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July 5, 1995
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 18, 1995.
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 18, 1995
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 18, 1995.
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 5, 1995 By: /s/ STEPHEN A. ORUM
Stephen A. Orum
Executive Vice President,
Chief Operating Officer &
Chief Financial Officer
Attached is a summary transcript from a meeting with members
of the financial community in New York, New York, on Thursday,
May 18, 1995.
LANDS' END, INC.
8TH ANNUAL UPDATE FOR
PROFESSIONAL INVESTORS
New York, New York
May 18, 1995
(edited transcript)
MIKE SMITH
Good morning. Welcome to our New York analysts meeting.
It's good to have you all here on this lovely day.
I'm Mike Smith, or as all the reports say, 34-year-old
Michael Smith, and I'm the new president and chief executive
officer. To my left is Mindy Meads, who is our senior vice
president of merchandising and design, and to her left is Chip
Orum, who is our chief financial and chief operating officer. In
the back of our room here is Don Hughes, who is our director of
financial services. I'll start by having Chip present our
financial results.
CHIP ORUM
***************************************************
Chart 1 -- Net sales (in millions)
FY-1991 -- $602 1QFY-1995 -- $187
FY-1992 -- $683 1QFY-1996 -- $207
FY-1993 -- $734
FY-1994 -- $870
FY-1995 -- $992
In fiscal 1995, net sales increased $122 million to $992
million due to increased catalog circulation and from sales
increases in our international and new businesses. Sales were
stronger in the first half of the year. Over the past five years
sales have increased at a compound growth rate of about 12.5
percent.
For the first quarter of this year, sales were up 11
percent, and nearly all of the growth was accounted for in our
international and new businesses. Our core business had flat
sales with last year.
***************************************************
Chart 2 -- Catalogs mailed (in millions)
FY-1991 -- 117
FY-1992 -- 123
FY-1993 -- 136
FY-1994 -- 155
FY-1995 -- 191
In fiscal 1995 we mailed 23 percent more catalogs, 191
million in total. The corresponding increase in circulation the
prior year was about 14 percent. During the past year, we mailed
an additional edition each of the prospector, Kids catalog and
Beyond Buttondowns. And as you know we prospected heavily during
the year last year.
In addition to the increases in our Lands' End monthly and
specialty catalogs, our international circulation increased
sharply due to the growth in the U.K. and the launch of our
Japanese business.
***************************************************
Chart 3 -- Customers (in millions)
36-month buyers/Housefile names
FY-1991 -- 5.5/12.5
FY-1992 -- 6.1/14.1
FY-1993 -- 6.8/15.6
FY-1994 -- 7.4/18.1
FY-1995 -- 8.2/20.4
At the end of last year we had over 20 million names on our
mailing list. Of this total, 8.2 million customers made a
purchase during the last three years, about an 11 percent
increase over the prior year.
***************************************************
Chart 4 -- Gross profit margin
FY-1991 -- 40.4% 1QFY-1995 -- 42.6%
FY-1992 -- 42.2% 1QFY-1996 -- 44.0%
FY-1993 -- 41.8%
FY-1994 -- 41.1%
FY-1995 -- 42.7%
Gross profit margin in F95 was 42.7 percent, about 160 basis
points higher than the prior year and a five year high. The
improvement in margin was largely due to better merchandise costs
from improvements in domestic and foreign sourcing. About 25
percent of the merchandise sold in F95 was sourced offshore,
compared to about 20 percent in the prior year.
For the quarter just ended this year, gross margin improved
further due to greater growth in our high gross margin businesses
and continued improvement in the full price core businesses. Our
international businesses generally carry higher gross margins in
order to help compensate for the structurally higher operating
costs in those countries. Liquidations offset some of the full
price margin improvement. Sales from liquidations represented
about 11 percent of total sales, compared with 8 percent last
year, primarily due to the timing of the fall/winter clearance
catalog.
***************************************************
Chart 5 -- SG&A ratio
FY-1991 -- 36.3% 1QFY-1995 -- 38.5%
FY-1992 -- 35.0% 1QFY-1996 -- 43.1%
FY-1993 -- 34.2%
FY-1994 -- 33.0%
FY-1995 -- 36.3%
Last year, our selling, general and administrative expense
ratio rose 330 basis points, after several years of decline. The
favorable trend in the prior years was principally a result of
stable postal prices, a soft paper market and better printing
costs. About 45 percent of our SG&A expense is catalog expense.
Last year, the rise in our SG&A ratio was principally due to
spending to develop international and new businesses, increase
customer acquisition and upgrade our consumer package delivery by
offering two-day UPS delivery service.
While spending on international, new businesses and two-day
delivery service continued to be factors in the first quarter
this year, we are now feeling the effects of a 14 percent postal
rate increase and sharply higher paper prices. These, coupled
with lower sales per catalog mailed in the U.S., have had a
negative impact on the SG&A ratio.
Finally, we experienced stronger growth in our international
and new businesses during the quarter. These businesses
generally have higher operating costs, which has also had a
negative impact on the consolidated SG&A ratio.
***************************************************
Chart 6 -- Pretax return on sales
FY-1991 -- 4.1% 1QFY-1995 -- 4.3%
FY-1992 -- 7.0% 1QFY-1996 -- 1.1%
FY-1993 -- 7.4%
FY-1994 -- 8.0%
FY-1995 -- 6.0%
Pretax return on sales declined to 6 percent for last year
due to the higher operating costs I discussed. For the quarter,
pretax margin was 1 percent, reflecting the lower than
anticipated demand generated by the catalogs.
***************************************************
Chart 7 -- Net earnings per share
FY-1991 -- $0.38 1QFY-1995 -- $0.14
FY-1992 -- $0.77 1QFY-1996 -- $0.04
FY-1993 -- $0.92
FY-1994 -- $1.18
FY-1995 -- $1.03
In fiscal 1995 earnings per share were $1.03 compared with
$1.18 before a change for accounting in income taxes in fiscal
1994 when we adopted FAS 109, which added about $1.3 million to
income or about $0.04 per share. Earnings per share for the
first quarter this year were $0.04.
