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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 22, 1997
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 22, 1997.
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 June 13, 1997 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 22, 1997.
LANDS' END, INC.
10TH ANNUAL UPDATE FOR
PROFESSIONAL INVESTORS
New York, New York
May 22, 1997
(edited transcript)
MIKE SMITH
Good morning. My name is Mike Smith, and I'm president and
chief executive officer of Lands' End. I'd like to start by
introducing the members of our management team who are with us
today: Brad Johnson, our chief financial and administrative
officer; Bill Ferry, our vice chairman of sales who heads up the
Lands' End core business; Chip Orum, our chief operating officer,
and Don Hughes, our vice president of finance. These are the
players today. We'll start by going through some financials, so
I'll turn it over to Brad.
BRAD JOHNSON
Thanks, Mike. It's a real pleasure to be with you this
morning. They say that "timing is everything in life." That
appears to be true for us. It's always easier to speak to this
group when your stock hits an all time high as ours did
yesterday. And I do have some very good results to share with
you for fiscal 1997 and for the first quarter of this fiscal
year. You should find a copy of the slides that will be shown in
your folder inside the briefcase.
*******************************************************
Chart #1 Net sales (in millions)
FY-1992 -- $683 FY-1995 -- $992
FY-1993 -- $734 FY-1996 -- $1,032
FY-1994 -- $870 FY-1997 -- $1,119
This first slide shows that net sales were $1.119 billion in
fiscal 1997, which was an 8.5 percent increase over the prior
year. This increase was a result of growth in our specialty,
international and core businesses. In fact, one of the most
encouraging things about the year is that every division
contributed to our growth and success. The core business in the
U.S., which accounts for about 60 percent of our total sales,
showed some encouraging growth. Our specialty businesses
continue to post good growth and the international businesses,
which includes landed operations in Japan, England and Germany,
account for just under 10 percent of our total sales and are also
growing very well. During the year we made a successful launch
of our catalog in Germany.
*******************************************************
Chart #2 Catalogs mailed (in millions)
FY-1992 -- 123 FY-1995 -- 191
FY-1993 -- 136 FY-1996 -- 200
FY-1994 -- 155 FY-1997 -- 211
During the year we mailed 211 million catalogs, which was about a
5 percent increase over the prior year. Each segment of the
business -- core, specialty and international -- had an increase
in the number of catalogs mailed.
*******************************************************
Chart #3 Customers (in millions)
36-month buyers/Housefile names
FY-1992 -- 6.3/14.1 FY-1995 -- 8.2/20.4
FY-1993 -- 6.8/15.6 FY-1996 -- 9.0/23.1
FY-1994 -- 7.4/18.1 FY-1997 -- 9.6/25.6
At the end of last year we had almost 26 million names on our
mailing list, which was an 11 percent increase over the prior
year. Of this total we had 9.6 million customers who had
purchased from us during the past three years.
*******************************************************
Chart #4 Gross profit margin
FY-1992 -- 42.2% FY-1995 -- 42.4%
FY-1993 -- 41.8% FY-1996 -- 43.0%
FY-1994 -- 40.9% FY-1997 -- 45.5%
Our gross profit margin increased to 45.5 percent for fiscal
1997, which was an increase of 2.5 percentage points over fiscal
1996. The increase in gross margin was primarily due to lower
costs associated with liquidating overstocked product. In
addition, we had margin improvements from better sourcing and
from a greater proportion of sales from higher margin businesses.
Merchandise liquidations were about 9 percent of total net sales,
down from 11 percent in the prior year. During the fiscal year,
about 37 percent of our product was imported. The remaining 63
percent of our merchandise was purchased through United States-
based suppliers who source portions of their production through
programs outside the U.S., mainly in Central America.
*******************************************************
Chart #5 SG&A ratio
FY-1992 -- 35.0% FY-1995 -- 36.0%
FY-1993 -- 34.2% FY-1996 -- 38.0%
FY-1994 -- 32.8% FY-1997 -- 37.9%
Our selling, general and administrative (SG&A) expense ratio was
slightly improved over the prior year at 37.9 percent versus
38.0 percent. Higher sales per page gave us relatively lower
catalog costs, but this was mostly offset by increases in bonus
and profit sharing related to the additional profitability.
Paper prices in fiscal 1997 were about even with the prior year,
with savings on paper in the second half of the year offsetting
additional expense in the first half.
*******************************************************
Chart #6 Pretax return on sales
FY-1992 -- 7.0% FY-1995 -- 6.0%
FY-1993 -- 7.4% FY-1996 -- 4.9%
FY-1994 -- 8.0% FY-1997 -- 7.6%
Our pretax return on sales increased to 7.6 percent versus 4.9
percent in the prior year.
*******************************************************
Chart #7 Net earnings per share
FY-1992 -- $0.77 FY-1995 -- $1.03
FY-1993 -- $0.92 FY-1996 -- $0.89
FY-1994 -- $1.18 FY-1997 -- $1.54
In fiscal 1997 our earnings per share grew to $1.54 versus $0.89
in fiscal 1996.
*******************************************************
Chart #8 Year-end inventory/First-time fulfillment
(in millions)
FY-1992 -- $123/87% FY-1995 -- $169/88%
FY-1993 -- $106/87% FY-1996 -- $165/90%
FY-1994 -- $150/85% FY-1997 -- $142/86%
Our year-end inventory was $142 million versus $165 million in
the prior year. However, our first-time fulfillment was a very
disappointing 86 percent. Our first-time fulfillment goal is to
ship 90 percent of the merchandise ordered by customers at the
time the order is placed. We disappointed too many customers
during the peak season as we could not meet the unexpected strong
demand. The fulfillment problem carried over into this year
because of the depletion of inventories caused by the strong
fourth quarter demand. Getting the fulfillment back to
acceptable levels will be a major objective in fiscal 1998.
*******************************************************
Chart #9 Return on average shareholders' investment
FY-1992 -- 23% FY-1995 -- 20%
FY-1993 -- 25% FY-1996 -- 16%
FY-1994 -- 28% FY-1997 -- 24%
Return on equity increased to 24 percent in fiscal 1997.
I also want to remind you that we continue to operate the company
with a very strong balance sheet -- no long-term debt and a
considerable amount of cash -- $93 million at the end of the year
and $57 million at the end of this year's first quarter.
*******************************************************
Chart #10 Capital investments (in millions)
FY-1992 -- $5 FY-1995 -- $27
FY-1993 -- $10 FY-1996 -- $15
FY-1994 -- $17 FY-1997 -- $18
FY-1998 -- $43 estimated
This slide shows that our capital expenditures in the current
year will far exceed anything we have incurred in prior years.
