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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 20, 1999
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 20, 1999.
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 20, 1999 By: /s/ STEPHEN A. ORUM
Stephen A. Orum
Executive Vice President
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 20, 1999.
LANDS' END, INC.
12TH ANNUAL UPDATE FOR
PROFESSIONAL INVESTORS
New York, New York
May 20, 1999
(edited transcript)
Statement regarding forward-looking information
Statements in this document that are not historical are forward
looking, including, without limitation, statements about goals
for Internet sales, anticipated cost savings, and possible
circulation reductions and their anticipated effects on sales or
profits. As such, these statements are inherently subject to a
number of risks and uncertainties. Future results may be
materially different from those expressed or implied by these
statements due to various factors that may occur. Such factors
include, but are not limited to the following: general economic
or business conditions, domestic and foreign; continued growth
rates for e-commerce shopping; the company's ability to attract
customers to the Internet; technology developments and their
availability and cost; customer response to product offerings and
initiatives; costs associated with printing and mailing catalogs,
dependence on consumer seasonal buying patterns; the ability of
the company to complete its Y2K programs; and fluctuations in
foreign currency exchange rates.
DAVE DYER
Good morning, and thank you all for meeting with us today. We
are fresh off our annual shareholder meeting yesterday. As you
probably know, we have been communicating quite a bit with the
financial community since I came back to Lands' End in late
October of last year. Since that time we have had four
conference calls, our first conference calls ever, and we've met
with quite a few of you in Dodgeville. Those of you who have not
come to see us in Dodgeville are certainly welcome to come and do
so. And we are gathered here again today. We are questioning
whether a forum like this, in light of our conference calls and
visits, is necessary in the future or if you would be better
served by our attendance at key industry or investor conferences.
We would welcome your input on this matter.
I have said early on that one of my key objectives was to improve
our communications with the financial community, not only in the
quantity of communication, but also in its quality. And as an
example of that, I think we were one of the few retailers to
release exact annual Internet sales, which we did at the end of
the fiscal year.
Today, I have with us Chip Orum, our chief financial officer,
Mindy Meads, who is executive vice president of merchandising and
design, and Lee Eisenberg, our executive vice president and
creative director. They'll walk you through some of our
financial results, our merchandising plans, some of our new
advertising campaign and what's going on in the creative area at
Lands' End.
I did state last November that my short-term goals were to return
the company to its traditional level of profit through improved
merchandising, better catalog creative, a leaner and more focused
organization, and expense discipline. I believe we have made
progress in each of these areas ... and as evidenced by our first
quarter, we have begun our journey back to a more traditional
level of profit.
As stated, we have also made great progress in attracting talent.
Mindy Meads has rejoined, Lee Eisenberg has joined us from Time,
Inc., and we just announced last week that we hired Bill Bass, a
group director in charge of the e-commerce group for Forrester,
Inc., to lead our Internet efforts. We have brought on Sid
Mashburn, who was formerly at Tommy Hillfiger, Inc., and before
that at Ralph Lauren, to head our design efforts. And we've
brought in Jim Fielding who spent most of his career with The
Gap, Inc., and then took a little one-year sabbatical with J.
Peterman & Co. We have begun to really repopulate our company
with some terrific talent. We have a lot of talented people now,
and they just need leadership and direction, so we feel we're
well on our way.
More important though, I believe that we have clearly begun to
reposition Lands' End from a catalog company to an emerging
e-commerce player. This is one of the first things I did. We
were organized around the printed catalog, and what we had was
independent, autonomous business units that focused on printed
catalog performance. What we have done is go back to a more
centralized organization where our merchants and inventory people
are responsible for product categories across all channels of
distribution. A sale is a sale, and it doesn't matter where we
get it. An e-commerce sale has the potential to be more
profitable because of the ad cost. Ad costs are the creating,
printing and mailing of the catalog, which was 43 percent of
total SG&A for fiscal 1999. We expect an Internet sale to have a
much lower ad cost, so there is the potential for leverage as we
move sales from the catalog to the Internet.
We have just launched a major consumer campaign to acquaint new
and existing customers with landsend.com and Lee's going to walk
you through that. I will say that since we have launched the
campaign, our Internet business it is at levels we did not see
until after Thanksgiving of last year. The results have been
pretty phenomenal so far.
I guess with that, I'd like to introduce Chip and then follow
that up with Mindy and Lee. After that, we'll spend our time
being available for your questions and to see what's on your
mind.
CHIP ORUM
Thanks, Dave. I'm pleased I have the opportunity to address this
group again. I am going to briefly review our results of last
year and some more encouraging first quarter results. Most of
you have participated in our quarterly conference calls, so I
won't dwell at length on what was previously covered. You should
have a copy of my slides in your packet.
Slide #1 Net sales
(in millions)
***********************************************************
Fiscal 1999 $1,371
Fiscal 1998 1,264
Fiscal 1997 1,119
Fiscal 1996 1,032
Fiscal 1995 992
Fiscal 1994 870
Fiscal 1993 734
Fiscal 1992 683
***********************************************************
This first slide shows that net sales were $1,371 million in
fiscal 1999, which was an 8.5 percent increase. Of the $108
million increase, about $58 million was from our specialty
businesses, about $36 million from our Core adult apparel
segment, and $14 million from our foreign-based businesses. The
specialty businesses as a group grew nearly 19 percent, with
Corporate Sales and Kids providing the biggest boost. The core
business grew 4 1/2 percent despite an 8 percent increase in
pages circulated.
Sales were up more in the fourth quarter due to the inventory
reduction efforts undertaken. Sales of liquidated merchandise
represented about 10 percent of total sales for the year,
compared with 8 and 9 percent in the prior two years,
respectively.
Slide #2 Catalogs mailed
(in millions)
***********************************************************
Fiscal 1999 259
Fiscal 1998 230
Fiscal 1997 211
Fiscal 1996 200
Fiscal 1995 191
Fiscal 1994 155
Fiscal 1993 136
Fiscal 1992 123
***********************************************************
During the year, we mailed about 259 million catalogs, which is
an increase of about 12 percent from the prior year. The total
number of pages mailed were up about 10 percent. About 7 million
of the circulation increase was from the fourth quarter efforts
to work down inventory.
Slide #3 - 36 month buyers/House file names
(in millions)
***********************************************************
36-month buyers House file names
Fiscal 1999 10.1 29.5
Fiscal 1998 9.6 27.2
Fiscal 1997 9.6 25.6
Fiscal 1996 9.0 23.1
Fiscal 1995 8.2 20.4
Fiscal 1994 7.4 18.1
Fiscal 1993 6.8 15.6
Fiscal 1992 6.1 14.1
***********************************************************
At the end of last year, we had over 29 million names on our
mailing list, which was an 8.5 percent increase over the prior
year.
Of this total, 10 million are customers who made a purchase in
the past 36 months. Our 12-month buyer file was 6.1 million,
about a 3 percent increase over last year.
Slide #4 - Gross profit margin
***********************************************************
Fiscal 1999 45.0%
Fiscal 1998 46.6%
Fiscal 1997 45.5%
Fiscal 1996 43.0%
Fiscal 1995 42.4%
Fiscal 1994 40.9%
Fiscal 1993 41.8%
Fiscal 1992 42.2%
***********************************************************
Gross profit margin was 45 percent for fiscal 1999, down 160
basis points from the prior year. The decline was principally
due to the inventory reduction efforts in the fourth quarter,
including price roll-backs, red-line price reductions and 2-for
and 3-for pricing. Our plan is to improve gross profit margins
through improved sourcing, not through across-the-board price
increases.
Slide #5 SG&A ratio
***********************************************************
Fiscal 1999 39.7%
Fiscal 1998 38.8%
Fiscal 1997 37.9%
Fiscal 1996 38.0%
Fiscal 1995 36.0%
Fiscal 1994 32.8%
Fiscal 1993 34.2%
Fiscal 1992 35.0%
***********************************************************
Our selling, general and administrative expense ratio increased
90 basis points to 39.7 percent. Poorer catalog expense ratios
coupled with higher salary and benefit costs were partially
offset by lower bonus and profit sharing expense and higher net
shipping income. As I showed on my second chart, catalogs mailed
were up 12 percent over fiscal 1998. Over the past 2 years,
pages circulated have increased by 38 percent. Without the
commensurate sales increase, our productivity has continued to
decline. Since catalog expense represents over 40 percent of our
SG&A, we need to get the ad ratios down in order to reduce the
level of SG&A.