***************************************************
Chart 8 -- Year-end inventory/First time fulfillment
(dollars in millions)
FY-1991 -- $ 74/82%
FY-1992 -- $123/87%
FY-1993 -- $106/87%
FY-1994 -- $150/85%
FY-1995 -- $169/88%
Inventories at the end of F95 were $169 million, up 13
percent from the prior year and in line with our sales increase.
Importantly, our fulfillment rate improved to 88 percent for the
year. As you know, our fulfillment goal is to ship 90 percent of
the items at the time the customer orders. We have continued to
make some headway regarding fulfillment into this year.
Although not shown on the chart, inventory at the end of the
first quarter was $191 million, up about 14 percent from a year
ago. Growth in the international and new business area accounted
for about half of the increase in inventory.
***************************************************
Chart 9 -- Return on average shareholders' investment
FY-1991 -- 13%
FY-1992 -- 23%
FY-1993 -- 25%
FY-1994 -- 28%
FY-1995 -- 20%
Return on equity declined to 20 percent in F95, principally
due to a lower level of profits. We continued to operate the
business without any long term debt, and we utilize domestic and
foreign bank lines for our seasonal and operating needs.
In summary, we had a disappointing year in F95, and we are
not pleased with business to date. The bulk of our sales and
profits are derived from our core monthly catalog. We need a
productivity improvement in these catalogs in order to offset our
rising costs.
At this point, I'll turn it back to you Mike, and we'll take your
questions at the end.
MIKE SMITH
Thanks Chip. Last year Bill End and Dave Dyer talked quite
a bit about some of the specific actions we were taking for the
business. While I will be talking about some of that today, I'd
like to touch a little bit more on how we're going to approach
things, our philosophies, values and beliefs about the business.
I know you might prefer more talk on the specifics, but I'd like
to suggest that these philosophies are far more important to you
than any individual action that we're going to be taking. My
goal is not necessarily to get you to agree with me, but I would
like you to at least come away from here with a clear
understanding of the values and philosophies and beliefs that
will be guiding the business in the future.
I started with Lands' End about 12 years ago, and I started,
as many graduates do, with certain ideals about how business
should be operated -- ideals about serving the customer,
treating them right and doing the right thing. But I soon
learned from many of my friends that politics and egos and
budgets and profits often got in the way of serving the customer.
But I found a different atmosphere at Lands' End. It truly
was an atmosphere that was focused on the customer. The most
common questions asked were, "How is this going to affect the
customer?" Or "What is the customer going to think?"
Titles weren't used and were rarely even known. People all
had a job to do, everybody was important and respected. There's
one story that sticks in my mind from that time, that really made
an impression on me and made me realize that Lands' End was a
place that I wanted to stay and work. It was around Christmas
time of my first year. We had run out of a particular hot-
selling sweater, and it turned out we couldn't get any more from
our current supplier who was overseas. But we could get a
reorder domestically and get it delivered in time for Christmas.
The only problem was our cost was going to be higher than what we
were selling the sweater for at retail. Anyway, we decided to
buy the sweater from our domestic supplier and lose money on
those sweaters so we could satisfy the customer.
That was typical of decisions that were made at the time.
The customer was always first, and that's the kind of atmosphere
that we'd like to see at Lands' End today. I'm not saying we
want to sell product below cost. Obviously, it's pretty tough
to make money that way. But a company that's willing to go to
great lengths to satisfy the customer, is truly committed to the
customer.
I've been asked and the question has been raised in the
media, if I am going to be doing what Gary Comer wants me to do,
or am I going to be making my own decisions? The answer in most
cases is both. It will come as no surprise to anybody who is at
all close to Lands' End that we share most of the same views, and
we agree completely on those core values and core philosophies
that have always guided the business.
I share wholeheartedly Gary's views about the customer and
the employees out in Dodgeville. A lot of what I've learned has
come from Gary Comer and Dick Anderson. Because of all this, the
Wall Street Journal article that was published recently talked
about rejecting modern management techniques and going back to
old-fashioned values. It assumed that it meant a return to the
past for Lands' End, and I'll tell you in some ways it is going
to be a return to the past.
But I found it rather ironic that the article implied that
we were resistant to change. If you look back over time, Lands'
End has a long list of firsts that have been pioneered in the
catalog industry: the 800 number, 24 hour service, business
reply cards in the catalog, full-page black and white national
ads. These things weren't done to any degree until Lands' End
pioneered them. And Gary and Dick, more than anyone I know,
always challenged people to come up with new ways of doing things
and challenging the status quo.
The only things that we're resistant to change are those
fundamental beliefs that are central to who we are as a company.
There are three areas where those fundamental beliefs guide us,
and they are our commitment and devotion to the product, a
passion for the product, commitment to the customer and the
creativity we bring to executing these ideas.
These are the old-fashioned values that Lands' End is
returning to. The old-fashioned way of doing business meant
building product that we could be proud of, product that was
unique and original and distinctive. Not sometimes, not even
most of the time, but all the time.
The old-fashioned way of doing business meant treating every
customer like they were your one and only customer. Not
sometimes, not most of the time, but all the time, with each and
every phone call.
The old-fashioned way of doing business meant challenging
the way we did things, breaking new ground whenever and wherever
we could. These are the things that have made Lands' End
successful in the past and will continue to make us successful in
the future.
The thing to remember is that strategies and tactics and the
way we do business can change over time and it should change as
the needs of the business change. But those core philosophies
and values that the business was built on should not change over
time.
At the core of who we are as a company is product, so now
Mindy Meads is going to tell you a little bit about our approach
to merchandise and product development.
MINDY MEADS
Good morning, and thank you Mike. Before I get started I
want to take a few moments to tell you about my background. I've
had over 20 years experience in women's apparel, with 16 years in
department stores. I spent 12 of those years at Macy's, 10 in
New York and the last two years as senior vice president of
women's apparel in the Macy's South/Bullock's Division. I had
one year at The Limited where I merchandised dresses. That year
was spent learning more about product development. I've been at
Lands' End four years, 3 1/2 years merchandising womenswear.