We will be making some major investments to ensure we have the
infrastructure in place to accommodate future growth.
Specifically, we are adding warehouse and office space in
Dodgeville, a distribution and phone center in England, as well
as significant information services expenditures and improvements
in our Dodgeville distribution center.
While the absolute dollars we are spending are very large, when
compared to our history as a percent of sales or other ratios, it
is not as large as some prior years when we invested in the
infrastructure that has allowed us to grow to this point.
We often get the question about what we are going to do with all
of our cash. The capital expenditures are one place we will be
spending it. In addition, we will be continuing our stock
buyback plan. Last year we spent $30 million for stock
repurchase. In January, our board of directors approved the
purchase of an additional 1.5 million shares of stock.
*******************************************************
Chart #11 First quarter results (in millions)
FY98 FY97 Change
Net sales $244.7 $211.8 + 15.5%
Pretax income 18.8 7.3 +156.5%
Net income 11.3 4.4 +156.5%
Income per share $ 0.35 $ 0.13
Excluding gain on the sale of TTA
Pretax income $ 11.0 $ 7.3 + 50.2%
Net income 6.6 4.4 + 50.2%
Income per share $ 0.20 $ 0.13
Sales for the first quarter this year were $244.7 million, a 15.5
percent increase over the prior year. Again, the sales increase
occurred in all segments of the business.
Net income for the quarter was up significantly to $11.3 million
from $4.4 million in last year. Earnings per share increased to
$0.35 from $0.13.
During the quarter we sold our interest in The Territory Ahead
and realized a one-time after-tax gain of $4.7 million. If we
exclude the gain from that sale to come up with comparable
numbers, our net income grew 50 percent and our earnings per
share grew from $0.13 last year to $0.20 this year.
*******************************************************
Chart #12 First quarter margin analysis
FY98 FY97 FY96
Net sales 100.0% 100.0% 100.0%
Gross profit 46.1% 44.7% 43.8%
Selling, general &
admin. expenses 41.7% 41.1% 42.8%
Other income/
(expense) 0.2% (0.1%) 0.1%
Pretax income 7.7% 3.5% 1.1%
Excluding gain on the sale of TTA
Pretax income 4.5% 3.5% 1.1%
Improvements in gross profit accounted for most of our earnings
increase. The stronger gross profit margin was due to initial
margin improvements and reduced cost of liquidations.
Our selling, general and administrative expense ratio was above
last year as a result of higher bonus and profit sharing expense
and the cost of filling backorders.
Pretax income as a percent of sales for the quarter, excluding
the non-recurring gain associated with the sale of The Territory
Ahead, was 4.5 percent, compared with 3.5 percent last year.
In summary, fiscal 1997 was a strong turnaround year for Lands'
End. The stronger economy and better retail environment along
with a reemphasis on those things that make Lands' End a great
company -- customer service, quality, creativity and
people -- helped produce record results in fiscal 1997. The
first quarter was a continuation of those results. The company
has a great foundation with extremely high name recognition, a
stellar reputation with customers, a wonderful work force, and a
strong balance sheet. Thank you.
MIKE SMITH
Thank you, Brad.
Being a big sports fan, I often relate business to sports. And I
really believe that there are many similarities and parallels.
One interesting thing that I've noticed about sports fans is that
they have an instinctive knack for strategic thinking. If you'll
notice, most fans generally don't spend much time discussing the
particular score of a game for example. Oh, they'll remember who
won and lost, of course, but the specific score itself is less
important.
They talk about how the game was played -- they talk about
execution. Great moves or blown shots. They talk about how we
might need a big man, or a point guard, or more depth. They'll
talk about how we need to strengthen the defense or play a slower
tempo game.
Fans generally talk more about what determines the outcome of the
game than about the score itself. They know instinctively that
having a great coach with a great strategy and a deep bench is
more important than how many baskets were made in the game. The
score is simply a measure of how well you're doing all the other
stuff.
Just as in sports, the year-end numbers in business are the
result of how good a strategy was and how well it was executed.
And so while I'm pleased with the numbers that we posted last
year, and in the first quarter this year, those numbers will go
up and down. What's more important is the progress that we've
made to strengthen the company.
I'd like to touch on just a couple of areas where we are stronger
this year than we were a year ago. I won't go into detail here
because I do talk about it in the annual report.
First, quality. It always has been and always will be a high
priority, and we continue to focus on improvements. Last year at
this meeting I spoke of how we reduced returns to a five-year
low. This year, that trend continued, and we are now at an
eight-year low. And as you might have read in the annual report,
it will be a priority for us once again this year.
Second, and most important to our current and future success, is
the quality and the development of people that we hire and train
at Lands' End. We've continued to make good progress in this
area. We've filled several vice presidential and director level
positions within the last year with very strong people, and most
of thesse were internal promotions. This group has stepped up to
the plate and started to show some very strong results.
We've also seen a strengthening of skills and people throughout
the company, at all levels. While this will remain a high
priority for us, it's nice to see the development that's occurred
so far.
We also continue to strengthen our customer sales and service
areas. I get 2,000 to 3,000 letters a year from customers. This
past peak, in spite of product shortages, the number of customers
who took the time to write me about receiving outstanding service
jumped over 100 percent. And it was up 160 percent from two
years ago.
It's great to see that our ability to provide great customer
service continues to grow stronger every year.
The single biggest disappointment last year was our inability to
meet our fulfillment standards. Brad noted that our first-time
fulfillment rate was 86 percent last year, well below our target
of 90 percent or even higher. We were rolling along quite nicely
until the third quarter, when demand came on strong. This
depleted inventories for the critical Christmas shopping period,
and we still have not fully recovered from that.
I want to point out that one of our current strategies is to
produce the unexpected in our catalogs. We want customers to
look forward to each catalog, not knowing exactly what to expect.
Almost by definition, this is going to make forecasting more
difficult. So realizing the importance of driving customer
interest and demand, we need to better figure out how to respond
and react to that demand. Bill will get into that in just a few
moments.
Let me talk for a moment about sales growth.
One of the things I touched on last year was future growth
opportunities. I talked primarily in terms of where those growth
opportunities were -- men's big and tall, Germany, etc. I'd like
to talk this year about our strategy for growth -- how we view
it, how we might pursue it and where we'll look for it.
In the past, we've tried all kinds of approaches to grow the
company. We tried line extensions, spin-offs from our Lands' End
catalog, acquisitions, and start-ups. One of the things that we
learned through all this is that our way of doing business
differs from most others. Because of this, we find that we are
generally more successful when we do things on our own, rather
than trying to do things with others or assimilate other
companies into our own.