Slide #6 Pretax return on sales
***********************************************************
Fiscal 1999 3.6% (1)
Fiscal 1998 7.4% (2)
Fiscal 1997 7.6%
Fiscal 1996 4.9%
Fiscal 1995 6.0%
Fiscal 1994 8.0%
Fiscal 1993 7.4%
Fiscal 1992 7.0%
(1) If non-recurring charges are excluded, pretax ROS is 4.5%.
(2) If extraordinary gain from The Territory Ahead (TTA) is
included, pretax ROS is 8.1%.
***********************************************************
Our pretax margin was 3.6 percent versus 7.4 percent in the prior
year.
At the end of fiscal 1999, we took a $12.6 million charge to
cover the cost of employee severance, the liquidation of the
Willis & Geiger business, the closing of three outlet stores, and
the cost to wind up the MontBell business. If we exclude this
non-recurring charge, the pretax return on sales would be 4.5
percent for the most recent year.
Slide #7 Diluted earnings per share
***********************************************************
Fiscal 1999 $1.01 (1)
Fiscal 1998 $1.85 (2)
Fiscal 1997 $1.53
Fiscal 1996 $0.89
Fiscal 1995 $1.02
Fiscal 1994 $1.21
Fiscal 1993 $0.91
Fiscal 1992 $0.76
(1) If non-recurring charges are excluded, diluted EPS is $1.27.
(2) If extraordinary gain from TTA is included, diluted EPS
is $2.00.
***********************************************************
In fiscal 1999, our earnings per share were down substantially to
$1.01 as reported, and $1.27 with the non-recurring charge
excluded.
Slide #8 Year-end inventory/First-time fulfillment
(inventory in millions)
***********************************************************
Year-end inventory First-time fill
Fiscal 1999 $220 91%
Fiscal 1998 $241 88%
Fiscal 1997 $142 86%
Fiscal 1996 $165 90%
Fiscal 1995 $169 88%
Fiscal 1994 $150 85%
Fiscal 1993 $106 87%
Fiscal 1992 $123 87%
***********************************************************
This chart shows our year-end inventories and corresponding
service levels over the past 8 years. Over the years, we have
had first-time fulfillment rates normally in the 87-89 percent
range. Our year-end inventory levels have been more volatile. In
fiscal 1997, we were too light on inventory in the fourth quarter
due to a strong outerwear season beginning with the October book.
By the middle of fiscal '98 we over-reacted to perceived customer
demand. We have just now gotten the level of inventory down.
Last year, we ended the year with $220 million of inventory and
first-time fulfillment of 91 percent.
Slide #9 Return on shareholder equity
***********************************************************
Fiscal 1999 13% (1)
Fiscal 1998 28% (2)
Fiscal 1997 24%
Fiscal 1996 16%
Fiscal 1995 20%
Fiscal 1994 28%
Fiscal 1993 25%
Fiscal 1992 23%
(1) If non-recurring charges are excluded, return on
shareholders' investment is 16%.
(2) If extraordinary gain from TTA is excluded, return on
shareholders' investment is 25%.
***********************************************************
Return on equity declined to 13 percent in fiscal 1999. If we
exclude the non-recurring charge, ROE was about 16 percent.
Slide #10 Capital investments
(in millions)
***********************************************************
Fiscal 2000 about $20 (est.)
Fiscal 1999 $47
Fiscal 1998 $48
Fiscal 1997 $18
Fiscal 1996 $15
Fiscal 1995 $27
Fiscal 1994 $17
Fiscal 1993 $10
Fiscal 1992 $ 5
Fiscal 1991 $18
Fiscal 1990 $25
Fiscal 1989 $16
***********************************************************
Capital spending for this year will be less than half of the
prior two years. The $20 million for this year is principally
for information systems related projects.
Slide #11 Share buyback
(in millions)
***********************************************************
Fiscal 1999 1.1
Fiscal 1998 1.5
Fiscal 1997 1.3
Fiscal 1996 1.3
Fiscal 1995 1.4
Fiscal 1994 0.2
Fiscal 1993 1.4
Fiscal 1992 1.5
***********************************************************
In fiscal 1999, we continued our stock buyback plan, purchasing
1.1 million shares at a cost of $36 million. We currently have
approval to buy about 1.1 million additional shares.
Slide #12 First quarter results
(dollars in millions, except per share data)
***********************************************************
Fiscal 2000 Fiscal 1999 Percent Change
Net sales $289.6 $268.6 + 7.8 %
Pretax income $ 10.3 $ 8.3 + $2.0
Pretax income
(% of sales) 3.6% 3.1% + 0.5 pts
Net Income $ 6.5 $ 5.2 + 25.0 %
Diluted EPS $ 0.21 $ 0.17
***********************************************************
I'd like to turn to the first quarter of fiscal 2000. Sales were
about $290 million, a 7.8 percent increase over the prior year.
The sales increase of $21 million was principally a result of
liquidation activities. The liquidation of the Willis & Geiger
inventory significantly exceeded our expectations in the first
quarter. On the full-price front, we continue to see strong
trends on the Internet but weak trends in the monthly primary
catalogs.
Our Specialty business segment increased about 25 percent over
the prior year. We had good sales growth in Corporate Sales and
Kids. Willis & Geiger is also included in this segment.
International sales were down slightly due principally to changes
in circulated pages and mailing dates.
Net income increased 25 percent. Earnings per diluted share were
$0.21 cents, which includes about $0.03 cents for a partial
reversal of the year-end, non-recurring charge.
Slide #13 First quarter margin analysis
***********************************************************
Fiscal 2000 Fiscal 1999 Change
Net sales $ 289.6 $ 268.6 + 7.8 %
Gross profit
(% of sales) 43.3 % 46.4 % - 3.1 pts
SG&A (% of sales) 40.2 % 43.3 % - 3.1 pts
Pretax income 3.6 % 3.1 % + 0.5 pts
***********************************************************
Gross profit margin in the first quarter was 43.3 percent as a
result of increased liquidation sales and lower initial margins
associated with the price rollbacks. This 310 basis point
decline was offset by a 310 basis point reduction in the SG&A
ratio. The better expense ratio was principally a result of
higher catalog productivity and lower paper prices. We also had
better net shipping and also savings from the restructuring.
Slide #14 Consolidated inventory
(in millions)
1Q 2Q 3Q 4Q
***********************************************************
Fiscal 2000 $192
Fiscal 1999 $266 $318 $379 $220
Fiscal 1998 $158 $217 $321 $241
Fiscal 1997 $163 $168 $207 $142
***********************************************************
Finally, I want to touch on our current inventory position. We
are obviously pleased that inventory is down nearly $74 million
from a year ago. This is particularly important in light of our
plan to significantly refresh the product assortment for Spring
2000. We need to exit this spring season as clean as we can
while still providing an acceptable service level. Our first-
time fulfillment rate is down from last year, but was still 90
percent for the first quarter. Our fill problems are not broad-
based and would be resolved with $4-5 million of additional
inventory in the right spots. We are planning on fulfillment
rates somewhat trailing last year.
In summary, fiscal 1999 was a very disappointing year. I feel we
have a lot of positive changes in the works going forward. We
all continue to be excited with the potential of the Internet, as
I think you will be. I think you also will be excited with what
Mindy is doing in the merchandise arena and with Lee's creative
direction. The company has a great reputation with our customers
and I think we will do a better job of serving them and by doing
so, improve our financial results over time.
And now, I'll turn it over to Mindy.
MINDY MEADS
Good morning. I'm also very excited to be here today to share
with you some of our new merchandising strategies. If I look at
our focus in the past three months, it's really been threefold.
First: updating product for Spring 2000. Even though we've
started to add some into fall, the big difference will start with
spring of next year. Bottom line, we've got to get the product
right. Second is developing new sourcing strategies with a more
global view. And third is people. And that's pretty obvious,
because we really can't achieve anything without strong merchants
and talented designers.
We will continue, as always, to interpret the current trends for
the classic-minded Lands' End customer. Just as our customers'
lifestyles change, so must our product.
