-end product. We'll have a terrific English rib,
four-ply cashmere sweater that's going to retail for about $400.
So in terms of the average price points in the book, you will see
that going up. But on a product for product basis, it's still
going to be essentially flat, with maybe slight increases.
Q: What can you do or could you have done differently to counter
increases in paper and postage expenses?
A: SMITH: I don't think we should get too hung up on short-term
cost changes. We can't affect them, and we should not completely
change the way we manage the business because of them. We have a
threshold that we believe we should mail down to in terms of
acquiring a customer, and regardless of how much paper is going to
be in the future, that customer is not going to be worth more
because of that so we shouldn't be mailing deeper. One thing we
may do differently is put more emphasis on new acquisition ideas.
It's not just mailing deeper, but coming up with a new way to
acquire customers. We probably could have been a little more
innovative, put a little bit more behind it in terms of coming up
with those ideas. It was tough because we had the profitability
pressure in terms of turning the big book around. But that was
clearly an area where we would have been a lot better off had we
had one or two breakthrough ideas on acquisition. As I said, we
are spending time on acquisition right now.
Q: Could you elaborate a little more on customer acquisition
ideas?
A: SMITH: There are lot of things that we can do. In the past
what we've done primarily is mail the prospector book to prospect
groups. There are things we can do in terms of targeting the
message to different prospect groups that we used to do back in the
'80s, but we got away from that a little bit. For instance, if
someone comes to us through a catalog request or a pass-a-long, is
there a different message we can send them? Is there a different
stream of pieces that we could send them? Is it a letter, a series
of pieces, a combination of cards, letters, catalogs? Those are
some things we're thinking about in terms of acquisition. We've
got this group together and they have a pretty free rein on the
ideas they can come up with.
Q: How are the Willis & Geiger and The Territory Ahead businesses
doing?
A: SMITH: We're very pleased with both of these new businesses.
Willis & Geiger is still so young that basically all we have is
prospecting results, and some information on retention of new
customers. It's very early, but so far we are pleased with it.
The Territory Ahead has been around for a few years and we're also
pretty pleased with that book. It's great; it's exciting; it's
written very well, and it has some exciting products. Both of
these businesses are still very small, and I don't spend a lot of
my time nor does Chip spend much time on them. But as they grow
they could become significant.
What we're going to be doing in the future is evaluating all
of our growth opportunities. Our approach isn't to do x number of
startups, x number of acquisitions, x number of new line
introductions. Rather, it's putting them all together and
prioritizing them. Where we see the biggest opportunity is where
we'll spend our time. Recently, it's been men's big and tall, it's
been on quality, it's been on Germany. That's the approach that we
would take, we wouldn't focus specifically on one area.
Q: How are your new service initiatives being accepted--are they
helping sales?
A: SMITH: Our customers give us very positive, consistent
ratings in the customer service area. In terms of 2-day delivery,
we did get some feedback from customers saying they don't need it
in two days, and could they pay less to get it in a longer period
of time. We've talked about that a little bit and may be able to
come up with something. As for the Shoehorn idea, that was an idea
that came out of the shoe area, a good example of ideas bubbling up
from people throughout the company. Shoes are a tough sell through
the mail. People generally want to try them on, so the question
was how can you build confidence so customers will try it. The
initial idea was "Wouldn't it be great if the UPS guy could pull up
and wait at your door while you tried on the shoes." A great idea,
but we couldn't just do that yet. So we came up with the shoehorn
idea. We tried it and had a great response. It did increase
returns a little bit, which we expected, but it also increased
demand quite a bit. So we're going to be expanding service,
offering it for some of the women's shoes. It's an example of an
idea that came up, we tried it and it worked, and I hope to see
more of that kind of thing.
The idea is that you buy the shoe and try it on. If it
doesn't fit you call us. We'll pick them up and have the new shoes
to you the next day, by noon. There's no charge for picking them
up or shipping the new shoes out. We'll do this as long as it
takes until we get it right. Once we fit you, you don't have to do
this again, since we're using the same lasts, you will be able to
order the same size from us all the time.
And the name SHOEHORN is because we've got a 1-800-SHOEHORN
number that you dial for the service.
Q: How are your sales per page running?
A: SMITH: Sales per page are down from our peak, which was back
in the late 80s and partly due to the issue of product mix. We
have 23 million households on our file now versus a lot fewer back
then, so we think we can get higher sales per page than we are
today. Whether we can ever get back to those historical levels is
questionable.
Q: What feedback do you get from customer research and customer
letters?