MontBell, for example, didn't make sense for us to own as a
California-based wholesaler, retailer and cataloger. But we
always loved the product, so it makes perfect sense as a line
within the Lands' End catalog, managed in Dodgeville.
So where will we look for growth?
We believe that one of our most valuable assets is the 26 million
name customer file that we've developed over the years. We
further believe that one of our greatest strengths is our
understanding of customers on that file and the relationship that
we've developed with them.
Our growth potential then, we feel, is greatest in acquiring more
customers who share similar lifestyles, habits and interests as
our current customers, and in serving more of their shopping
needs. Back in the mid-eighties, we saw that our customers had
kids and bought children's clothing, so we launched our Kids
catalog. We also saw that they had homes and bought a lot of
product for the home, so we launched Coming Home. And later, we
started our men's and women's tailored catalogs, corporate sales
and so on. We've been very successful with that approach.
Even today we believe we have a great deal of untapped potential
within those avenues of growth, and that's primarily where we'll
look for future opportunities.
One approach that I haven't talked about, and this may be a bit
controversial, is building and leveraging the Lands' End brand.
Branding is very popular today, and many people think that that's
the way we should grow. They believe we should create an image,
a position, if you will. We should package it and give it an
identity that will sell.
Let me tell you, we won't be building our brand, because we don't
think of ourselves as a brand in the classic sense. What we have
is our good name and reputation. You can't buy a good name. You
can't acquire it, and you can't create it. You earn it. It's
built customer by customer, order by order, phone call by phone
call, day by day.
You learn how to build a brand at business school. I think you
learn how to earn a good name at home. Think of the merchant of
yesterday. He knew you by name. He knew what you liked and
didn't like. He scoured the world searching for things you might
be interested in buying. And you knew him by name, and you
looked forward to seeing him. Even as today, he was competing
with a lot of other merchants at the time. But was he a brand?
I don't think so. I think you thought of him by his good name
and by his good reputation.
You know, we didn't create our position, it's simply who we are.
And we can no more change who we are than we can change the color
of our eyes or hair. People come to know us through who we are.
They talk about us to others. "Have you heard of Lands' End?
Have you heard what they did for me?" And we begin to earn a
good name and reputation. And the good name and reputation of
Lands' End is built and earned every day by the proud and hard-
working people who call Lands' End their company. They protect
it like it was their own, because in many ways, it is their own.
They care as much about our name as anyone.
The lengths that some of our people go to serve and satisfy the
customer makes me think sometimes that it's not Gary Comer who
owns a majority interest in the company, but some of our
employees. And that's a really great trait to have in people.
I'd like to read from a few customer letters to give you a feel
for what I'm talking about. These are all letters I got during
or since our last peak season.
The first one is from Honolulu, Hawaii. She writes, "Dear Mr.
Smith. I've held it in and I can't take it anymore. Your company
is so fantastic, it leaves me speechless. But I will try to put
my feelings into words. Lands' End service is excellent. Lands'
End quality is unsurpassed. Your prices are outstanding. And I
appreciate the fact that your company is constantly trying to
improve your products and service. I can't express the gratitude
and admiration I feel for the business values that you and your
employees consistently demonstrate." And then she goes on and
talks about what happens. And then she says, "Keep up the
excellent work, and thank you. You are appreciated." And she's
got that in capitals, underlined and with exclamation points.
Here's another one from Aurora, Ohio. "Dear Mr. Smith. It's rare
that my husband and I are knocked off our feet by a company's
customer service, let alone its products. We have bought Lands'
End products for years. However, we recently returned something
to your company, and I can not believe how well we were treated."
She goes on to explain what happened. She said, "Mr. Smith,
thank you for making customers a priority. It really shows in so
many ways. Not only that, it's refreshing and encouraging to be
treated well by a company."
And finally, one more from Manchester, Missouri. "Dear Mr. Smith.
I have never ordered from a mail-order catalog before, much less
written to the president of the company. However, my recent
experience was so positive that I felt I wanted to pass along my
thoughts to you." She goes on and explains what happened and
continues, "I wish I had the names of the people who helped me,
because they should know how nice it is to deal with people who
are concerned and extremely helpful. I am very pleased with the
entire transaction and will be sure to order again. It's good to
know that old-fashioned service still exists in the '90s world."
You know, Gary Comer's founding vision becomes more brilliant to
me every day. It's so simple, yet so powerful, to encourage
customer service like this to flourish.
Not all our letters are this glowing, but many are. And we know
that it's human nature to more readily criticize than it is to
praise. But during our critical peak selling season when
fulfillment was lower than we like, positive letters like these
outnumbered negative letters by over two to one.
When I travel, I meet a lot of people and get the same reaction.
We'll get talking and inevitably they'll ask where I work. And
when I tell them Lands' End, their eyes light up like it was
Christmas morning, and they start telling stories about how some
caring, heroic Lands' End employee saved the day. They talk
sometimes like they believe that they were very lucky to find
such an employee at a company and that they were lucky enough to
have been rung through to them when they were in such dire
straits.
Of course, I never tell them that chances are, whoever they might
have gotten would have done the same thing. Long after the
results of last year or this first quarter are forgotten, these
are the things that will give Lands' End its good name and
reputation. And this is what has value over time.
Thank you.
And now I'd like to introduce our next speaker. Bill Ferry
started with the company in 1981. He hired me to the company --
one of the best things that ever happened for me. I learned a
lot from him, and now that he's back, I look forward to learning
a lot more. I really believe that he's one of the top merchants
in the country, although at Lands' End, he does a lot more than
just merchandising. I'd like to turn it over to Bill Ferry, our
vice chairman of sales.
BILL FERRY
Thanks Michael, for the kind words, and good morning. Since this
is my first analyst meeting, I thought it appropriate to share
with you a brief overview of my background.
I started my career with the DuPont Company in their textile
fibers department focusing on marketing and merchandising their
fibers to the retail and garment manufacturing community.
Following that, I came to New York and spent six years in the
advertising world on the account side, again primarily focusing
on the soft goods accounts, but a little on the package goods
experience.
In the early 1970s, I joined a central Pennsylvania clothing
manufacturer by the name of Woolrich. For those of you not
familiar with them, they make functional outdoor clothing. It
was during the mid-point of my Woolrich career, in the mid-'70s,
that I had the first opportunity to meet Gary Comer and become
acquainted with Lands' End. At that time, Gary had a very solid,
very small marine fittings business. He realized that if he was
to experience the growth that he hoped he could obtain, he needed
to broaden his product offering. So, his focus was to add to his
mix -- quality, functional, outdoor clothing. That was an
exciting time for Woolrich and for Lands' End and obviously an
exciting period of growth.
In 1981, I joined Lands' End with a primary responsibility
in the product, quality and merchandising end of the business.