Our number one initiative is to rebuild the coed business. I
think Dave mentioned that on the conference call last week.
These are the categories of knits, sweaters and outerwear where
many of our basic items, such as the mesh, the turtleneck, and
the Squall jacket are located. In addition, we have three key
initiatives: editing assortments, balancing colors and updating
styling. We got too wide with our assortment and it caused
confusion. Less is more. Balanced colors -- we were able to add
a few of the neutrals into the fall assortment, so that we will
be more balanced and more current, but I think as we move into
2000, you'll even see a more dramatic shift. We'll have the
appropriate neutrals, a beautiful array of pastels and also some
soft brights that are needed in some of our core programs.
The styling of the specialty products that surround the core also
needs to be differentiated instead of pages of similar product.
It needs to be edited and it needs to be fresh. This is an
example of some colors for fall that show the neutrals, some
grays and some heathers that were missing in last year's
palettes. This is an example of an updated shetland high v-neck
with an open bottom. Function with style is important. We have
a very strong outerwear business, but we really need to bring in
more style and update it as we move into the season.
Redefining men's and women's is another initiative. Men's must
return to new classics, masculine patterns and fabrics. By
separating the casual bottoms and casual shirts from men's and
women's we can then achieve these proper patterns and fabrics.
Women's, on the other hand, needs to focus on more feminine
silhouettes, lighter fabrics and feminine details. This is an
example of some cashmere shirts that you will see this fall that
really do have the colors and the textures that are appropriate
for men.
This next slide shows business casual, which is a phrase we're
spending a lot of time talking about as we're repositioning not
only the core but both men's and women's. We believe it's gone
way past casual Friday, and we have not maximized this. So as we
start to look at our products, you will start to see changes in
the way the products will look. Even with our most tailored
product, we also feel that it needs to have some softening.
Moving into women's, this is an item that we actually moved into
the fall assortment, three-quarter sleeve stretch shirt. Stretch
is a fabric that is important in almost every classification of
women's wardrobe today, so we are excited to get into this, and
it will be a front cover in our September catalog.
Feminine chic -- We've talked about how are we changing product?
In many of the women's silhouettes our lengths were too long, our
skirts were too wide, this is an example of a jersey dress that
shows a little more currency.
Tailored -- This is a business that is doing quite well for us
right now. Our First Person Singular catalog is really growing
in momentum. This is an example of a commuter suit. We'll also
look at softening women's a little bit as lifestyles change.
Further strengthening of the Lands' End brand is needed, with a
closer connection between adults and kids. This is an example of
a cashmere twin set that was added for the holiday season that I
think we have not fully capitalized on, our customers are
definitely family oriented and I think we can do a lot more with
appropriate matching.
Kids is a business that continues to exceed our expectations.
Where appropriate, we will expand the Lands' End classics and
also update the color palette. For fall, we were able to add in
some neutrals as we were able to do in adults; but keeping it fun
is critical. We need to capture the playfulness or the whimsy of
the child, yet at the same time still appropriately translate
down the adult.
Here are a few examples of the fall product that we have,
certainly a heritage product, the Lands' End Squall jacket for
kids. Here's an updated rugby classic, heather gray, from top to
bottom, including the shoe, and a little more fun here, with a
more playful attitude in this one.
Coming Home is also a business where we've had some recent,
positive reaction. We are broadening our assortment, starting to
add in furniture, lamps and rugs. We're actually trying a
different approach with how we're presenting in the catalog.
Looking at bed, bath and living--in the past you may have seen
pages of sheets and pages of towels separately. We're starting
to coordinate them to really give it a room environment and it's
really causing us to get cross selling by lines. This is one
example of a shot actually from the Spring catalog that was very
successful and here we're selling quilts, sheets and also towels.
Here's another example of some future creative that you'll see
this fall, bath, we are selling all the accessories.
We're just beginning to get into furniture, it's really still in
a test mode.
Editing assortments -- We've talked a lot about them. We are
well on our way. For Fall, we edited 35 percent and I see an
additional 30 percent going into spring. This will be
silhouette, color and also sizes. Our assortments were really
too wide, as I mentioned before. This will not only give us
more focus and direction for the customer to buy from, but it
will allow us to better execute.
Leverage buying power across divisions -- Although we've done
this in the past, we are taking a stronger focus on this. When
we can leverage a silhouette or a fabric, we can be more
advantageous in our costing and have better flexibility with our
flow. For example, a chino fabric that we might use in men's,
women's and kids, we will start to combine and gain more
purchasing power. We're looking at our turtlenecks in kids,
looking at our turtlenecks in adults, to give us much stronger
buying power.
Improved costing is a focus. As you know, we took rollbacks this
year and took a corresponding dip in the margin. We feel that
over time we can recover the lost margin with lower cost
sourcing. We are looking more globally, looking at Asia
differently, looking at the western hemisphere and we feel we can
make significant improvement there.
Sourcing for international is another initiative that we've
started to take on. We've taken core programs, the denim and the
mock, and started to source in Europe with a 30-40 percent
savings. We'll look at expanding as we go forward.
We've created a new agent relationship in Asia and we renewed our
contract with Wm. E. Connor in Asia. We had a relationship with
them before, and they're a fine agent with a great background.
We think this will give us more flexibility so that we can
understand what markets we need to be in. We will have better
quality control as we move to the countries we need to. They
also have more expertise in due diligence and compliance issues.
Developing a strong merchandising team, as I mentioned earlier,
is critical, and we've been recruiting top talent. Dave
mentioned the additions of Sid Mashburn and Jim Fielding.
They've been here for two months, and they're off and running.
I'm thrilled with the additions. They are making impact and are
fully involved in our Spring 2000 assortment.
Building a strong bench will be the next step as we get the team
in place. We can build the team as we grow in the future, and we
have our inside talent that we can draw from.
The third way is collaboration, which I really think is probably
the key. As we've moved out of separate functional silos and now
have each function centralized, it's critically important that we
collaborate to get the best results. We truly can create
wonderful product if we get everyone's ideas all working with the
same vision.
In summary, a phrase that we've been talking about a lot, which I
think is somewhat new from where we've been in the past, is
updating the product for the forty-something customer with a
thirty-something attitude.
In strengthening some of the core values that we have always
stood for: Quality, we will maintain, and in some cases, improve
where needed; value, solidify our value position with incredible
prices on key programs; and service, expanding our service for
customers to shop when and how they want.
Simply put, doing what we do best.
Thank you. Now Lee's going to share the advertising campaign.
LEE EISENBERG
Good morning. It's great to be back in New York. I have two
basic tasks this morning, one: to give you a pretty full rundown
on the details of Lands' End's new ad campaign that started last
month. This is a campaign that will be, in the fullest sense of
the buzzword, multimedia. It will play out in print, on
television, buses, catalogs and on-line and as a two-part
initiative. And two: I would like to let you under the tent, as
it were, to give the first public preview of some of the creative
changes that we are working hard on with regard to the core
catalog and the basic presentation of the Lands' End brand.
Let's start with the ad campaign. In some ways this is not a
particularly revolutionary idea. It's to underscore Lands' End's
age-old role as direct merchants, something that Dave has talked
to you quite a lot over previous months. Lands' End was both
very lucky and very prescient to incorporate the phrase "direct
merchants" into its logo when it began thirty odd years ago.
This basic positioning is something that stands us in very good
stead as we hurdle forward into the brave new world of digital
technology.
A subsidiary objective is to acquaint both experienced and new
on-line users, particularly the millions of women who are now
coming on-line, to participate in all kinds of transactions, to
acquaint all of those users with the convenience, the excitement,
the innovation, and the dynamism of the Lands' End Web site.
There's a very simple message that all of the advertising, in
whatever media, is conveying, and that's the phrase "From the
catalog to the Web, the store is yours." However you want to
shop from Lands' End, we'd be delighted to accommodate you.
In terms of the media plan, I sincerely believe that we're
probably going to get more "bang for our buck" than any campaign
that I can immediately think of, apparel or otherwise.
Basically, we are emphasizing a very heavy saturation across a
variety of media. This saturation began, as I mentioned, last
month and will continue through November. There will be a couple
of blitz moments -- intense coverage -- in July and November,
when you will be walking around the streets of this great city,
looking at a lot of buses festooned with Lands' End advertising.