Last fall, I was given additional responsibility over menswear,
and as of the first of this year, I took on the balance of the
coed, outerwear, sweaters and luggage. This structure allows me
to focus on the total core book and ensure that the product and
the presentation has one eye.
I will also oversee the specialty tailored businesses for
men and women. The Kids catalog and the Coming Home catalog will
now be operated as separate divisions with managing directors
reporting to Phil Iosca, who previously managed Kids and coed.
I'd like to talk a bit about our product and our
merchandising strategy. The individual customer continues to be
our primary focus, and building a lasting relationship by
listening to our customer is really the key to our future growth.
Our long-standing commitment to quality is currently being
further enhanced by an intense scrutiny of all the core product.
That has always been what Lands' End stood for, but we are now
raising the bar on quality. We feel this strategy will distance
us from the competition and improve our customer loyalty.
An example I'll talk about today is an item we are updating
in the fall season, our mesh knit shirt. It's important to know
how we go about developing a product. We start by looking at the
competition and seeing what's out there, we look at our own
product, and then hold focus group meetings to listen to our
customers' comments as they compare our product with the
competition. At that point, we can totally understand what they
like and don't like about ours and our competitors, and what is
most important to them.
Next we look at fabric. Rather than starting with price or
style or gimmick, fabric is where we think the product needs to
be started. With our new mesh knit shirt, we've changed the
fabric from a four-sided diamond construction to a six-sided
honeycomb pique, which in essence is a double pique. This gives
our shirt a much softer hand and a slightly heavier weight which
is what our customers told us they liked. We changed the
shoulder tape on the inside, around the neck and the shoulders,
from a mesh to a jersey, which will provide much softer, more
comfortable wearing garment.
In construction, we changed to a sewn-on placket in the
front, a design detail that we think is an attractive look with a
much cleaner finish to enhance comfort. We put treetop vents in
the bottom, a detail usually found in cut-above, expensive
product. That extra detail will prevent the garment from fraying
at the bottom. To finish it, we put topstitching around the top
and around the sleeves to give it a more finished, decorative
look, and also stronger reinforcement.
Once the garment was finished, we did our usual extensive
wear tests with our employees, and we found they really loved it.
This product will be priced at $21 which is half the price of our
key competitor's.
Our mesh knit shirt is currently priced at $19.50, so we
don't believe this is a significant price increase. Generally,
our prices for fall will not show significant price increases
even with the pressure from increased cotton and wool prices. We
have other improved items for the fall and will be extending this
program over the next year to bring this same scrutiny to all of
our large core programs. So please stay tuned and see what's in
store for the spring.
We're very excited about our program to revitalize all of
our core products. The competition is fierce, and we believe
what will distinguish us is taking those items that have been
extremely successful and the standard in the industry and making
them even better.
I also want to update you a little bit about design. This
is the third year we've had a design department. Initially, we
had a couple of designers in the men's area and expanded into the
women's. We now have a head of design for men's and a head of
design for women's. In the men's area we have two designers, a
knit designer and an outerwear designer, and in women's we have
designers for tailored, for casual and for knits. They all came
from great backgrounds, from great companies, and they have a lot
of experience. And they understand who the Lands' End customer
is. They will be providing unique styling that is timeless for
our classic traditional customer, unlike fads that come and go.
I think it's crucial that we stay focused on who we are and what
kind of product our customers need. Our designers are
instrumental in directing these upgrades I'm talking about. They
are the key, along with myself and our two general merchandise
managers, in directing where we are going.
We're also currently piloting a program that will extend the
ability of our design, merchandise and quality teams to
electronically communicate product specifications to our vendors.
Our designers will be able to draw their designs and sketches
directly on the computer to send to a manufacturer. This will
dramatically speed up the product development process.
One of the key changes that is taking place is the amount of
coordination that we're doing. In the past, I had developed a
process that coordinated women's, and now we've expanded this to
men's. This improved coordination across the men's and women's
divisions will give us a much stronger brand identity for the
total core book. This will deliver better continuity in both the
product and in our presentation to the customer. The synergy
that exists by working closer as a team is one of the keys to our
future success. This will eliminate a lot of duplication of
effort that occurred in the past, when individual categories or
individuals could go off in different directions. I will be
looking at it as a total and making sure that you see one focus.
Another area we're concentrating on is color. We may have become
over-assorted in color. While we need to keep track of our stock
keeping units (SKUs), it's also a customer benefit to edit and
provide a stronger direction and clarity. In the past, each team
selected their own colors from a base palette. We're taking it a
step further and really looking to make sure that not only will
the garments work together more closely, but we will also have
more cohesiveness from category to category, book to book and
season to season. Our customer keeps coming back for some
colors, and we want to make sure that the navy is the same navy
for two seasons, the red is the same red. What we hear from our
customers is that they build their wardrobe from each book and
then from season to season.
Another trend that we see in the market is the trend toward
casual dressing. It's been around for a few seasons, but it
seems to be getting stronger and is having a benefit to our
business. As the trend toward casual dressing continues at the
office and because technologies are allowing more people to work
at home, we feel that our products are well-positioned for this
growth. It is very evident in some of the successes we're seeing
this spring -- our casual bottom business for both men's and
women's is strong. Other examples are the five pocket jean
that's been a staple at $30, our $32 chino pant that is also
doing well. The latter is a good example of an item we upgraded
a year or so ago. We looked at the fabric, looked for the best
combed cotton, added the right finishing, and, frankly, that item
is even stronger now than when it was first introduced.
While we'll also continue to offer select tailored product
in the main books, our focus for the core book will be dominated
by casual lines. This will allow each book to have a focus and
to be differentiated. We'll continue with our current strategy
in Beyond Buttondowns. Franz Weiglein, one of our merchants,
will be director of Beyond Buttondowns, which will allow Joe
Sirianni, our GMM of men's, to focus on the core book. This will
distinguish those two books and let Beyond Buttondowns become
even more tailored, for example, expanding the suiting separates
that have been successful.