For those of you who are familiar with the early days, it was a
combination of a rocket ride and a roller coaster ride. It was
very exciting to work on the positioning of the product for this
company going forward. The last ten years I have been president
and CEO of a New Hampshire-based retail company, Eastern Mountain
Sports. EMS sells apparel and equipment to those who are
interested in the outdoor lifestyle -- hiking, biking,
mountaineering, backpacking, ice climbing, rock climbing and that
kind of thing. Today it's a 75-store chain.
In July, I had the pleasure of coming back to Lands' End to work
with Mike and the Lands' End crew. Obviously, when you do
something like that, there are a lot of questions as to what
changes have you seen at Lands' End over the last ten years.
During my 10-year vacation, there certainly were an awful lot of
changes at Lands' End and most of them very, very positive. But
to me the really neat experience was not what has changed, but
what hasn't changed -- a still unequaled dedication to quality, a
focus on customer service, and a loyalty and interest level from
our employees that is just absolutely suburb. They're fun to
work with, they're very dedicated and very focused. It's great to
be back.
Today I'd like to just briefly address the subject of the growth
of the core catalog. It's my belief that if we buckle down and
do what we do and do it well, that growth is doable. As you
heard this morning, we have a housefile of almost 26 million
names. As you listened to the letters that Mike read, we have a
strong customer relationship. I believe we have a strong ability
to design, develop and source a quality product. We have the
ability to produce an interesting, involving and informative
catalog. We have a dedication to service that permeates
literally the entire organization, and I think we have very
talented and dedicated workforce. In my experience, this is a
unique combination of skills and assets. Add to this an
environment in Dodgeville that encourages new ideas, testing
things, a willingness to experiment. Add to this what I think we
all know as a time-bound customer, a customer who is increasingly
service focused. Add to this a renewed customer interest in
quality. My sense is that the combination of this bodes well for
the core catalog at Lands' End.
As Mike and Brad indicated, this all came together for the
company in the third quarter of last year with an improvement in
performance in the core book, and we are happy to report that it
has continued through the first quarter. It is very important,
however, that we don't rest on our laurels. Perfection we have
not reached by any stretch of the imagination, and we are in a
very, very competitive retail environment. For continued growth
of the core book, I think there are two critical areas that we
need to focus full energies on -- first is merchandising product,
and second is the creative challenge.
From a merchandising standpoint, we must pursue aggressively the
challenge to build the best product we know how to build and
price it fairly. We must recognize that this is not a one-time
challenge, but rather a never-ending challenge that goes on day
in, day out. We must be true to our claim as direct merchants.
We must continue to prowl the world for interesting finished
product, raw material and sourcing opportunities. Today we must
go all out to know our customer intimately. This is not just
focus groups and research. It really is an overt effort on our
part to get to know them the best we can on a one-to-one basis.
Today, the textile market we deal with is alive with innovation
and new ideas. We've got to be there, we've got to be aware of
these ideas, we've got to test them, evaluate them and take
commercial those which we think are the most meaningful to our
customer. There are new sourcing opportunities world wide. We
must improve our skills at partnering and no longer rely on the
typical buy/sell relationship. We must constantly ask our
sources what we can do to add quality, to add features to this
product, not what we can take out to save a nickel or dime here
or there.
Sourcing is a key issue for Lands' End today, and it will
continue to be for the immediate future. Yesterday, Lands' End
sold primarily in the United States and serviced it through one
distribution center in Dodgeville, Wisconsin. Today, we sell
internationally, and we service it through four distribution
centers located worldwide. This requires an altering of our
sourcing strategies, to see that we economically meet the
worldwide demand.
We recognize that we are in a competitive retail market today.
I think there is some validity in the thought that we are over-
stored and over-cataloged. We must be aware of that. We must be
aware and constantly testing the product that our competition is
selling. There is no suggestion here that we develop a
competitive paranoia over what's going on, but rather maintain a
competitive awareness as to what's going on. To assure the
Lands' End product, in fact, competitively stands up very well
from a quality/value standpoint. Today, customers' expectations
for service are constantly increasing, and it's no secret that
retail, in general, is responding to those requests for
heightened service levels. What was unique yesterday is parity
today. We must be aware of that and constantly strive to raise
the bar on our own service levels.
Our primary service measure is first-time fulfillment. As you
heard this morning and have heard in the reports, this is an area
where we need some substantial improvement. Our fill rate last
year was 86 percent. I assure you we are aggressively addressing
this. We have added staff both in the areas of inventory
management and in quality assurance. We've improved our systems
with EDI, quick response, what we refer to as net position
management. We are working hard to improve our sourcing
relationships. The thrust of that is a greater frequency of
contact with the sources, both at their sites and in Dodgeville.
We are working hard to manage the process further down the
pipeline.
We are working hard with raw material suppliers to project our
needs two to three years out, so that they know and we know
together what we need to accomplish. We are working very hard on
improving our ability in the whole area of contingency planning,
whether that is in raw material management or in holding open
production time with our sources. Further, we are addressing
growth of the core catalog through line extensions. I think
there are some very obvious and logical extensions of our current
product mix which would better serve our customers. And we are
also looking at new product categories, as Mike mentioned
earlier, such as MontBell, which we will be introducing in our
October catalog. The MontBell line is designed by Isamu Tatsuno,
who is a 20-year experienced designer of outdoor apparel and who,
himself, is quite an activist in the outdoors. That product
however, will be sourced and managed by Lands' End.
I'm confident that we can continue to improve our relationship
with our customer so we can clearly understand their needs and
expectations and, with that understanding, develop product that
meets or exceeds their expectations.
The second key growth challenge for us is in the creative area.
The average Lands' End household receives and reads six
periodicals a month. It's our goal to be one of the six
periodicals that they read each month. Certainly a lofty goal
and ambitious, yes, but I think here we must set our sights high.
We must create a level of anticipation and involvement with the
customer through the catalog. Create anticipation through
unexpected editorials. Editorials on product as it is built
around the world. Editorials on people and crafts that reflect
our belief in quality. Editorials on adventure. People
learning, experiencing, doing things -- and our ability to share
those experiences with our customer through our catalog. We want
to increase anticipation through product news. New product in
each catalog. Cut-above product that reflects our ability to
develop best-of-class product and special values that our product
managers find as they tour the world. We want to create
involvement through covers that stop, that differentiate Lands'
End from everything else that is being received in the mail on
that given day. We've got about ten seconds where the customer
is going to make a decision to put us in the "I will read" pile
or the "I will throw away" pile, and obviously, we want to be in
the former.