I'll give you an idea of what that's going to look like a little
bit later.
This chart simply sums up our multimedia aspect of all of this--
"From catalog to the Web, the store is yours", from print to
cable television, Lands' End catalogs, buses and Web sites.
I'm going to start with the details of the television campaign.
There will be an eight-month saturation campaign on eleven cable
television networks. What we're going to be doing here is not
going up on any more than one at any given time. We're going to
cycle through the year, beginning as we did last month by going
up on CNN Headline news for several weeks. Last week, we
switched over to Lifetime, and then through the end of the year
we will be hopping to successive cable networks. Hundreds of 15
second spots will appear on each of these networks, so when
you're going up and down the dial with your remote control, it
may seem like Lands' End is all over the cable dial, but in fact,
is just playing hundreds and hundreds of times on any given one
and then it'll bounce to the next.
I'd like to show you now the three, fifteen second spots that are
currently running. We're going to be adding to these later on,
but this is what you can currently see on Lifetime.
Come late summer/early fall, there will be a fourth, fifteen
second spot that will be very "webby" in nature. It'll celebrate
the fun, the convenience, the utility of the Lands' End Web site,
and then later in the year, pre-holiday, we're going to move to a
much more product-based pre-holiday spot.
Unless you think that you don't get a lot of viewership when you
cycle through the cable channels, the total viewership of those
networks that I showed you a moment ago is in excess of 76
million people.
In print, we're going to be doing something quite similar in
concept. Beginning now, we'll be running Lands' End advertising
in thirty two prestigious, national publications, all of which
reflect the affluent, up-market, literate, intelligent, qualities
of our customer base. These titles will include the Atlantic
Monthly, Fortune, The New Yorker, New York Times magazine, Wired,
and so on and so forth.
The total circulation of those books is 54 million plus, with a
total readership of 433 million plus.
We're running two kinds of creative in these publications. The
smaller number of insertions will be full page advertisements.
All of the ads are going to feature that www.landsend.com mouse.
The full page ads, of which we have four or five different ones,
will look something like this.
The far greater number of insertions are the print equivalent of
the fifteen second spots. We've come up with a fairly unusual
and unique, one-third page, square configuration, so if you can
imagine this ad sitting in the lower left hand corner of a page,
in the New Yorker or the New York times magazine, you'll get a
sense of what this is going to look like. By going with this
configuration, we're going to a whole lot more insertions than we
normally run.
Lands' End's own catalogs should never be underestimated as a
pretty powerful universe of customers unto itself. Beginning in
the June issues, our campaign will run in all of the Lands' End
catalogs from core to the specialties to corporate sales. Lest
you think that's not important, these represent a total
circulation well in excess of 200 million, with total impressions
in excess of 400 million.
I mentioned New York city buses. Having buses cruise up and down
Fifth Avenue and all parts of Manhattan during July and November,
brings as many as fifty million impressions to the campaign.
Here's an example of what you might see on the side of a bus in
early December. Just imagine this festooned from back to front,
"Who needs chimneys?"
Now to the editorial preview I mentioned. I want to start by
saying that what you're going to see now is not intended to be a
presentation of the entire Lands' End catalog. What you're going
to see are a number of spreads that we have been working very
hard on. They indicate how I think you can take a catalog that
frankly has suffered from a certain degree of clutter spread to
spread, and begin to infuse a creative and visual pacing into it
to make the catalog come alive.
I want to start with what is probably the most important part of
the Lands' End catalog -- the cover. My background, as some of
you know, is commercial magazines, where we have to go through
all the heartache of trying to sell our issues on the newsstand.
Fortunately, catalogs don't have to do that, but of course they
do have to sell their way in, if not shoot their way in, to
people's homes.
In my estimation, and this is just sort of an instinct, we've got
about two or three seconds with a consumer when he takes the
catalog out of his mailbox. The only way to make the most of
those two or three seconds is the Lands' End cover. I could
talk, probably way too much, about what makes a good cover, but
the simplest way to say it is, something that stops you, it has
to be something that keeps you from throwing it away. This could
be provocative in any number of ways. It could be funny,
irreverent, different, satiric. It could be a photograph or an
illustration. The Lands' End cover is going to use all of those
means to make sure that whatever pops out of the mailbox in any
given month makes you pause, smile, laugh, or think, but it will
certainly encourage you to keep it.
The first cover--and I'm going to show you two of them--is the
actual cover of our July issue. As you might imagine, it's an
issue that features Hawaiian shirts. Back in the forties, the
Matson steamship company, which ferried a lot of people back and
forth between the West Coast and Honolulu, commissioned five or
six very fine American artists to do murals for the steamship
company that were adapted for use as menu covers that were used
in the dining rooms. We bought a series of those vintage menus
and are using some of that art in what I hope will be a pleasant
and pleasing way on the cover.
I also want to give you a quick heads up as a way of showing how
editorial can be integrated into the look of the catalog itself.
After the cover, we follow with a newly designed contents page,
called "What's in Store," and we pick up some more of the art on
the left side of that page.
After that page there are a couple of spreads that show further
"editorial material," and let me say right now, that I'm not
trying to turn this catalog into a magazine. The more magazine
elements, the better the editorial quality the catalog has, the
more likely a customer is going to feel good about keeping it.
In the four pages of this catalog, there's really wonderful,
social history of aloha art and Hawaiian shirts that ends with a
merchandise spread in which we sell the Hawaiian shirts. Then,
in the columns on the right and the left, there's a very funny
piece by a New York humorist, Bruce Mccall, called The Thinking
Person's Guide to the Hawaiian Shirt, which describes the six
do's and don'ts of how to wear these very strange garments.
This is the next cover. This cover will come out in late July.
Contrary to rumors, this is not a photograph of my wife after she
learned that she would be moving to the shores of Lake Mendota.
The catalog is called the End of Summer Splash, and it was
designed by Milton Glaser. Glaser, as some of you may know, is
one of the most prominent graphic designers in New York. He is
incredibly influential. He was the person who initially designed
New York magazine, which has gone on to be a proto-typical
magazine design. He recently redesigned Fortune magazine. He is
a very fine graphic designer and quite a brilliant marketer in
his own right. He really thinks about customers. He is
consulting with us and one of the reasons I want to use Milton on
some of the covers, is to serve as a catalyst. I think that it's
important to have someone on the outside think about covers.
About thirty years ago perhaps the most notorious and prominent
series of magazine covers of our time were a series of Esquire
Magazine covers done by George Lois, who was an ad man. He did
such things as put Sonny Liston in a Santa Claus hat and made
Andy Warhol drown in a Campbell's soup can. Lois was not an
insider. He had his own ad agency, and once a month the editor
would say here are five stories that I think could be a cover.
Lois would send back these conceptual rough ideas and then the
editor, at the time Harold Hays, would pick the one that he
thought was most provocative.
Working inside at a catalog company or for a magazine you often
get too close to the process. You're on a treadmill simply
putting out the catalog month after month. Sometimes you don't
have the necessary distance to imagine what is the best face for
the catalog, what's the best, most interesting, provocative
cover. So Milton's going to be very helpful to our art people as
to how we can be most potent when we present the cover to our
Lands' End customers.
As you're turning the pages of the catalog, every three or four
pages, you get a page or spread that look a little more like
this, much more graphic, much more photographically powerful,
bold, with greater use of white space. This is an example of how
we might do jeans one month. An example of how we might do
casual shirts. Now a couple of really radical examples, and
we're going to do this judiciously, but here's a Lands' End
spread with, lo and behold, just one great product on it.
All of the pictures you are looking at are pictures that have run
or are about to run in the Lands' End catalog. These were not
done by some expensive photographer for purposes of this
presentation. These are all essentially Lands' End stock
pictures, but when you see them staged in a certain way, on these
spreads that are designed to bring up the brass section of the
catalog, you get a sense of how powerful and potent the pages of
the Lands' End catalog can be.
I wanted to show you this next slide because it's one of my pet
projects. It's something I know Mindy feels very strongly about.
We're eagerly thinking about how to bring this to bear, again
this is something that is on the horizon. It's a sample spread
for something that we're calling the Lands' End All Season Store.