A: SMITH: Generally it's been very positive. We always get our
share of product requests. I talked about the fact that we pulled
back a little too far on SKUs, and that came from customers.
Recently we've been getting customers calling saying "I've ordered
from you in the past, you dropped my size, now I can't order
anymore." So we're going back and adding some of those SKU's. We
track customer requests in different ways. We capture customer
comments more than 10,000 each month from our operators. We also
track two or three thousand letters a year that I get. We track
where those letters are coming from, are they product, are they
service related, are they something else. Trends have also been
very positive. I get letters raving about service and about people
going out of their way to help customers. We also hear about more
topical issues. For example, when we did the Peruvian pima story,
we got some letters on the Lori Baronson situation that was
happening then. While we do get some letters on topical issues,
it's mostly product requests and service.
Q: Can you elaborate a little bit more on product?
A: SMITH: Generally requests will be very specific, such as, "I
want this shirt in an aqua blue," or "extra small," rather than
broad requests like, "why don't you offer face creams?" We also
track all quality comments, and the percentage of positive comments
has increased over the last twelve months or so.
Q: Are you getting comments through e-mail? How are you doing in
electronic media?
A: SMITH: We get many comments through the Internet and e-mail,
and we have a group of people who respond. In terms of the
performance for the future, it's the right way to go, though it's
still very small. Sales and "hits" and catalog requests are
growing pretty rapidly, but on a very small base. We don't see it
as being significant in the near future, but it's really handy for
some customers, particularly international customers. They can
send for a catalog free of charge rather than paying for a long-
distance call.
Q: What are your opportunities in the big-and-tall category?
A: SMITH: There is some competition out there for men's big-and-
tall, more in terms of regional stores, particularly in the bigger
cities. There are a small number of catalogs that focus on big-
and-tall, but we don't believe anybody's doing it as well in terms
of overall quality and breath. We think it's a big opportunity.
We'll be expanding our offerings into big-and-tall sizes this
fall, but do not plan to have a separate catalog for this category
at this time. I believe we'll pick up some new customers, but we
think many will be in the same families. A guy who might be buying
ties or pants, will now be able to buy a sportcoat or something
else. It'll expand what they can buy from us and certainly, in
many cases, it will be other members of the family that were
already buying.
Q: Have you made any progress on the physical handling of returns
compared to a year ago?
A: ORUM: We're in the final stage of implementing a new process
for product returns, which improves speed and cuts some costs.
We've also seen a decline in returns relative to sales which is
terrific. Hopefully that cost of returns will be greatly affected
by the fact that we have less product coming back.
Q: Can you quantify the cost of returns coming back?
A: Orum: It's expensive to process a return. When someone
returns an item and wants a replacement, we have a shipping cost
that the customer isn't paying for. We charge the customer about
$5 for a shipment, and we aren't trying to make a profit on that,
so that gives you an idea of the magnitude. If a customer makes a
return and does not want a replacement, we've lost a sale in
addition to the original handling cost and the returns processing.
We're talking single digit dollars per item.
So you can see where the return rate can have an impact. We
want to improve on the quality side, give a better explanation of
the product in the catalog, and make a better visual presentation
of the product. Anything we can do to make sure that the product
the customer gets is what they thought they were going to get, and
that it fits -- that's where we're going to win this one. Besides
the cost savings, we have also increased in customer satisfaction
as a result.
The return rate varies quite a bit by category. In categories
where fit is not critical, as in luggage, we'll have a very low
return rate. In some of the women's categories and highly tailored
areas, there is a very high return rate. So we do see some
differences in product mix. We are seeing meaningful reductions in
return rates from the prior year throughout all categories, so it's
not a mix issue for us.
Q: What kind of response have you seen from your TV ads on
cashmere and dress shirts?
A: SMITH: The response is very positive. We ran the cashmere ad
last fall, and it got very tough to staff for them. You have a
very short period of time when everybody's calling. It generally
overloads the phones for five or ten minutes, and then it drops
down. We tried to staff up for it this past Sunday when we ran the
dress shirt ad, but found out, after the fact, that it wasn't
nearly enough. We plan to step up the TV advertising. We have two
ads now and are developing two more. By fall, we'll have them
running concurrently.
Q: How are you making improvements in sourcing and are you using
more or fewer sources?
A: SMITH: First of all, we don't source strictly for cost,
though we have seen some improvements there. Generally, we've
switched vendors for quality and it cost us more, but recently we
have done more 807 production where it's happened to cost us less.
It takes so long to bring a new vendor on line that it would be
counter-productive to move around simply for price. The number of
vendors we use hasn't changed significantly.