We want to create involvement also through a continuing,
aggressive attack on electronic media. As you may be aware,
Lands' End has been on the Internet for two years. This is an
exciting business, a rapidly growing business, albeit a very,
very small part of our business today, but one that we think has
great potential in the years ahead. Our key mission creatively,
however, is selling product. Our approach is copy-intensive,
informative, not cute. We want to talk about features. We want
to talk about benefits. We want to talk about the quality
details in a product. We want to be sure that we can
differentiate our product from that which is in the marketplace
at large. We want to talk value. In short, we want to give our
customer more than enough information to make an intelligent
buying decision.
Secondly, we would like to simplify the shopping experience. If
we are time-bound, it is to our advantage and to the customers to
create the easiest shopping experience we know how. We believe
that can be done through the organization of the catalog, through
better indexing, through presenting product by category, through
effectively accessorizing the product to show the customer how to
build a wardrobe out of a series of different Lands' End
products. We want to come up with interesting shopping aids.
Some of you may remember in the last December book, we had the
post-its -- that was fun. In the past June Father's Day issue,
we had the tie templates, where customers could see how ties
looked on different shirts. We obviously will be repeating those
and hopefully coming up with more ideas in this whole area of
interesting and involving shopping aids.
It is our challenge to make the catalog as involving as possible.
It is our challenge to try to create a piece that the customer
really does want to spend more time with. We must strive to tell
such a compelling story in the Lands' End catalog that our
customer would feel guilty buying clothing anywhere else. An
interesting challenge and a fun one, and we'll be hard at it. I
believe we have the talent, dedication and resources to produce
continued growth in the core catalogs. While we can't guarantee
that, I will guarantee that we will put forth one heck of an
effort to make it happen. Thank you.
MIKE SMITH
Thanks, Bill. That concludes our talks, and we have plenty of
time for your questions.
*******************************************************
Q: Have you seen any change in response rates in New York since
you started collecting sales tax there? Are sales in New York
growing?
A: SMITH: We did see an initial decline in response rates,
particularly when we first announced it in the catalog. We
couldn't do an A/B split, so it isn't purely scientific, but
after an initial decline in response, it came back within a
couple months to what we think is pretty much former levels. So
there was a primarily short-term impact on that.
Sales in New York are growing pretty much consistently with the
rest of the country. We don't track it carefully by state. We
have that information, but we look more at customer segments than
at geographic segments.
Q: Could you speak a little bit more about your experience with
electronic retailing on the Internet versus other experiments
through the years?
A: As Bill mentioned, while it's still very small in terms of
absolute numbers, we are very excited about it. We think that
it's going to be very important in the future. If you've looked
at our web site and noticed some of the changes we've made,
you've noticed that we've been fairly aggressive on the site. We
have one of the better retail sites out there, and the customer
really seems to be responding well to that.
We actually get more correspondence from customers over the
Internet than we do by old-fashioned letters today, so that just
gives you a feel for the impact of that. We're very excited
about it, we think it's going to be important, but it's small at
this point.
Q: Could you discuss what has to be done to get your fill rate
up to 90 percent and why is it taking so long?
A: FERRY: The fill rate we experienced, as Mike said, began to
deteriorate with the increased demand in the third and fourth
quarter of last year. The first and the most logical thing we
did was to move early receipts up. Our hope was that we could
have caught and made up that gap by this time. Demand has
continued strong during the first quarter of this year, and
candidly, as Brad indicated, we are not at fill levels that we're
proud of at this point.
The solution to remediating fill is a combination of many things.
We are effectively addressing it by watching very carefully what
we put into the catalog. We are pulling product from the catalog
to see that we don't jeopardize fill from that standpoint. From
a sourcing standpoint, we have put a lot of additional staff into
inventory management and into the quality assurance function and
have improved our ability to deal with our vendors.
Another is to consolidate our colors so that our risk is more
centralized and more easily manageable. And of course, the
electronic contribution of net position management and
forecasting demands out over a longer period of time and sharing
those forecasts with our sources should also be a benefit. I
believe we'll be in much better shape as we move into the third
and fourth quarter of this year. I candidly would have thought
we would have been in better shape by now, but that's not the
case. However, we do see some very clear indications of
improvement as we move toward the third quarter.
SMITH: I'd just like to touch on that for those of you who are a
little bit newer to the industry. Fulfillment problems cost us
in three main areas. First, short- term sales are hurt because
we don't have the product on hand and some people won't wait for
the backorder. Secondly, it costs us more in phone time, as
operators are spending more time with customers, and people are
calling back more. Third, it costs more in shipping, as all the
subsequent shipments are on us, and that is very, very expensive.
It also hurts us in terms of future customer demand because
people get upset and don't order as much. And when we pull
product from future books, those books are weaker because we're
pulling some of the stronger product out of those books. So it
hits us on a number of fronts. On the other hand, if we have too
much inventory that also hurts demand, because then we can't
afford to bring in as much new product, SKUS, etc. Also, too
much inventory results in increased liquidations, which puts
pressure on the margin. So that's what we're trying to balance.
Q: The ratio of your 36-month buyer list to your total list has
gone down pretty steadily over the last four years, relative to
sales, while your productivity per page was up last year. Is
that because people who are buying from your catalog are simply
buying more, and you have a growing group of core customers who
have significantly increased their spending at Lands' End? Or
are you getting a lot of incremental buyers and your productivity
from prospecting is at or above what you anticipated.
A: SMITH: It's a little of all of the above, but I'd be careful
with that ratio of 36-month buyers to the total housefile. Keep
in mind that as people age, some are never going to reorder. To
give you an idea the industry average, what is quoted is that
about 50 percent of the people who order once are not going to
order again. That's the industry. So as those groups age,
you're going to have more and more older customers who aren't
going to affect your business in any way, even though you still
count them on the total housefile. You expect that ratio to get
smaller and smaller over time. It's really the 12-month file
that we really focus on, our active customers, as part of that
three year segment.
Q: Does the 36-month file include international?
A: SMITH: Yes, that's worldwide. It includes everything.
Q: Could you elaborate on how line extensions increase your
share of wallet?
A: FERRY: Some of the most obvious examples of that are in size
extensions. As you know, we initiated a program for the big and
tall man last year, and our petite business has grown very
nicely. There are obvious extensions in expanding just those two
concepts alone into additional product, and I believe there are
more opportunities in outsized product.
If you look at some of the product categories, we are currently
offering what I call a good core product, but we haven't expanded
beyond that. One example might be sleepwear, another might be
accessories -- not moving out into new categories, but just
maturing and refining existing business categories.
Q: Will you stick with the apparel and home businesses?
A: FERRY: It will very definitely remain apparel and home. As
Mike said, we learned that some of our customers had kids, so
we're at work on that too.