I think everyone in this room would agree, that if you need to go
off and buy a bathing suit for your child in January, it's
awfully hard to do that, hard to find T-shirts, shorts and all
these other things that we in a Northern climate need to or want
to buy in the off season. There's not a reason in the world why
Lands' End should not, and can not make these products available
in a sensible and appealing way. The All Season Store is a
conceptual way for us to begin to think about how to market our
merchandise counter-seasonally.
Another reason for the off-season store, obviously is the massive
demographic shift that's occurred in the country over the last
twenty or thirty years. The shift to the sunbelt. I think a lot
of catalogs, certainly mainstream and indeed the larger catalogs,
are guilty of a northern bias, having to do with their own roots.
It would be a shame if a catalog like Lands' End, with so many
millions of loyal, northern cold climate customers, lost those
customers to the sunbelt. It would be a shame if those core
loyal people left Lands' End behind along with the ice and the
snow, so we're thinking very hard about how we can either use
pages in the catalog on a selectronic basis, perhaps even a
sunbelt edition.
To sum all this up, I just want to end with these points.
I can't emphasize enough the need to have covers that you just
can't put down; coming up with an appealing uncluttered design
with an emphasis on the right kind of spacing is long overdue at
Lands' End; bold, beautiful photography, staged in the right way.
I think we've got to make the catalog a place where there's a
sense of the tactile possibilities of the garment. You want to
imagine what it feels like, and photography is clearly the best
way to do it.
I haven't mentioned text, so I'll take a moment to talk about
that. Lands' End is distinguished in the long term by how
literate it is and for how committed it is to explaining why
something is good -- what makes a good blazer, what makes a good
cashmere sweater. We are not in any way going to divert
ourselves from the ongoing task of informing our customers.
However, I do think that text has its limits in a catalog. As an
exercise a couple of months ago, I took a printed catalog and a
pen and edited the catalog and found that without any sacrifice
of any of the important information that Lands' End stands for, I
could get out ten or twenty percent of the body text without
losing anything important. That fifteen percent of real estate
is very important when you want to go about designing some of the
spreads that I showed you and getting pictures to be bigger. I
think the other thing to be mindful of is that informing people
is a good thing, but you don't want to make the catalog to be
like homework. You don't want it to be spinach -- read this
because it's good for you. I think you have to strike the right
balance between what's informative and what's pleasurable. The
text should inform, but the pictures are what infuse the page
with pleasure. Thank you very much.
DAVE DYER
Thanks, Lee, Chip and Mindy. That completes our formal
presentations, so at this point, we'll take your questions.
Q: How much are you spending on advertising this year?
DFD: This year to last year, we have slightly increased our
budget, but we have just focused it a lot different. Rather than
spreading it throughout the year, we've consolidated it into
about a six or seven month time period, much more focused.
Q: Are you thinking about selling ad space in the catalog?
DFD: No, we have not thought about it. I wouldn't categorically
rule it out, but I don't think that's something we would do. But
we really haven't discussed it.
Q: What are some of the benchmarks you'll use to judge the
success of these changes.
DFD: I think there are several things. Obviously the bottom line
is what we're focused on improving. But for us internally, the
number one measure would be catalog productivity and page
productivity. As you heard from Chip earlier, we saw that we've
been up 38% in circulated pages over the last two years, and our
business has not grown even close to that. We think that we
tremendously over-circulated. I was very surprised when I came
back, as Mindy was, when we went through the catalogs, to see the
volume of pages that we're doing now versus what we were doing
when I was here in 1994. So we're spending a lot of time making
sure we get increased catalog page productivity. And that's a
big measure in two ways. It's a measure because through
circulation you can come up with a scientific answer of what page
productivity should be. And then when you exceed that mark,
that's what I'd call a merchandising factor or a creative factor.
So I think it gives us ways to measure.
SAO: One of the things we'll be doing beginning this fall is
pulling back on circulation and reducing the average number of
pages in the catalogs. We've not done a lot of that for spring
of this year due to the fact that with the lead times in the
inventory that is on its way, it wouldn't be prudent. But
starting with fall of '99, we'll be pulling back on the number of
books, the average page size of those books and the absolute
circulation. We'll be doing a similar thing for Spring 2000. As
we would expect, that's the one side of the business that is
reasonably analytical and predictable, and we've seen gains in
productivity when we've done that. So we'll be doing quite a bit
of that, and by this time next year, we should be at a new base
to build on.
DFD: Just one more thing on that. When you're looking at the
productivity and the unprofitable circulation that we're
deleting, we have looked at each catalog as an independent
decision vertically. And when you look at it vertically, you
don't consider the cannibalization and the incremental sales you
get per issue. The real way to look at it is incremental sales
as opposed to gross sales and gross profit for that edition. So
looking vertically, you make different decisions. What we find
is that we'll be able to eliminate an edition or eliminate pages,
but not eliminate all the sales, a lot of which go back to
surrounding issues and surrounding categories. So in essence you
deliver a tremendous amount of volume back to surrounding
catalogs at virtually zero ad cost.
And it's even becoming more complicated because what we haven't
talked about is the relationship of the Internet and this whole
database. We're rebuilding our front-end and rebuilding our
database so we can understand how the customer purchases from us
across multiple channels of distribution. And the only way that
we can put in the bank the difference, which I think is the
biggest leverage to the bottom line, is this ad cost. If 43
percent of our SG&A is in printing the catalog and we know
Internet is significantly less, what we need to do is to move as
many sales from the catalog to the Internet. The only way to
realize that difference in profit and put that to the bottom line
is to pull back circulation against those people who shop with us
electronically, so there's a lot that we're considering right
now.
Q: It seems like one big opportunity you have is in petite
sizes. Could you discuss that?
MCM: Petites actually is a good business for us, and although
we've edited SKUs, primarily on the men's size on the extended
sizes, we have not done so on the women's side. Both the large
sizes and the petites are doing well and hold their position as a
SKU as we analyze. Going forward, we'll continue to look at both
of those for women's, and it probably will not be an area that
we'll be cutting back.
DFD: From the time that Mindy and I were here before, there has
probably been about a 50 percent increase in SKUs. When you look
at the size and the color SKUs, that 50 percent increase in SKUs
only accounted for less than 10 percent of additional or
incremental demand. So it was not very profitable. We have
looked not so much even at sizes in women's where we have some
good business, but we have cut back color assortments. We
offered something in fifteen colors, now we'll offer it in five.
I had that question asked in our employee meetings, and I said
that when it got to men's, we did eliminate 3XL, because we
weren't getting the volume.
Q: What are your expectations for Internet sales this year, and
what is their growth rate for the first quarter?
DFD: We did $61 million last year in Internet sales, up from $18
million the previous year. In our first quarter this year, we
were up about two and a half times over the previous year.
Whether we continue with that rate or not I don't know. We
expect to have a significant part of our business from the
Internet, and I have refocused the organization to build a
substantial e-commerce business. I mean everybody is focused on
delivering a profitable, more exciting business for Lands' End
over time through both catalog and the Internet, but we think the
Internet's going to be a big piece of it and we're doing
everything we can to make it happen.
Q: You have a major opportunity in restructuring the inventory
assortment, and you spoke about interpreting the trends for
current customers and we're looking forward to spring 2000. Can
you give us your thoughts on where you want to position Lands'
End over the longer term?
MCM: I think the way we're looking at the core catalog, just from
a positioning standpoint, is to really focus on weekend casual as
a general statement. So if you look at that core catalog, 70
percent of that business is casual weekend wear, which is really
what we've stood for in the past, with maybe 20-30 percent in
this business casual arena. As we separate the two women's and
men's specialty books, that will be a shift on the tailored, as
we've done it in the past. But instead of having it be maybe 90
or 100 percent tailored, that may shift down to 30 or 40 percent
of this business casual that I'm talking about. It's just really
a softening. Almost everyone here is dressed in suits, but it's
really a smaller part of how you dress or how the world is
dressing today. I think that's probably the big shift, so that
each book will have its own personality.
Q: Could you talk about the clearance issue, cutting back
number of stores, and how you see the overstock area on the
Internet playing out?
DFD: First with the stores -- we did eliminate three stores. The
cost recovery by liquidating over the Internet is significantly
higher than the cost recovery liquidating through stores. By
eliminating those three stores, it contributed about $1.5 to $2.0
million in bottom line profits for us in the year, just by being
able to liquidate through the Internet at a higher cost recovery.