In the Textures area, we're still in a learning mode. While
we've had some successes this spring and feel good about the
direction we're taking, we're trying a different format for fall.
We're going to be inserting a 24-page section into selected books
instead of issuing a separate book to find out from our customer
which way she really wants to shop.
Another trend we're all aware of is increased fabric prices.
Cotton is up over 40 percent, wool over 50 percent and cashmere,
an important fiber for us, over 60 percent. These three fibers
represent approximately 75 percent of our business. But we're
really taking a somewhat different strategy than what we think
we're hearing from the competition. We're going to continue to
upgrade our products, even with the increased fabric prices, and
make them even finer. This will set us apart from the
competition who may be opting to use more blends which may be
cheaper. In talking to the mills, both domestically and in the
Orient, our approach is definitely a different direction than
that of our competition.
As I mentioned earlier, although piece goods are going up,
we do not anticipate making significant price increases. There
may be a dollar or two increase on some products, but we will
still be way below the market. On key core programs, prices will
be maintained: our turtleneck at $15, a key price point; our
pinpoint shirt at $19.50; our five pocket jean at $30. These are
areas where we don't want to raise our retail this fall.
Part of that ability to keep those prices is that our
offshore production is about 25 percent this year, which is
significantly different from the industry. We anticipate that
this could grow to 30 percent. We don't know what the final
number will be, as we want to be comfortable with the fulfillment
before we go further. We also supplement our domestic sourcing
with 807 production, so we have ability to get quick response
with better pricing. By changing this mix, I believe we will be
able to once again increase our gross margin this year.
Though it may seem somewhat contradictory, our three key
points are to constantly improve quality, keep prices at a
minimum to retain our value positioning, and improve margin with
a better mix of sourcing.
Another strategy that is important to Lands' End is our
three way partnership -- Lands' End, the worldwide manufacturers
and the mills. Keeping all three in the loop allows us to better
control our inventories and improve fulfillment. With business
being tougher, as described by the numbers that were shown, we
feel comfortable that we have the inventory under control.
Because of the processes in place, we can react to the business
as it changes and as it becomes more difficult. We're ahead of
schedule in the implementation of electronic data linkage that
makes net position management possible, and over 60 percent of
our shipments are on net position management today.
Another method that supplements that process is to
coordinate fabrics across styles. In the past, each style would
have its own fabric. Now, for example in the women's area, there
may be seven styles drawing from a particular knit, and we'll be
doing the same with some of the coed product to even make it
stronger. This provides us the ability to commit to greige
goods, commit to contingency plans and control the dates of
coloring, size and cut. This limits our risk of overstock and
also allows us to more successfully chase the runners.
In summary, our structure will allow us to build on our
strengths, continue to improve quality, provide the best value to
our customer, and offer unparalleled service.
MIKE SMITH
Thanks Mindy. So once we get the product right, and
obviously we spend a lot of time on that as Mindy just outlined,
the next step in the process is to sell it, and our means for
selling obviously is the catalog. How we merchandise the
catalog, how we present the product on the page, has a tremendous
impact on the performance of each book. Different creative
presentations can have different sales levels of 25-50 percent or
even more. It doesn't cost any more to put an effective
presentation on a page than an ineffective presentation, so it
has huge bottom line implications. And because quality is what
we stand for, one of the key points is getting across those
quality differences in the catalog. And that's sometimes
difficult to do.
We spend a lot of time scrutinizing the layouts and the
spreads and how we put things on the page. Let me just talk
about one element of that, the headline. If you look at
competitive catalogs, you'll notice that nobody really does
headlines like we do. What we try to do with the headline is to
come up with the one most compelling reason to buy the product,
instead of a generic headline like "this product is high quality,
a lot of details, better value." Our headlines need to state the
one thing that's going to get our customers to buy that product
over competitive product. Our customers are very intelligent,
they're highly educated and they want to know this information.
They come to us for this information, and that's something that
nobody else does.
We want to be able to educate them so they can make informed
buying decisions whether they buy from us or whether they buy
from a competitive catalog. Because we feel that our product,
when the customer is fully informed, is a better value.
So everything about the pages is scrutinized, the headline,
the allocation of space to the different products, the focus on
the page. It's a combination of all these things working
together that's going to determine whether or not that page is
successful.
It's not fancy, it's not slick, but it's effective. And it
works.
Moving onto service, you know that service is another one of
our cornerstones. And that comes relatively easy for Lands' End.
I believe we have one of the most outstanding workforces in the
world. The people at Lands' End are hard-working, they're
dedicated, they simply want to do a good job. I spend a lot of
time walking through the company and talking to different people
and they know what our customer wants. They're very attuned to
what's going on and how the customer feels, and I learn a lot
from them. And as we expand into other businesses, other product
categories or overseas, it's important that we extend that same
level of service to those new businesses as our current customers
have become accustomed to.
There's an interesting story from our U.K. office. Someone
was running a contest there for companies to see which companies
offered the best customer service. Someone from our office
called up and were told that Lands' End U.K. couldn't enter
because it would be unfair to other companies in the contest.
But we could be judges if we wanted to. It's really gratifying
to see that even with a start up that's just a few years old,
we've already established a reputation for service.
These are the top priorities for us this year: making sure
that the product is right, making sure that the catalog is right,
that it's an effective selling tool, and making sure that our
service continues to be unmatched in the catalog industry.
There are other areas that we're going to be working on, and I'd
like to touch on them.
This business has changed a lot in the last five years, and
it's a lot more complicated today than it was. We're at the
point where we need to start working on those processes and
infrastructure pieces, the foundations for managing those
businesses, to ensure that we don't have problems in the future.
A couple areas that are priorities for us this year are
managing worldwide quality and worldwide inventory. Quality is a
cornerstone for us. As our international business grows and as
we look to sourcing some of that product locally, it's critical
that we get processes in place to manage that and ensure that
we're going to meet those levels of quality.
Inventory management is also another critical area, and
we've had some problems there. In Japan, we've had some
difficulties filling that business because a lot of the processes
to manage it were done manually. Our fulfillment was well below
our standards last fall. So we need to spend some time on
worldwide inventory and worldwide quality.