Q: What are your opportunities in the school uniform business?
A: SMITH: We've recently launched a school uniform catalog.
That's a difficult market to get a handle on, because most people
don't classify school uniforms as a separate market. We know how
many schools and how many students are out there, and we also
know the trend is showing more and more schools moving toward
uniforms. We're very encouraged by the early results. This is
really driven by requests that we were getting from customers
that we offer a school uniform catalog. We're going to see how
it goes. We are very excited about the opportunity and think
that it could be quite large.
Q: Do you think that your high gross profit margin of 46.1
percent in the first quarter is a peak, or is it sustainable?
A: FERRY: Obviously, we hope it's sustainable. I do not want
to indicate that I think it's a peak, but the air beyond that is
fairly thin. As you can see, there have been some pretty
dramatic movements that Mike and his team have made in the last
couple of years and to compound that kind of improvement would be
very difficult. But the sustainability is, I think, possible
through our maintenance of our IMUs and the mix of product. The
big question here, of course, is if we can manage the inventory
to avoid the pressures of liquidation.
Q: Could you discuss the profitability of your overseas markets?
A: SMITH: We really don't get into a lot of detail on breaking
that out, but obviously we're investing in those countries. We
do make a big investment when we go into a country, because we
want to do it right. We've been very pleased with pretty much
all of our international efforts for the most part. Germany was
launched last fall, and we've been very pleased with that. The
biggest disappointment, even internationally, has been with our
fulfillment, as the demand has exceeded our expectations there in
most cases. Overall, we've been very pleased with the strength
of the international markets.
Q: How many more years of investment will it take to get to the
levels of profitability that you're comfortable with?
A: SMITH: Well there's a model that a lot of people use where
you break even in year three and recoup all your investments by
year five. We believe we should be better than that. That's our
goal. In general, we have been better than that, partly because
of our strategy of spinning off the Lands' End file. We already
have customers in countries where we don't have landed
operations, so we have, in general, been better than that model
and have, in general, been profitable more quickly than that.
Q: Which of your products are higher margin?
A: FERRY: We don't share margin by product type. It might be
interesting to understand our whole approach to merchandising the
catalog. We are not driven by the margin on any given item.
Rather, we really focus on the value of the product that we can
offer to the customer, and the margin falls out of that decision.
The pricing is not driven by the margin objectives.
Q: Regarding capital expenditures -- how much will you be
spending for your new office building and distribution center,
and why do you need them?
A: JOHNSON: We need both of them for growth. We are literally
out of space in terms of office space and distribution center
space. We have some segments of our business that are growing so
fast that in order to meet sales growth over the next year, we
will need that additional space. Our office building will be in
excess of $10 million and our distribution center about the same.
Q: What percentage of demand for out-of-stock items goes to lost
sales instead of backorders, and how successful are you at making
substitutions for out-of-stock items?
A: SMITH: It varies by product and by time of year, as you might
expect. If it's a Christmas gift item and it's December 15th,
we'll have fewer people waiting for the backorder. However, I've
been continually surprised by how many people will wait for those
types of items until after Christmas. If they want the product,
they will wait, but it will vary for that Christmas item. If
it's very close to Christmas, maybe 25% of the people might wait.
If it's not a Christmas item and people wouldn't need it right
away, well over 50 percent would take the backorder. It's
similar for substitutions. It depends on the product. If it's a
close substitute, more people will take it. If it's something
that's less similar, we're going to find fewer takers.
Q: So 4-5 percentage points of your 14 percent backorder is lost
sales?
A: SMITH: It varies on either side of 40 to 50 percent. Your
4-5 percentage points wouldn't be completely out of the ballpark,
but keep in mind that would vary considerably.
FERRY: It was interesting that when we went into the latter part
of the Christmas season and realized we were up against this
service issue, we put together a program with our operators
whereby, for selected products, they could substitute product at
a greater value than the one that was ordered. That did increase
the percent of customers who took the substitution. However, it
was intriguing that, even with that program, a large number of
customers opted to wait for January or February delivery.
Q: Why would catalog customers tend to buy earlier in the season
than they do at retail?
A: SMITH: I'm not sure it's all that different. One of the
things that is different is that at least we can control when our
customers see our book, while in retail you can't control when
they're going to walk into your store. So much of that is driven
by when we will send our catalogs out. We've seen the same thing
as has been seen at retail. People are buying closer to need,
year over year that seems to be the trend.
Q: Could you discuss the competitive environment, both catalog
and store-based retail? Some seem to be doing very well, others
are not. Where are you gaining market share?
A: SMITH: By the way, that is how we define our market. Store-
based retail is our biggest competition, as that's where the
business is. We do not spend a lot of time studying the
competition, how much share did we steal, where did we steal it,
I don't think that's very productive. What we focus on is how
much are we getting our customers to buy from us, how much more
than last year, what else are they buying, what else could they
buy. That's really where we spend most of our efforts.
Q: What are the current tone and growth prospects for your Kids
business?
A: SMITH: We've been very excited about our Kids business,
particularly recently. If you look historically for us at Lands'
End, that business has kind of been up and down. For the last
couple years, we made some changes. We put some new management
in place there, and they've really been on a roll, as you've
noticed in our press releases. So while we don't know how high
is high, I can tell you it's been raised significantly over the
last couple of years, as we've seen the strength of that
business. If you look in the market, there are some very
profitable, very fast-growing kids businesses -- Gymboree and Gap
Kids are doing very well. So we think that's still a very young,
very immature business, and there's a lot of potential yet to be
had in the Kids business.
Q: You had strong productivity increases in the second half of
last year. How are they carrying over into the first quarter?
A: SMITH: Just a comment on productivity. What we look at is
what we call comp segment performance, quite similar to comp
store performance. How deeply we mail has a huge impact on
productivity. One of the things that happens as we add pages is
that we tend to get less productive. That's because the
incremental space is not going to be as productive as all the
core pages, so you tend to find that productivity does decline.
Since we did add some pages and space in the first quarter, the
productivity increases were not equal to last fall, and we would
expect that to continue going forward. We're still seeing
productivity increases, and over the quarter we saw some nice
productivity increases in total, but probably not to the extent
that we saw last quarter.
Q: Are your international plans as aggressive as they have been?
A: SMITH: That's a very good question because we've been
weighing that fulfillment issue against international expansion.
Right now, we're kind of continuing to explore some new markets.
At the point in time when we feel comfortable that fulfillment
will be satisfactory, we will continue to push ahead. If we feel
we haven't solved the problem, and by the way we expect to do so,
we would hold off on further international expansion.
Q: Do you plan to test a proprietary credit card?