We do think that stores are necessary and that right now we have
the appropriate amount of stores. We'll consistently revisit
that as we go forward. We don't have any current plans to close
additional stores, but it all depends on how things look and how
we build clearance through the Internet over the next year. We
have taken steps to focus more and more of the clearance
assortment on the Internet. We had eight or twelve pages in the
middle of each catalog for clearance, and that's moving down to
four pages. It will be more or less a sampler in the catalog, and
we'll direct customers to go to the Internet for the full
clearance assortment. So you'll see us moving more and more that
way.
SAO: I'd just add a couple of points. Dave mentioned we've gone
down to four clearance pages. Our ultimate goal in our full
price catalogs is to have none in there. We'll probably focus
print clearance in stand-alone pieces that would be mailed to the
customer as we do now. But our goal would be to limit clearance
mailings to customers to hopefully three times a year. Stores
continue to play an important part because of Not Quite Perfect
product. However, we experimented just recently with some
product that was off color, didn't meet the standards, and we
were successful in liquidating that through the Interent. So we
will try to focus as much as we can on the Internet. Clearly
that would be the preferred channel. In terms of the amount of
inventory that we are going to have to clear, I believe we're in
pretty good shape. We'll have to see how this churn in inventory
plays out this year as Mindy repositions a lot of the product for
Spring 2000 and even Fall 2000. It will be one of the largest
churns in product that we've had. I believe we're approaching it
intelligently. Our inventories are tight right now, we're not
bought out further than our needs, and I feel pretty good about
where we are.
Q: On the Internet. Do you have any indication of how much
time your customer is spending on the site when they log in?
DFD: I have heard that figure, but cannot remember it. We
obviously track page views and how they go through the site.
According to our new Internet guy Bill Bass, on his second day on
the job, he says that based on the companies that he has worked
with and visited, we have a higher conversion rate of visits to
orders than he has seen.
Q: How are Your Personal Model and Oxford Express working?
DFD: The Personal ModelTM and Oxford ExpressTM on our Web site
have been interesting. Dress shirt sales are now coming through
Oxford Express, and our biggest hit on the personal model was the
first day that we started running the commercials on Lifetime
Cable TV. It surprised us, how many hits and how many people
built models that day.
Q: Can you discuss in any more detail the economics of doing
business on the net versus the catalog?
DFD: Directionally, when you look at the cost of an Internet
sale, you need to then look at the cost of a catalog sale, which
has approximately a 16% ad cost plus the cost of taking that
sale. It's hard to give you an exact number because we haven't
spent a lot of time trying to allocate the nits and gnats down to
every Internet sale. We look at it more directionally, and I
would say that directionally, the associated catalog expenses
will probably be in the neighborhood of half the cost. So when
you take a look at that and with catalog costs being as big a
piece of our SG&A as they are, that's pretty significant.
Basically, if we could do every sale on the Internet, we'd be in
tall corn, as they say in Dodgeville.
SAO: The piece that we haven't figured out and that we're working
very hard on is what print program do we need to continue to
support the Internet sales, because we do believe that the
customers are going to buy through more than one channel. We
know that when that catalog gets in-home, we get a spike in the
Internet. So we know that catalogs in-home are driving Internet
sales. We don't know what the balance is. Beginning this fall,
we're testing, looking at alternative mailings, looking at
mailing patterns, trying to figure out how many catalogs we need
to mail, frequency, the whole bit.
Q: What are your plans and timetable for translating some of
the creative changes you'll be making in the print catalog to the
presentation on the Internet?
LE: There are very definite plans to create a look for Lands'
End that is reflected in all of our various presentations, from
catalog to Internet to advertising to everything imaginable.
With any luck and hard work, everything will look like it's
coming from the same place. One of the advantages of the
Internet is that you can make changes a whole lot faster and with
greater acceleration than in print, so it's relatively easy and
perhaps a good idea to start with the Web site. But because
culturally we're still a print company and because it's a little
harder and a little slower to get the print thing right, we've
decided to make our laboratory print rather than on the Web. I
don't know if you've logged on to the Web site lately, but just
in the last couple of weeks there was a pretty significant
cosmetic change. I won't say it's a fundamental change, it
certainly wasn't a systemic change, but mostly a facade change.
The palette has changed, and some of the typography has changed.
I think the on-line user not only tolerates change but expects
it. It's in the nature of the beast. If you don't change, I
think the user gets a little bit restless. In print it's
different. If you redesign a magazine or a catalog, even if
people weren't crazy about the old version, they say, "You took
away this thing that I like." And then it takes them a little
while to get used to it. Our job is to try to balance both the
expectations of customers in both media and also the speed with
which you can make change in both media. But the short answer is
that the two will be very much in sync when all of the changes
have been followed through on in the catalog. Right now, I agree
that there's not necessarily a connection.
In terms of content, we are now putting all of our merchandise up
on the site. To date, only a portion of the merchandise has been
up. In terms of the editorial content, that is and will be up, so
McCall will be up. A lot of our content will be up for longer
periods of time, obviously because you don't have to take it
down. In terms of design, I thought you were referring more to
the typography and the visual.
DFD: One example of the ways we're integrating is, if you look at
the July issue, you'll see an Internet ad, what we've said is go
to the Web site where we have antique Hawaiian shirts, anywhere
from $500 to $2000, that are really fantastic. We're doing it as
a one-of-a-kind and as a way to get you to go to the Web. We're
doing anything we can to drive traffic to the Web. We will see a
major site redesign as we move to kind of a new system
architecture this fall, and we'll be on Sun servers and a lot of
other things. We're developing another site that we think is
going to be pretty terrific. We're developing it in parallel,
and sometime in 2000, we'll switch over to the new site. We see
this as sort of ongoing. I believe that in the Internet, you
never stop, you just keep moving.
Q: I'd like to follow-up on the idea of shifting to the
Internet. I may not be a typical Lands' End customer, demographic
profile. I do know that having purchased from Internet site, I no
longer want to get catalogs. We on Wall Street have seen a huge
shift in the way research is delivered to us. Everyone is trying
to get more stuff electronically, rather than more junk in the
mail. What kind of disappointed me with the experience of buying
on the site was, I haven't gotten any follow-up. There really
has been no effort on Lands' End's part to shift me away from
being a catalog customer in terms of getting me targeted updates
over the Web.
DFD: That's a really key issue and something that we're certainly
addressing post haste. We really haven't used e-mail as
effectively as we could. We've had people opt in to
correspondence rather than opt out. We think we can be much more
effective. We are putting in major tests to try to figure out
the frequency. We believe we can do a hell of a lot better job
there. When you think about it, and I think the comment was, it
kind of looks like the catalog on the Web. I think that's the
way people started, by putting the catalog on the Web. What you
have to do is use it for what it's good at. And what it's really
good at. I believe our whole challenge is to build a
merchandising and marketing and communication plan customer by
customer, rather than by cells of hundreds of thousands of
customers the way a direct marketer has done.
That's going to be the key breakthrough. It's going to be using
cookies, which we haven't done unless the customer has requested
it. I don't think that's really an issue anymore. I think as
long as you treat people with respect and treat the information
securely, people kind of like it, so we're moving that way. And
that is the big issue. That's where a lot of our big investments
in capital this year and next year are -- investments in people
to get it done and systems that we're purchasing and bolting on
are for these issues. That is the key issue: converting people
from the catalog to Internet and cutting back circulation.
Q: I would think that the advertising campaign to attract
people should be extremely effective in generating visits to the
site and you ought to be able to effectively hold on to those
people.
DFD: I agree, you're right on.
Q: We saw the clearance the first quarter, and understand that
you wanted to be squeaky clean coming out of spring season to set
you up for next year. How much clearance remains to be done, and
are you in a good position to judge that right now?
SAO: Regarding the liquidation in the first quarter, about half
of it was from Willis & Geiger, and we are well on our way. We
have very little of Willis & Geiger yet to clean out, so we will
not have that repeat going forward. This is still a very
imprecise business, and I can't sit here today and say how much
of the spring merchandise between now and July we are not going
to sell through. I do feel very good that relative to past
performance, we've got our risk inventory down, and I don't see
an undue problem in that regard. Again, during the first
quarter, about half of that liquidation was Willis & Geiger.