Another area for our attention is planning and tying all of
the businesses together, giving us capabilities to do what-ifs,
tracking customer file growth, conversion rates, profitability,
return on capital. These are things that we don't really have
consistent measures for or consistent reporting throughout the
different businesses. Tied in with that specific planning and
reporting are the specific measures that we use. Right now,
while we have the core measures of sales, profitability and
margin, we've got to define what are all the key measures that we
want to track for the different businesses. We need to make sure
that we're measuring and calculating them the same way, so we can
make correct decisions on allocation of resources and identify
problems or potential problems before they become too large.
We're at the point in our lives where we need to make sure
that we get those pieces in place. It's a lot easier for us to
do that today than it would be three or five years from now.
Even today we've got a lot going on, with the U.K. business,
the Japanese business, Willis & Geiger, Corporate Sales, Beyond
Buttondowns, Coming Home. We're in many different businesses,
which leads me to my last area and that is people and structure.
I believe that each of those businesses is different. They
serve different markets, different customers, in short, they have
different needs. To compete in today's environment, I believe
you've got to have people who are dedicated to each of those
businesses, people who are thinking and breathing and living that
business all the time, people who are specialists in it. And
that's why we've structured the company around each of these
individual businesses, and put people in charge, particularly in
the areas of product development, catalog creative, and
marketing, the areas that really drive the business.
One example of this is in the core book. As Mindy
mentioned, we used to have three people directing product
development, we had two merchandise vice presidents and a design
vice president. Today we have one, and Mindy heads up all of that
so she'll be able to coordinate things much better. We expect to
have a much more cohesive look throughout the book, in product
and design, in color, and creatively. There will be one eye
looking over the whole book.
We made quite a few other changes throughout the company as
well. There are a lot of new people in fairly high positions
throughout the company, and the one thing that we all have in
common is a deep commitment and dedication and belief in Lands'
End's way of doing business. This is critical for us, because if
Lands' End is anything, it's unique. While many casual outsiders
and observers will have a difficult time understanding this, I
think our longtime customers and followers and employees know it.
Lands' End is not just another company. It's special, it's
unique, it's creative, it's fun, it's original, it's a company
with a heart and a soul. It's the preservation and nurturance of
this culture that's going to ensure our success in the future.
And it's those assets that aren't on the balance sheet -- our
employees, our customers, customer goodwill -- that really
determine our true value.
Thank you. We're happy to take any questions you have.
***************************************************
Q: In the focus groups, what do your customers say they do not
like about Lands' End?
A: MEADS: There are a number of things our customers bring up
in the focus groups. In the one I was referring to, they were
mainly looking at the new mesh knit shirt and didn't even know
that we were behind the screen. They talked about shirts in
general, what they don't like, what's important to them. In that
particular group, we really got more details of what they wanted.
In other groups we've shown different creative
presentations, and they're very vocal about what they like and
don't like. We tend to receive more positive comments,
especially about our service. We find that we have to ask
ourselves if we are really that good.
SMITH: Let me also address a couple of things. Pricing rarely
comes up as an issue. Within our target market, people feel that
we're very reasonably priced. We do hear occasionally that
people feel they are getting too many catalogs. That's an area
we continually spend time on, as it's in both our interests if we
can target customers more effectively. Other areas for comment
arise when we have women's focuses, then we get comments from men
that the book's become too much women's or vice versa. We get
some comments on sizes and colors, and we always get requests for
more, as many people think that we should offer everything.
Q: You look at your customers on a three year basis. Would
there be any opportunities to look at this on a shorter term and
prospect to them rather than prospecting for entirely new
customers?
A: SMITH: We report customers on a three year basis, but we
look at them each individually. We don't have any arbitrary
three year customer cutoff. We evaluate each customer based on
when they last ordered, what their other orders were and how much
they ordered. Then we determine whether it's better for us to
mail that customer or to prospect for a new customer. Each
customer has a different value.
Q: It seems you survey customers very thoroughly and yet
response rates are falling. Can you focus your surveys on why
people do not buy from the catalog?
A: SMITH: Through our market research, there are some measures
that we track consistently over time in terms of awareness and
how the customer feels. We've done surveys and interviews on
people who haven't bought in a while and gotten some good
information. Usually it's things that we don't have a lot of
control over, for instance, they don't have a need for the
catalog anymore, they had grandkids who are older or whatever.
But I do think that, for example, advertising has always been
very important to us. I think there are opportunities in terms
of advertising, particularly in times like this, that may be an
avenue for us to stand out a little bit with a different
approach. That is something that we would consider.
Q: What is happening with the rate of returns and how does that
compare with the industry?
A: ORUM: The industry-average for return rates is said to be
around 15 - 20 percent over all merchandise categories. We see a
dramatic difference in return rates by category, with much lower
return rates in items like luggage and much higher return rates
where fit is a more critical factor, whether it be women's
tailored or even men's tailored clothing. Our return rates of
late have not been significantly different than the prior year.
To date, we're not seeing anything that's a significant trend one
way or another.
Q: Is your goal to improve your return rate or do you assume
this is the way it will remain?
A: ORUM: We always have a goal to improve it as it has dramatic
economic impact on the business. Although many of our returns
are what we call return/replace, where the customer sends it back
and asks for a different size or color, it clearly adds more
handling costs to complete that order. We feel that in the long
run it's not good customer service, and we don't get the same
customer goodwill out of a transaction that way.
Q: Given that the core business was more sluggish than you
expected in the first quarter, will there be increases in your
liquidations?
A: ORUM: At this point, we have a lot of the year ahead of us
yet, but we don't anticipate any major shift in liquidations over
prior years. We think liquidations will continue to be about the
same. Our liquidations have averaged about 10 percent per year
over the last few years.
Q: I sense that your clearance process is not very sophisticated
compared to some of the marketing you see in the outlet areas.
Would you agree and would you see getting more focused?