A: SMITH: In one of our recent catalogs, my customer letter
touched briefly on that. I didn't specifically highlight that,
but if you look at it, I kind of think it's a Skinner experiment
gone awry. A number of catalog companies s try different things,
such as free shipping or a discount on orders. People try new
things, they see a spike. They try something else, they see
another spike. I believe it does two things. One, the gains are
short-lived and they're continually up against anniversarying
those short gains. Two, I think it clouds the issue with the
customer. Those costs are going to show up somewhere, and I
think that we'd rather be straightforward and base our prices
primarily on the cost of the product and not get into all the
promotional games. So we've looked at the possibility of a
proprietary credit card, it but we don't feel it's right for us
at this time.
Q: About two years ago the economics of prospecting didn't look
so good. How do you see them now and how have paper prices and
postage had an impact?
A: SMITH: Remember that the attractiveness of prospecting is
based on both costs and results. Our costs are the amount we
invest in prospecting, and results can be the response rate or
average order value. If costs such as paper and postage go down,
obviously that makes it easier, all things being equal. If those
costs go up, it makes it tougher. However, if we get a stronger
response rate or higher average order value, that makes the
economics of prospecting more attractive. However, regardless of
where costs are, we've got the challenge of bringing in new
customers every year.
We've seen productivity improvements in prospecting, beginning
with last fall. We structured the company a little differently
and set up a group of people whose primary responsibility was to
acquire new customers. In the past, that had fallen in the realm
of the teams, so that group had the responsibility of both the
core books plus prospecting. And, of course, we know which one
would tend to get the most attention. So we feel that is working
and hope to see further gains in the future.
Q: What is the impact of that on SG&A?
A: SMITH: There really is not a significant impact. The main
reason is that the more productive we are, the more names we can
afford to mail, which gives a higher percentage of the business
to prospecting. While the net effect of gains or reductions in
prospecting is not significant on the SG&A in total, it is
significant to our growth. The more names we bring on, obviously
the more growth we'll have, and as a result of that, more new
names and higher profitability.
Q: Do you see an improvement in SG&A percentage going forward
due to changes in paper cost?
A: SMITH: Paper cost is obviously a big component, and as that
goes up and down, that piece has a big impact on SG&A. But the
bigger piece is the productivity measure, which is where we have
to focus our efforts.
JOHNSON: Let me just add that we are doing some more investment
spending, things like the year 2000. That's a significant
expense that we need to cover in SG&A. We're also adding people
as part of the infrastructure thing we talked about earlier.
We're going to need some sales growth to leverage that SG&A
ratio.
Q: Do you see opportunities to increase prices along with
quality improvements?
A: SMITH: Our strategy hasn't changed but our execution has.
We've always seen that our customers are willing to spend more on
product if the quality is there, if the product is there. But I
think that in the last few years, sometimes we've seen that more
products sell at $25 than they do at $50, so we introduced more
products at $25. And that we have changed. Last year, I talked
quite a bit about what we call cut-above product, or higher-end
product, and that has driven price points up. I'd like to turn
it over to Bill for further comments on that.
FERRY: I think Mike has summarized it nicely. We do not see and
do not want to get into increasing price points on what we call
our core product. We really do believe that one of the basic
tenets, albeit we're dealing with an upscale audience, is the
value of the product, and that audience clearly does respond to
value. On the other side, there are opportunities as we look to
expand the business categories, to produce yet better and better
and higher quality and, in turn, more expensive product. And
that has worked. That has worked throughout the history of
Lands' End, and we really want to try to continue to drive that
going forward. The whole idea of the $400 cashmere sweater I
don't think will ever become a core business for us, but we did
very well with it last year. However, the basic business was the
$129 and $139 cashmere.
Q: Was the $400 cashmere successful in terms of sales per 1000
pages?
A: FERRY: The core item is what really drives the success of
the category.
Q: What works well prospecting, and are you considering more
external marketing to get more customers into the fold, rather
than just adding more books?
A: SMITH: Interestingly, it's very similar. What works as far
as product, as far as creative presentations and merchandising
techniques, 95 times out of 100 is the same for prospects as for
the core customers. One of the things that we do focus on is
trying to address some of the apprehension about mail order
shopping. So we'll talk about the ordering process and the
guarantee, the service, the sales reps, things like that. We do
find that people respond to that because we've got to overcome
that fear of the unknown with people. But as far as what sells
in the book, it's very, very similar. What you mostly see in the
prospector books are the core products, the big sellers. We do
try to sprinkle it with new products and finds-of-the-month, just
to add some excitement.
Regarding external marketing versus just adding more books, I
think there's a limit to how many customers you can acquire by
adding more books, simply because there are going to be some
people where that hurdle of buying through the mail is going to
be too high. We do think we still have a lot of potential there,
and just our current prospecting results would bear that out. I
think we do need some completely new approaches and new
techniques. One small example of that, which you might have
seen, is the new Inlet stores. While they are outlets, we call
them an Inlet. One of the benefits, we believe, is that it's a
better representation of Lands' End and better sells the company.
We've got a lot more services in the Inlets. If you walk in
there, you'll see a lot of signage on who we are and on our
philosophies. We feel that we're going to bring in some new
customers from people who walk through that store. That's going
to be a very tough area because people have been trying to do
something like that for years, and I'd say nobody has been very
successful. But we do think it's important to try. I think the
Internet is one good avenue for that, and we have found some
things that have gotten us pretty excited about customer
acquisition over the Internet.
Q: How has the trend from career to casual dressing had an
impact on the business?
A: FERRY: My sense would be that it really is hard for us to
measure the impact of career to casual in the core book,
Certainly product categories like oxford cloth shirts have been
good, sweaters have been good, but speaking personally, I can't
decipher how much of the impact of that is career. We had an
issue focus a year and a half ago on career, and it has not made
the list of the ten brightest things we've ever done. So it's
tough to read in the core book. On the other side, the two
specialty books, First Person Singular and Beyond Buttondowns,
have done very well, and I think are playing into a trend that
says we might have overdone casual dressing, and let's look
tailored, let's look neat, let's look clean, let's look
presentable as we go to work. Those two books have responded
very, very nicely in the last year.
Q: Have you seen shifts in your customer comments regarding
domestic versus imported country of origin?
A: FERRY: I don't think we've seen any precipitous shifts in
the response from our customers. You're always going to get some
concern about manufacturing in the Pacific rim or other parts of
the world, but we have not seen any increases in the customer
reaction to that as we have shifted the sourcing mix. So I don't
consider that an overall issue. I think there are pockets of the
business where it is important. For example, within Corporate
Sales, the need for domestic product seems to be a little
greater. Obviously, our preference would be to source everything
we sell domestically if we could, but it's just becoming a more
and more difficult task today. The country of origin listed on
the label, including those of 807 manufacturers, shows the
country in which it was sewn.