Q: I'm just a little bit uneasy because you're saying that the
core catalog sales were not up to expectations.
DFD: That is correct. One of the things we have said is that our
core catalog has just been disappointing, and it's largely
because, as Mindy had said, because of our coed products. Those
are knits, sweaters, outerwear. Those are the big gun, key
categories for Lands' End. You may have seen last Spring, when I
think some of our color selection was just slightly, maybe more
than slightly left of center for the market. So we're having to
recover from that. I believe we've got updated styling, updated
color, and we feel really good that we're making progress to get
that business back. That's the key. If we get that back, we've
got the core catalog back. So that's what we're doing.
Q: Do you notice any differences in product returns between the
catalog and e-commerce?
SAO: Basically, they are about the same.
Q: How much do you expect the SKU reduction to be in the fall
catalogs?
MCM: In the fall catalog, we'll have about a 35 percent
reduction, and that's a combination of sizes, colors and also
some silhouettes.
DFD: One thing to remember, you can give a customer too much
choice. If we offer something in fifteen colors, by cutting SKUs
you don't really lose any volume. They just buy one shade of
blue rather than buying the other shade of blue. What you find
is that with too much choice you just spread your business across
more and more SKUs, and that's just not important. So we think
by editing and becoming more focused, we actually could do better
business than we did with too many SKUs.
Q: How predictable do you find your customers' fashions?
MCM: I think it's interesting that today versus three years ago
when I was here, the customer is moving much faster to what is
more current. We see indications of that this Spring,
particularly in women's, where we've got some of the stretch
items, and we've got some of the silhouettes that are happening,
maybe in smaller space. The tankini in swim was one of those
items. It's not the newest, it's been there a while, but it's
extremely strong and it's doing extremely well, so they're
finding it. I think that's just some of the change that's
happening.
Q: You mentioned a lot of different fashion trends. To me it's
very confusing, even alien. I've been wearing the same clothes
for twenty years. You say they're moving rapidly towards what's
current. How confident are you that you can identify what's
current, and, therefore, easily predict what they're going to
buy?
MCM: There really isn't a science to that. But I think with the
team that we're putting into place and with us being far more
aware, by traveling to Europe, by looking at the shows, by seeing
what's next, by not looking behind us but looking ahead of us, by
seeing what the designer market is doing so we can decide what
piece interprets -- then it's gut, then it's deciding how this
trend will translate to our classic traditional customer. So
there really isn't a science. It's the collaboration of talented
people sitting in a room and making a decision -- this will work,
this won't work -- and in some cases do some testing. That's a
shift that we're moving a little further, but you're not going to
look at Spring 2000 and say "Whoa, what happened here to Lands'
End?" You're going to say "Wow!" My vision is that you'll pick
up the catalog, you'll see a new creative approach, and you're
going to be more excited. It's not going to be dramatic in each
style, some may be subtle, but overall, I think it's going to be
powerful.
DFD: We're not trying to be leading edge or first. I mean we're
not into three sleeve sweaters and that kind of thing. It's
updated classics, in the way that Ralph Lauren would update
classics every year, or better brands would update classics.
It's not leading-edge fashion. That's not what we're all about.
But we do think if gray is the color of the season, we need to be
represented in gray or neutrals or pastels or whatever's
happening, and we can do that. It's interesting when you're in
the fashion business and you travel. As Mindy says, you go to
Europe, you go to the Orient, you go to New York. Everybody from
Ralph Lauren to Collections, we're all seeing the same things,
going to the same places, bumping into each other all over the
world. So to me, you have to really be blind not to see what's
going on out there.
MCM: I think another area that we can excel in is fabric, and
that's where we have to. Our silhouettes are going to be more
classic, but there's so much newness that continues to keep
happening in fabrics that we will be on top of.
Q: On the Web versus the catalog, what are the differences in
average order size and demographics?
DFD: The average order was about $105 to $110 both for the Web
and the catalog. It's similar between the two over the course of
a year. On the Web, we have seen a slightly younger customer.
If we look at us going after the 35-55 year old group, it would
be the 35-45 part more dominantly on the Web and the 45-55 part
for the catalog. And it would tend to be slightly more affluent
on the Web. So I think that directionally for us, the Internet
is really fantastic.
Q: What are the differences between male versus female
categories?
DFD: It started out being predominantly men's, but we have seen a
huge shift. As a matter of fact, when we got to fourth quarter
of last year, purchases from women's and men's categories were
much closer. This ad campaign that you saw -- what we put
together and the cable channels may have looked like a strange
mix. But the way we put that together is we looked at the index
of women Web users as the audience. So we are really aiming that
more at women than men as we go through, and we think that we are
attracting more women than many sites, and we'll continue to make
that focus.
Q: There's a lot of moving parts this year in terms of reducing
SKUs, changing the advertising, reducing catalogs. I'm wondering
if there's any update in terms of the goals for top-line and
bottom-line still modest improvements? Can you tell us anything
about gross margins -- will they be up or down? Can you give us
any direction?
DFD: Nice try, no cigar. And it was so nicely stated. I almost
kind of walked right into it. We really don't talk about going
forward. Obviously, we want to return to traditional profit. We
have said, and I'd like for everybody to understand, that we are
doing things in circulation that will affect the demand of the
company -- specifically in our core catalogs as we try to figure
out the catalog versus the Internet and also as we eliminate
unprofitable circulation. The result of that, as we have now
said several times, is that we will see perhaps some pressure on
the top line, but improvements on the bottom line. As I look at
this, I see this as a transition year and a building year. I
think Lands' End has tremendous opportunity to grow, specifically
when we get back to the appropriate base and rebuild and grow the
core catalog and our core businesses. That's the key and that's
what we're really focused on.
Q: When you talk about returning to traditional profit, are you
talking about net profit or operating profit?
DFD: We're looking at operating profit and net profit. We don't
have too much difference between the two other than tax rate.
Q: Are you currently selling your fulfillment capabilities to
other companies or could that be a possible business for you?
DFD: No, we are not selling our fulfillment to other companies.
We have thought about that and one of the things we think is that
as you look at the fourth quarter, it was the e-commerce
Christmas. But there were a lot of pitfalls because people
realize it's easy to create an electronic shopping basket, but
it's difficult to get it from the basket to the home. We think
we do that about as well as anyone. It's not only the systems you
have, but it's the people and their priority on the customer as
they deliver it. We think it's a strategic edge for us, and we
don't want to make people smart overnight, so we have not done
it. That being said, I would like to get some spring capacity
into our business. If we thought there was some way to get
something into the spring, if we could find something counter-
seasonal and non-competitive, we would perhaps entertain that.
Q: What's driving the planned reduction in circulation of
catalogs and pages?
DFD: When I left in 1994, we mailed 35 catalogs, last year we
mailed 54. That was partly exacerbated by the independent
business unit structure, which by the way was a perfectly logical
way to organize. But as you organize around the printed catalog,
what happened if you were in the women's First Person Singular
catalog, you may have said that to go from the 6th to the 7th
catalog was a great decision looking vertically. However, you
weren't adding the 7th women's catalog, you were adding the 54th
Lands' End catalog, and it was too much. Then we added
additional circulation last fall, not only in issues but
additional circulation in terms of depth into the file, to move
inventory. We'll be pulling that back as well.
It really is very scientific and very statistical. What we do is
take control groups and don't mail them certain catalogs, and you
see over time how much business goes back, how much business goes
into different catalogs. What we find is that we can really
understand the incremental effect of each mailing. When you look
at it vertically, or at incremental pages, it may make a lot of
sense. When you look at it in terms of incremental sales, you
can find it's unprofitable circulation. And that's what we're
cutting out. I don't think we'll go all the way this year, but I
think we'll make a good start.
Q: Have you given any additional thought to opening retail
stores?
DFD: The answer for retail stores is no. I had the opportunity
to be at J. Crew for the last year, and I saw firsthand the
complexity of having a catalog or a direct to consumer and a
retail business, and it is complex. I will tell you that a
retail business, is a little bit like a drug addiction. You put
up one, you say hey, three million dollars every store, wow, if I
did three hundred stores, hmmm, sounds good. It is very
difficult to manage those two channels. I think that we have
tremendous opportunity specifically driven by the Internet. As I
said, we have repositioned our company to be a leading emerging
e-commerce business. I think that gives us a global palette, a
global playground.