A: ORUM: We liquidate goods in two ways. The first is our
printed media, and I think we do a fair job of that. We've tried
some new things that seem to have worked pretty well for us. The
second is our outlet operation, where we clear a fair amount of
smaller quantities. It is a pure liquidation vehicle, whereas
many outlets or manufacturers are actually making new goods for
those operations. The outlet operation is an area that is going
to get some attention this year, and it's been an organizational
change for us. In the past, our store operations have reported
through our head of inventory, and this year we'll change that so
they'll be reporting to an executive that has some retail
background. That could perhaps make a difference there.
Q: Did you anticipate flat sales in the first quarter? If not,
why do you think sales fell off? Did you mail more or fewer
catalogs in that time frame?
A: ORUM: We don't disclose our circulation or make comparisons
to prior years on a quarterly basis. In terms of the core
catalog, sales were flat, and we had not anticipated it being so.
I don't think there's a single reason, but I do believe we're not
immune to what's happening in the retail arena. I think that
customers are voting with their pocketbooks right now, by not
buying. As Mike pointed out, there are some things that we need
to do with the core book in particular to improve its
attractiveness and selling strength. We'll be focusing on that
aspect the balance of the year.
Q: Where are you on the stock repurchasing?
A: ORUM: Last year I believe we bought back about $28 million
worth of stock. We still have most of the current authorized
shares to buy back, and we'll be in the market now and then and
work towards buying back that stock.
Q: Again on this share repurchase issue, do you buy according to
price? How do you rate yourselves or evaluate how well you're
doing in that share repurchase?
A: ORUM: Our general approach is to average our costs as we go
through the year, and we do look at our purchases compared to the
average transactions in the market. We believe that over time,
if we're buying back on a regular basis and as long as we buy it
at a reasonable value, it's a good investment for our
shareholders. On occasion, if we see a stock price drop, we'll
increase the rate at which we're purchasing.
Q: In fiscal 1989 you had a pretax margin of more than 11
percent. With your new businesses and your core businesses, can
you give us an idea of what is a reasonable, normalized margin
that you expect? Is 10 percent?
A: ORUM: I won't make a prediction as to where the company is
going as far as our pretax margin is concerned, but clearly it
would be our intent as we enter new businesses and for the core
business, that it would be desirable for us to get back to those
kinds of levels of profitability. We are not interested in going
into a business that cannot have significant levels of
profitability, but there's always this mix issue of underwriting
until they get to that level of maturity. We're clearly not
there, and we haven't been there for a number of years.
Q: That would be a pretty lofty goal.
A: ORUM: That's right, just like 90 percent first time
fulfillment is a lofty goal. I think that is what drives us --
setting tough goals internally for ourselves. But I won't make a
prediction as to what would be a normal profit level over the
next several years.
Q: How is your cash position and what do you anticipate in
borrowing?
A: ORUM: We are at higher levels of borrowing now. While we
had adequate cash flow from the business for last year, we also
had significant capital expenditures in excess of $25 million,
we had in excess of $25 million in stock repurchase, and
inventories grew substantially. I don't see that our level of
borrowing is at all an issue for us.
Q: You mentioned in the annual report that the paper and postage
will increase your costs by $15 million. If you apply a portion
of that to the first quarter, you seem to be way ahead on SG&A
versus sales. Have you been surprised by the size of the
increases, will it be a lot more than $15 million?
A: ORUM: In the first quarter, the rise in SG&A ratio was due
to a combination of things. One of them was that we did not get
the customer reaction to our core book that we had hoped for.
Generally, it's been disappointing across all books in the first
quarter. In terms of paper prices, yes, they are going up, and I
haven't seen anything that indicates that they won't continue to
climb.
Q: Is $15 million still a good number?
A: ORUM: I think $15 million will be a minimum number for the
year. As you know, our big mailings are in the fall. I'm not
very good at predicting paper prices for fall, but I do see them
climbing.
Q: With the increase in paper prices and postage, are you
looking at changing your circulation strategy and considering a
decline in circulation to improve profitability.
A: SMITH: We take each issue and basically look at each segment
that we mail on a profitability basis. When the costs go up like
they have, all things being equal, that raises the bar and would
lead us to mail fewer catalogs than we otherwise would. We look
at the return we're going to get on that customer, and we'll go
down to a loss, knowing we'll make that up over the next year.
So it's the same formula, but the bar is much higher because of
increased costs.
Q: Where do you stand on paper, and are there opportunities to
go to a lighter weight paper or there other opportunities to save
on paper.
A: SMITH: We don't think it's in our interests to go to lighter
paper. Actually we can't, since we're as light as we can
efficiently go. We've had a lot of efficiencies in terms of the
paper and printing contracts over the last couple of years, which
did improve our cost structure quite a bit. Our printing costs
are pretty stable, but the cost of paper continues to rise. We
don't see an opportunity to lighten the book, and we don't think
it's in our best interests to take another 1/8 of an inch or a
quarter of an inch off of the trim size either.
Q: What percentage of your catalogs go out to new prospects
versus someone who has ordered in the last, acceptable time
frame?
A: SMITH: It's different for different businesses and different
issues. For the Christmas book, for example, we mail the vast
majority of our file and just about all the rentals that are
available and profitable for us. For some of the smaller books,
it might be all buyers that we mail. It depends on the catalog
and the business. Businesses like Kids or Coming Home or a new
business are going to be almost all prospecting.
Q: Can you be a growth company if the core catalog is mature?
A: ORUM: I'm not sure of your definition for a growth business.
But since the bulk of our sales and profits come from that core
catalog, it's important that we have some growth in that business
to be able to maintain that level of profitability. I think
there are opportunities outside the core business that we will
continue to take advantage of. We currently have landed
operations in the U.K. and Japan, and there are other countries
that are open to us for expansion. We've learned a lot from
launching the specialty catalog businesses over the last three or
four years, and we see some opportunities in those areas yet to
be realized. So I think we can continue to grow even if the core
were a mature business.
Q: With respect to each of the specialty catalogs -- Beyond
Buttondowns, Home and Kids -- would you tell us whether they're
profitable yet, if you adjust for a normalized prospecting.