SMITH: We do get more comments on specific countries than
overall. So when the situation in Tiananmen Square was in the
news, people were more upset about products from China. When the
Berenson situation and the hostage crisis in Peru were in the
public eye, we got more comments about Peru, especially when we
were pushing our Peruvian cotton.
FERRY: But mind you, we just did quite a feature on American
cotton, and customers expressed concerns over that. It's neat
that we've got a customer base that's willing to share their
thoughts with us on what we do, but none of it is at an urgent
level by any means.
Q: Could you tell us more about your selling site on the
Internet?
A: SMITH: Our website is www.landsend.com. We have been
selling on the Internet for about two years. We have what we
call the intelligent agent, where you can check stock on
products. We also have separate electronic order blanks, where
you can order anything that you'd like from the site or the
catalog, and quite a few people do use that. We also have
liquidation on the Internet, and that's been up about a year and
has been going very well also. We continue to add things to
that, and in addition to selling product, we're trying to balance
that with news about the company and just general interest things
to get people into the website. Sales is just one piece of it.
You might have seen Viking Voyage 1000, which is very, very
interesting, and we've gotten a lot of comments about that. What
we're doing is sponsoring Hodding Carter III, who came to us with
an idea. He wanted to recreate Leif Ericsson's journey, the
Viking voyage in 1000 A.D. So he built an authentic replica of a
Viking ship that we just christened two days ago. It will be
things like that which we can use to draw people into the web
site that we think are necessary to make that successful.
Q: What percent of your product now offered on the Internet?
A: SMITH: You can order any product through the Internet, but
as far as online, point and click, it's still very small. I
would say 300 products, somewhere in that neighborhood and
growing.
Q: What is the reason there is a limited assortment on-line?
Q: SMITH: One of the difficulties right now is having the
product. On the Internet it's very easy to remove a product,
whereas if it's in the catalog, it's there for all to see until
the end of time. It's not particularly difficult to add product
to the Internet. We just wanted to take a more prudent approach
to putting products up there.
JOHNSON: One other comment on the Internet, internationally, the
Internet's been very successful and has also been a good source
of new names for us.
Q: How large are your sales on the Internet?
A: SMITH: Small. Very small at this point, but growing.
Q: Can you break down your catalog circulation by core domestic
and how many were mailed outside the United States?
A: SMITH: As with sales, we don't break out catalog
circulation. You can rest assured there is a relationship
between the size of the businesses, the number of pages in the
catalog and the circulation. The formula we use and the break-
even point are the same for all businesses obviously. So that
could give you some idea, if you know the pages in each, where
circulation would fall.
Q: Do you think the trend to casualization has altered your
product mix or do you see your merchandise mix as formality
neutral, so you can go in any direction regardless of trend?
A: FERRY: We don't see the trend to casualization altering the
product mix significantly. As you say, we would be formality
neutral. But I do think one of the interesting parts of this is
that we have gotten very positive response to some of the books
showing how some of this product should be worn. It has been
received very, very constructively and very, very positively by
our customers.
Q: We've seen the price of cotton rise for quite a while now.
What impact does this have on your margin?
A: FERRY: As far as the cotton prices are concerned, there is
no significant impact on margins at this point. The primary
reason is that we have been able to pretty much forecast our
needs over a longer period of time, which tends to permit our
sources to make extended contracts and neutralize some of the
impact in raw material variance.
Q: How much of the productivity improvements can be attributed
to better targeting?
A: SMITH: At this point, the improvements have come primarily
from merchandising and creative. We've invested quite a bit in
the database and systems, and we're still learning that, feeling
our way around. We haven't made significant gains in that area,
but we're very hopeful for the future. We've learned a lot of
things, and we have much better access to data today. We're
seeing some efficiencies, but as far as breakthroughs in
targeting, we've not seen those as yet.
Q: Have you learned more about your customer via the Internet,
and can you get some information from them that way?
A: SMITH: We have been very sensitive to the confidentiality
and privacy issues on the Internet, and we have chosen not to
pursue that aggressively. We do know what other web sites they
come from, etc. So as far as their behavior goes, we do learn
and capture that, but at this point, we have not pushed a lot of
information simply for that reason. As you know the Internet
community is very sensitive to the privacy issue, especially with
a big corporation. So that's why we've chosen not to pursue that.
Q: What are the trends regarding the number of products in the
catalogs?
A: FERRY: We do see and in fiscal 1998 would expect to see a
slight increase in SKUs as we enter new businesses and add sizes.
Obviously, it's going to take new style and SKU investment to do
that. At the same time, we have a very clear focus on SKU
productivity to be sure that we're not experiencing significant
deterioration there. So we'll be pulling SKUs from some of the
current offering to accommodate the SKUs from the incremental
offerings. The net effect will be a slight increase in SKUs and
styles.
Q: What is the average number of SKUs per style?
A: The average number of SKUs per style is increasing as we
expand the size offerings, counterbalanced a little bit by
drawing back on the number of colors offered.
Q: In the annual report, global sourcing was the number two item
you addressed. What are the issues there, what is your game
plan?
A: FERRY: The key issue in global sourcing is maximized
worldwide fill. If you ask if we have an objective, you bet we
do, and that is to maximize fill in a worldwide marketplace.
That means that we need to develop sourcing more broadly. It's
going to force us into sourcing in countries where we currently
don't do a lot of business, for example throughout Europe. It
also has implications on systems, the flow of goods, logistics,
getting it there. We've got to be very careful to watch customs
regulations as we move country to country, to better understand
and take advantage of that. But the primary goal, clearly, is
worldwide fill.
Q: Where do you stand now? Is it a six month effort? A five
year effort?
A: FERRY: It clearly is not a six month effort. I would hope
at my age that it's not a five year effort as well, but that it
sits happily somewhere in between. It's not a simple solution.
It's not one where you wake up Monday morning and say, "Aha! Got
it!" It's an ongoing challenge as we continue to expand.
Q: Your pretax margin is below what it has been in the past.
With respect to incentives and targets, can you give some idea
where those are at for this year?
A: SMITH: The stretch this year is very comparable to what it
was last year. In absolute terms, it's obviously higher, because
it's coming from a higher base. As you noted, we're well below
our historical high in terms of pretax profit margin. Can we get
there? I don't know, but I think that's where we have to be
aiming. I think the increase that we've seen last year from 4.9
to 7.6 shows significant gains can be made, and if we believe
that, I think we can get some further gains in the future.
SMITH: Okay, I'd like to thank everybody for coming, good to see
everyone again and I look forward to seeing you next year.