As Lee said earlier, we're direct merchants, we are positioned as
direct to consumer and with the Internet coming on as strong as
it has, it's perfect for us. Those of you who have been to
Dodgeville and seen our infrastructure, seen our systems, seen
the way we do it have seen this. The people in our distribution
center don't care if that order came by Internet, by phone, by
mail, by fax. The only thing they care about is picking it,
packing it and getting it out of there as quick as they can. And
so it perfectly leverages all of our investments, and that's why
we think there's tremendous opportunity for us to grow and expand
the direct to consumer business specifically and, probably most
significantly, over the Internet.
We haven't talked about one other business, which is really
coming on strong, and that's our business-to-business division,
Corporate Sales. That is evolving to what we call b to b to c,
business to business to consumer. There are several companies
for whom we have created catalogs and intranets, where they have
employee stores on their company systems, and we are able to go
in, and each employee is able to order logo'd company merchandise
direct from Lands' End. Now that's great for us on a couple of
fronts. It creates a terrific partnership with companies, but it
also gives us new names and new customers as we ship merchandise
to those companies' employees.
It's also very important for us to understand whether this
customer is shopping with us electronically, if we have seen them
before, are we mailing them a catalog, should we mail them more,
should we mail them less? This whole database thing across
multiple channels is really one of the keys and it's where we're
spending a lot on our systems and a lot of time to try to
understand the buying habits of each customer.
Q: You said that there is a savings by taking an order over the
Internet of about half. Is this from savings in phone operators?
DFD: Directionally, that's probably pretty good, although I don't
know the specific number. I don't think that's really the thing
to focus on for us. The big leverage is in ad cost, and I'll
tell you why. Again, we think that our phone centers, which are
going to become total customer communication centers, are a
strategic advantage for us. We find that many customers will go
in and shop on the Internet and pick up the phone and call.
That's fine. The Internet can become kind of gray and amorphous,
and it can be pretty lonely out there in cyber-space. One of the
things that we have done with our company is we that we have a
reputation for customer service, largely as a result of the
relationship our customers have with our operators.
We plan to add collaboration to our Web, collaboration software.
Hopefully we'll get it up this Fall. We want to seamlessly
integrate our phone centers, they're not simply phone centers
anymore, but they'll be able to talk with a customer via phone,
chat with them on-line, send them Web pages. If a customer is
looking on the Web and they have a question, we can split the
screen, send them a comparative product. Like John Madden --
circle something and send out the circle so we can show them what
we're doing. We think that integrating those phone centers into
the Web experience is really a strategic differentiator. So
that's why I'm not really looking at the phone cost quite so
much, because I think we're going to continue to have cost there.
Q: What kind of reduction are you planning for catalog and page
circulation this fall? Are we talking 5 percent or 20 percent?
SAO: It would be in the double digit area.
Q: Are you using outside consultants to help you design your
new front end and if so, who are you using?
DFD: I don't think that we have awarded the contract. We've
looked at two, CorePoint is one. We think that they're probably
a pretty good group to do the integration of the phone center and
some of the on-line requirements. We'll be using Internet-
specific people to do our new site, and we'll be making sure we
can take advantage of all the bolt-on enhancements that are out
there. We'll probably use multiple vendors to create the site
that we want.
Q: Over the past six or seven years, there have been waves with
what has happened inside management of the company, some of which
hasn't been strictly performance based, but the influence of
certain shareholders. What was sort of the agreement surrounding
your coming back in terms of their influence running things
behind the scenes?
DFD: The board asked and I came. It's really kind of hard to
speak to the past. I will tell you from some of the articles in
the press I have seen, specifically one in Business Week right as
I came back, I would say it was absolutely incorrect. And I will
tell you that when I was here before, if I heard from our
majority shareholder at board meetings and a couple of times
during the year, that was a lot. I believe the board gets
involved as they feel that they need to get involved, when they
see trends that they feel are moving in the wrong direction and
take what I would consider to be the appropriate actions. I
think that in any board there is that kind of balance of duty of
loyalty and duty of care. And duty of care means you have to
understand what's going on in the company, and your ultimate
authority is to make sure that it's executed in a way that's
going to build a brand in the future.
I came in with full authority to run the company and am running
the company in a way that the board endorses and supports.
Obviously, if you look at what happened in the last few months,
there were many things that were very new and different to Lands'
End that we did, including restructuring. I can say I had full
authority to do what was necessary to get this company moving in
the right direction, and I've had great support in getting new
people into the company, such as Lee and Mindy. I feel great
about where we are and what our future is -- and what our
potential is and what the team is -- and the enthusiasm and
energy that we all have for the business -- and passion for the
business too.
Q: Does the Internet allow you to expand more rapidly overseas?
DFD: Yes, absolutely. I don't think that we have totally tapped
into it, but that's going to be part of our next system
initiatives that we're working on. We have distribution centers
in Japan, we have a distribution center in the UK that supports
all of Europe, and we source product worldwide. Some product in
the UK is sourced differently than the same product in the US
market because of customs and duty rates. So we have the added
challenge as we take a global Internet sale to first find which
distribution center should we ship it from for geographic
reasons, and secondly how do we give the customer the best deal.
We have to look at the duties going into that country, the
sourcing, the cost of shipping. We'll be dealing with many of
those issues as we move forward. As you see our rewrite of the
system for 2000, there will be some pretty cool things happening
regarding international opportunities for us through the Internet
as part of that rewrite.
Q: Regarding circulation reduction, what is the correlation
between those who are shopping electronically and those who are
shopping through the catalogs?
DFD: That is something that we have not done a good job at, and
that is what the big task is with database management, but we're
going to test our way into it. I would say that in the past, we
looked at a new customer from the Internet as a new customer for
the catalog. We'd get them in from the Internet and bombard them
with 54 catalogs. That's not the way we're going to do it in the
future. We're trying to find out what that right mix is. So
while the answer is, we haven't done a good job of it, we're
heading in the right direction there.
Q: Could you expand on what you will be doing to test the
mailing strategy? Will you be sending Internet customers no
catalogs, some, one catalog, etc.?
DFD: Absolutely, and then we're going to do some things that are
just Web based. As Chip said earlier, we mail a catalog, and you
can watch what happens with Web traffic as it gets in-home.
There is a synergy between mailings and Internet sales. If
nothing else, it stimulates them to go to the Web to buy. I
think you'll see much less frequency of catalog mailings to
electronic customers over time, and much fewer pages. I don't
think we need to send 150 page catalogs to people who are
shopping with us electronically. We can be much more efficient in
the mailing totally, and we may do some things that will be
Internet specific.
One of the things is through monitors. Sometimes color is a
problem. Maybe what we should do is in every mailing we send to
Internet customers, we should include the seasonal swatch card so
they can actually see true color much better. We may want to
include other things, such as talking about navigation on the
Internet or new ideas or new features. All of that is going to
be areas that we're looking at and considering. This is
uncharted territory. This is Star Trek, going where no people
have gone before, and it's really very exciting. There's an
opportunity for us to carve a whole new way to market to
consumers, one to one, as opposed to en-mass, which is just
terrific and tons of opportunity for us.
Q: Is some of the new material that you're developing for the
Internet customer going to be available this year, or is that
further down the road?
LE: We are looking at something that would appear in the fourth
quarter that would be an interesting printed unit. It would
appear in the catalog as a definite enhancement to the catalog,
that we think can be fairly painless and economically adjusted,
shrunk a bit and mailed specifically and separately to Internet
customers. We're probably going to test how that works. A big
creative challenge, as Chip mentioned and Dave reiterated, is
brainstorming new ways to send materials that are not catalogs,
such as newsletters, swatches, etc. Frankly, it's sort of
interesting and exciting to think about, because these are all
new gardens that Lands' End can play in. We don't have to
confine ourselves to the orthodox catalog form, and I'm beginning
to put together a dedicated group of creative people to do just
that -- sit in a room and come up with some off-the-wall and out-
of-the-box ideas that are not catalogs.
DFD: I want to say thanks to all of you for coming and for
taking the time to learn more about us. Hopefully, we're moving
in the right direction in communicating with you, and we look
forward to talking to you all again soon. Thanks again.