A: ORUM: If you adjust for normalized prospecting, though I'm
not sure what the definition of that is, but if you took a normal
level of prospecting to get an average or maintained growth out
of the businesses, those businesses are profitable. All of them.
Q: How different will the catalog look this fall versus today or
this past fall?
A: SMITH: I'd like to think that it will be significant, but you
may have to look for it. Let me just give you a couple of
examples of what I'm talking about. An example of a headline
that I referred to earlier for a turtleneck might be "The best
value around for $15." That doesn't tell me anything, and that's
not a headline that Lands' End should do. Another headline might
be: "The Lands' End seamless neck gives you more comfort than
you'll find elsewhere." OK, now I've got a reason to buy the
Lands' End turtleneck. Those are the kinds of things that we
want to get across in the headline.
As far as other elements of the page, for example, if you
look through the book now, you'll see there may be four items on
the page or six items on the page, and they're all given about
equal space, they're all equally important. What we're saying in
essence is "pick one." Or you might find one item per page.
What we want to do is control that, we want to direct the
customer to where we want them to buy the product, we have to
direct them to where we're going to be making the money, where
the value is. We want to upgrade them where we can, and we
really haven't done a very good job of that. We have so much
control over how we put the page together, and we're not taking
advantage of that.
Q: Is there a sense of crisis or great urgency at the company to
lift the poor catalog sales and improve the books?
A: SMITH: I wouldn't characterize it as a crisis feeling, but
there is certainly a sense of urgency. You have to keep in mind
the cycles that we work on. Product-wise, we work a year in
advance, and so next spring is where you'll see a majority of
change there. Catalog-wise, we work months in advance, so we
spent a lot of time working on the fall books, and you're going
to see some changes there. In the product development area, the
product teams have spent a lot of time working on our books,
studying them, trying to figure out what's working, what isn't,
what do we need to be doing, so there's a lot going on. We're
spending a lot more time on the fundamentals than we have in a
long time.
Q: What are you doing in terms of electronic shopping?
A: SMITH: There's a lot going on in electronic, although nobody
knows for sure where it's going to go. We are involved in some
interactive tests. We have an address on the Internet, and soon
we'll have a home page there as well. We're continuing to
explore all the avenues, but there's nothing that we see today
that's going to have material impact in the near future.
Q: Where does Lands' End stand on launching new countries
internationally and new businesses domestically?
A: SMITH: Internationally, we think there's opportunity out
there. Our current plan is to not go into an additional country
this year, simply because of where we're at with things.
Domestically, Willis & Geiger is the only new title that we've
got planned for this year, and we are planning on mailing a
catalog in early fall for them.
Q: Are you open to further acquisitions?
A: SMITH: We'll continue to consider acquisition opportunities
if they make sense. For example, the Territory Ahead is an
acquisition we're very pleased with, and we'd love to see another
opportunity like that. It's a matter of timing and fit, but we
would certainly be open to considering the possibilities.
Q: In the annual report you mentioned that even with the strong
growth in international, it's still less than 10 percent of your
total annual sales. Would you expect to repeat that statement
and in general what are your aspirations?
A: ORUM: We've seen strong growth in international, both from
growth in the U.K. and also with the launch of the Japanese
business. We're all very encouraged by what we're seeing, but we
won't predict when we'll break the 10 percent barrier.
Q: Are you looking to really expand the international business?
A: ORUM: We continue to feel very strongly that the
international area is a great opportunity for us.
Q: You mentioned the broad number of businesses you're in. Does
that imply that you want to do some paring down of some of the
businesses?
A: SMITH: No. We're committed to the businesses that we're in.
We just want to be careful about adding additional businesses or
additional countries, and we want to make sure that we're capable
of managing them when we do add them. But we're not looking at
paring down our current businesses.
Q: What do you think is the ideal domestic/import mix?
A: MEADS: We're currently at 75/25 percent domestic/import
ratio, and right now we feel comfortable with going to 70/30. I
don't know when we'll hit that number, and we might reevaluate it
later. We need to be comfortable with the quality and need to
develop our relationship with our manufacturers offshore, the
same way we do domestically. We need to identify not only the
manufacturers, but also the factories in which we're doing
business, and that's going to take some time to get comfortable
with. For right now, I think a 70/30 split is right for us.
Q: With the strong values you offer and the demographics of your
customers, why not take up your prices?
A: MEADS: When we look at pricing, we look at each individual
item. In many cases, if it's a significant unit, our customers
can be sensitive to price, particularly more in men's than
women's. In some cases when we've taken an item up a dollar,
we'll sell even more units. We have to look at the market to see
where the competition is, because we don't want to be above the
market in any case. However, where we think we've got room to
create that value, we'll take up the prices.
Q: Are there trends that are particularly good or bad for you?
A: MEADS: The trend that's we are taking advantage of is this
casual trend. We have the key pieces to work with to develop a
more casual wardrobe, and that's where our strengths are. There
are many fashion trends that come and go, but I think that's to
our advantage. When you look at our customer demographics in
age, from 35-55, it's a mature customer. There's product out
there that I think they sometimes run away from. I see people
trying different things. I want Lands' End to keep doing what
we do best with some of our core basic products -- keeping them
updated so they aren't stale, which may have been the case in the
past. That's what the merchant and the design team is making
sure of -- that we are unique.
Q: When you talked about price points, particularly men being
cheapskates on price point, is there a possibility that you would
upgrade the quality of the cotton, going to a long staple
Egyptian cotton, as opposed to the cheaper grades that you've
been using? Or has your market research found that you can't
really upgrade the mature cheapskate.
A: MEADS: Right now we do use a lot of Egyptian cotton in our
men's shirts. We are in the process of looking at where we don't
have the finer cottons and putting those cottons in. What I
alluded to before is that there are a few sensitive areas, and
the pinpoint shirt is one. We've been at $29.50, and the whole
industry has stayed at that with us. So we'll look at that in
the future, but we feel comfortable that we want to stay at that
price for fall.
Q: In terms of your margins, you made a lot of comments in terms
of the raw material pricing going up. You're going to try not to
reflect that in your prices, and you're adding product features
that probably are costing you money. Can we expect your
merchandise margins to be narrower going forward?