Q: Do you have strong enough management in the merchandising
area?
A: SMITH: Actually, we do have quite a few people in
merchandising who have been around a long time. We have had some
changes in top management, most recently with our senior vice
president of merchandising and design, Mindy Meads, leaving and
also Phil Iosca, vice president, merchandising. We have Joe
Sirianni, group merchandising manager for coed, who has been with
the company 11 years; Franz Weiglein, who is general merchandise
manager for men's, has been with us since 1990; Tracy Gardner-
Cashen, general merchandise manager for women's, has been with us
a year and a half. But it is a concern. It is a critical area,
and we're looking to fill Mindy's position as fast as we can --
we're going to make sure, to the extent that we can, that it's the
right person. It's a top priority.
Q: What is the possible impact of sanctions vis a vis the China
situation?
A: ORUM: We're closely monitoring what is going on with the
China situation. As it appears now, it is not going to be a hugely
significant thing for Lands' End. Even though we are sourcing
quite a few goods out of China, many of them are not presently on
the list to have the surcharge. We do have a few items in the silk
area that could be subject to that. To the degree that we can,
we'll try to re-source those. As we see it now, it's not going to
have a severe impact for us this fall.
Q: Could you talk about the success of the outlet stores and if
there are any changes there?
A: SMITH: Sales have been up and down for the outlet stores,
similar to what's been going on in retail, and we are expanding
somewhat. Prior to last year, it had been several years since we
had opened an outlet store. Last year we opened four or five
stores, and we plan on opening more this year. It's really
dependent on the amount of product we need to move. If we reduced
all our returns and defective products to zero, it would eliminate
the need.
The stores have been our only resource for low quantity
product up to now. We can't put an item in a book and mail it to
three million people if we only have 100 units of something. So
the Internet is an interesting opportunity because it allows us the
flexibility for moving low unit items. If we can get that to work,
it will reduce our dependency on the stores. We'd rather not open
more stores if we can help it.
Q: How do you monitor product quality against the competition?
Do you use measures similar to Consumer Reports?
A: SMITH: That's one of the areas I was referring to --
implementing standards and procedures for evaluating quality.
There are a number of things that we've done. We've implemented
random audits in the warehouse, we're doing some things as far as
comparisons go, we're working with schools, and we're doing some
testing with an independent lab. It really varies by product.
Testing down product is very different from testing swimwear or
sportcoats. We sometimes use a Consumer Reports type approach, and
we've done very well with that. We've also used some very
technical measures, such as crocking and tensile strength. We
believe it's a combination of aesthetics and the technical
performance of the product. We track that against whoever we
identify as our key competition within product lines, and it varies
by product.
Q: What can be done to reinvigorate the core catalog?
A: SMITH: There are three areas that determine the strength of
the core catalog. First is the merchandising, the strength of the
product. Second is the creative in terms of how we present it.
Third is marketing in terms of who we send it to and when we mail
it. We've been spending a lot of time on the creative. I think
we've made a lot of progress, and that has had an impact. We've
also spent a lot of time on product, particularly core product
upgrades. We've started getting into new and specialty products,
and that has had an impact. We have clearly seen a swing in
performance from a year ago. It's a trend that started about last
August or September when we started to see improvement in the
productivity of those books. We're still not at the level where we
have been in the past, but we have seen improvement. We're going
to continue along those lines. An area where we have not seen as
much progress is marketing. We are now focusing our time and
investing heavily in that area, and hopefully we'll see some impact
in the marketing area as well.
Q: What are your growth opportunities?
A: SMITH: We don't get into specific numbers, but it's going to
depend on how well we execute. I believe there is growth
opportunity within the core book. Others think it's going to be
very difficult. We're at a size where if you look at our sales
within the catalog apparel industry, we have a very large market
share. We have to be very good if we're going to grow, and I
believe we can do that.
(Due to uncertainties in the marketplace
and in the pricing structure of goods and
services that the company uses, but over
which it has no control, our forward-looking
statements may not always be realized.)
Q: How is the catalog performing with older customers versus
newer customers?
A: SMITH: Generally, we haven't seen a big difference in terms
of performance. It's better for prospects, it's better for new
customers, it's better for older customers. If we put together a
book that doesn't work so well, it doesn't work across the board.
Rarely will we see a book do great for one segment and not for
another. But it is tougher to acquire new customers and to acquire
the same level of quality of customers. That's why we're focusing
on getting those people, and once we get them, to really make sure
they get to that higher level. We're doing some different things
because we're going deeper into the population. As we grow, it's
going to become more difficult in the future.