A: MEADS: I don't think so this year because we are having the
benefit of sourcing more out of the Orient. We have a 75 percent
split domestically. By increasing our off-shore sourcing, it
gives us a better mix, whereas the competition already has 80
percent of their business in off-shore.
Q: With the home product market being as strong as it is, is
there any plan to expand the merchandise line?
A: SMITH: There are a number of areas that we're looking at in
the home arena, and we may decide to enter some of those in the
future. There are some areas we're in that we're not
particularly pleased with in terms of the results, and we want to
make sure we take advantage of those before we expand much beyond
that.
Q: On your top core items, how do you stand versus the
competition on product differentiation? Has that gap narrowed?
A: MEADS: In many of our core products, we have been the
standard for the industry, and many people have tried to copy us.
At this point, there's a lot more competition. We want to take
those items where people look at us and make them even better. I
think you will see a difference in addition to prices that will
separate us even further. I would say in general we're ahead of
the market today. In some products, others have caught up, and
in those cases, we'll take them further. It's really an item by
item decision.
Q: You highlighted first time fulfillment as one of your goals,
to get that to 90 percent. How do you reach it? Why is 90
percent the magic number, what are the tradeoffs?
A: ORUM: In some respects 90 percent is an arbitrary goal, and
it is clearly a goal that is higher than the industry standard
and perceived by the customer as such, which sets us apart. What
do we have to do? There's lots of things that we have to do
improve our first time fulfillment, without throwing tons of
inventory at it. We can always bring in lots of inventory to
improve that target, but we've got the back-end problem of
liquidations, and that has not been our approach. The two areas
of most importance are forecasting errors of the book and vendor
reliability. And those are the areas that we intend to work on.
In those cases where we have put net position management in
place, we've got documented proof that we can increase inventory
turn and increase fulfillment at the same time. So a big thrust
is to get our larger manufacturers on net position management,
not just through the cut and sewn operation, but back to the
mill. It's not just a change in inventory management on Lands'
End's part, it's also a structural change for the manufacturer,
and it takes time and has it's ups and downs. The other area is
in forecast accuracy. If there's one thing in life that is
certain, besides death and taxes, it's that we'll never get our
forecasts absolutely right. But there are some things we can do.
Where we know that certain catalog layouts work and are
predictable, we'll try to stay with those things and those can
give us some reliability. Also, as we do the spacing, generally
new items are the most difficult to forecast. So in the future,
if we have less space given to new items in the catalog, we'll
reduce our overall risk on forecasts.
Q: When we met a few months ago, Mike, you were talking about a
project you were involved with to increase response rates and
have a better ability to access your database and target
customers better. That could have a huge impact over time if you
could get those numbers up. Can you give us a rough idea of
where you are and where you stand?
A: SMITH: We're working on modeling and predicting response,
and we have seen some things this spring that have improved our
ability to forecast fairly significantly. So we'll be rolling
that out for fall, but that's something that I see as a long-
term goal that we will continue to work on. Particularly as
paper and postage go up, the forecast accuracy becomes that much
more important -- not only at the product level, but at the
customer level -- in terms of forecasting response. We've seen
some things this spring that we're pleased with, and we're
currently working on exploring those and implementing those
things.
Q: Can you talk about what kinds of things those would be?
A: SMITH: It has to do with looking at all of the past buying
behavior of our customer. Some of our systems really aren't set
up to handle a multi-catalog business and look at all the
interactions between those businesses. Those are some of the
things we're looking at, all the different purchases from the
different catalogs, at different times. We've got to approach it
very differently from a one catalog, recency/frequency/monetary
value amount, so that's really what these things are looking at.
Q: How soon before you can have something like that up and
running?
A: SMITH: It's one of those things where we can take advantage
of some of it right away, and other pieces will take us longer.
Q: Five years ago, Lands' End was a company that did almost
exactly what you are describing using the same business
philosophies, and the company was not going anywhere. What makes
you believe that you will not slip back into that position?
A: SMITH: About five years ago we were at 11 percent pretax,
and we'd be thrilled to be there right now, so I don't know what
you mean by not going anywhere. We did have a slow period in
fiscal 1991 where we got a little bit conservative on product and
creative, and we certainly don't want that to happen.
Q: Where do you stand people-wise in terms of running the
business?
A: SMITH: I feel very good about the people we've got in place
right now. While we have made a lot of changes, it involved
people who were very experienced, and as I said before they know
Lands' End, so they're not learning about it. We do have a lot
to work on, but I feel pretty good about the people we've got in
place and allowing them to spend time focusing on their business
rather than trying to work a little bit on everything.
Q: You had a modest increase in shipping and handling prices to
your customer. Has that or your reductions in colors and SKUs
had an impact on response?
A: SMITH: We don't think that the increase in shipping really
had an effect, we're still well below most of our competitors,
dollar for dollar, so we don't think that had an impact.
MEADS: The reduction in SKUs is where we weren't profitable.
They were small units and not something that the customer wanted,
so I don't think that has had an impact on our current business.
If anything, it'll help us be more focused as we direct it more.
Q: Any plans down the road to add retail locations or move
beyond your liquidation needs?
A: ORUM: We will be adding some additional liquidation outlets
this year in the Midwest area as we haven't added significantly
to our network of 12-14 in the past two to three years. The
number of stores that we have will grow with the business. We
have no intention and probably an aversion to get into retail as
a full price retail business.
SMITH: We don't think we've mastered catalog yet. They're two
very different businesses. While we have a lot of people with
retail backgrounds, we want to focus on what we know best.
ORUM: In my former life, I was with a company that was in both
catalog and retail as well as manufacturing. I think the
integration of retail and catalog was probably the most difficult
part of that business. It's a different psyche, inventory
management is different, your selling approach is different. I'm
sure that the Talbot's of the world have figured out how to do
both, but I'm not so sure that it's as easy and as synergistic as
you might think.
SMITH: I think that's it. We've run out of questions. Thank
you all for coming -- and we hope to see you again soon.