Q: Are older customers ordering more or less frequently?
A: SMITH: It pretty much follows the trend of overall sales.
Recently they've done better than they were doing a year ago. The
first half of last year, the performance of that group, and all
groups, was really one of the worst periods we have seen in the
company. It started to pick up in the second half of last year,
and it has continued into the first quarter.
Q: What percent of sales is associated with core items? What is
the trend?
A: SMITH: The core business (regular monthly and prospecting
catalogs) generates about two-thirds of sales for the company, and
that number is decreasing. We want it to decrease because our
specialty businesses are doing well, not because the core books are
doing poorly. But clearly, there's more upside growth potential in
those specialty businesses.
Q: Can you break out sales by each of the businesses?
A: ORUM: We have three general areas, or segments: the core,
foreign-based operations and new and specialty businesses. As we
said, the core is about two-thirds of our business, our foreign-
based businesses are still slightly less than 10 percent, and our
new and specialty businesses fall somewhere in the 25 percent
range.
Q: Will you change circulation because of lower paper costs?
A: SMITH: I don't think we should change our circulation
strategy based on cost. The value of a customer doesn't change
based on what future costs are going to be necessarily. But
lowered costs do enable us to mail deeper because we can mail that
book to more customers with the same performance. So assuming
costs do come down, it will allow us to mail more than we would
have otherwise. We wouldn't simply pocket that savings.
Q: Any change in lifetime value of a customer over time?
A: SMITH: Actually it has come down somewhat from where we were
back in the late '80s. It really depends on source as well as a
mix issue of the quality of customers that we're going after today.
It was easier when we were small. We had more of the people who
really wanted to buy from us, and now we're going deeper into the
population than we had been in the past.
Q: How do you determine what your market share is?
A: SMITH: You can define it in a lot of different ways. We
primarily use research by NPD which reports that total apparel
sales in the areas we participate in is somewhere around $135
billion, and catalog sales for those categories is about 6 to 10
percent of that. We're at just over $1 billion total. So if you
look at those numbers, we have a very large share of the catalog
apparel market. We view our primary competition as being total
retail because the majority of the business is being done by
store-based retailers.
Q: Are you competitive on pricing?
A: SMITH: We don't focus a lot on price, but obviously the value
is very important to us. For what we offer, we believe we're
competitively priced, in some areas more so than others. We're
going to reintroduce the Textures line in the women's area this
fall, and because there are such high markups within the industry
in that product line, we're going to be coming out with products
that have a significant price advantage. In some core products,
the price advantage is less but it's still there. If you're
looking at comparable quality product, we compare very favorably
across most product areas.
Q: Would you talk a little about paper prices?
A: ORUM: In terms of pulp, prices have come down significantly,
but coated paper has not come down as rapidly. In terms of our
costs, by the end of the second quarter we will have anniversaried
most of the higher paper costs. My feeling is that we'll see some
small declines in paper prices as we proceed past that point.
Paper prices went up very sharply, very quickly, and they're coming
down much more slowly. Our coverage of paper, in order to make
sure we had sufficient supply, will actually carry us through the
second quarter, and then we should see some improvements.
Q: Any thought to approaching other foreign markets with a
partner or will go it alone as in Japan?
A: ORUM: We think Japan is a good model to follow, although we
will look at that on a country by country basis. In Germany, we'll
be going in alone and will be able to minimize our investment by
using our U.K. facility for warehousing and package preparation.
Doing so will add maybe one day on package delivery, as service is
quite reliable in Germany. We will have a phone and service center
in Germany. We'll also try to leverage the creative piece in terms
of catalog preparation and have only black-plate changes of type
for the German catalog. That will also help minimize the up-front
costs.
Q: Chip, where are you going to focus your efforts?
A: ORUM: In the near term, I'll concentrate on two principal
areas. First, in the area of operations, we want to look at what
service enhancements we can provide that will differentiate us from
the competition. Even though we have a great reputation in terms
of service and clearly want to maintain that, we also want to find
something different that we can do that someone else won't be able
to match -- not necessarily throwing money at it, but changes we
can make in process and the way we communicate and handle the
transaction with the customer.
My second focus will be in the area of supply chain
management. As we look at the international areas growing, we've
quite a bit of work yet to do, in terms of managing the sourcing,
the logistics and the service level for those international
businesses to make sure that we're optimizing our total cost
globally.
And anything else Mike has on my plate.
Q: Are you continuing your share buyback program?
A: ORUM: We continue to view buying back shares as a good use
for excess cash.