After less than two years into her role, Lands' End (NASDAQ:LE) CEO Federica Marchionni was forced out, sending shares down 16%. No specific reason was given. We get that the news creates some uncertainty about the future strategic direction of the company, but rather than panicking investors should be rejoicing. Mrs. Marchionni's vision for overhauling the brand wasn't working, and it alienated employees and customers. LE needs to get back to its roots, and a change at the top is the first step. We wouldn't recommend LE for long-term investment, but we do think there's a trading opportunity here. LE has fallen more than 1/3 during the past year and shares should rebound slightly from the latest hiccup.
Mrs. Marchionni tried to do too much too soon to fix an ailing business. Essentially, she tried to convert a mid-priced conservative fashion brand with an outdoorsy focus into a European high fashion house. The focus shifted from substance to style, as LE added slimmer fits and stiletto heels to the catalog. This confused employees and alienated customers. LE strayed too far from its core brand identity, leading to market share losses. Sales in the latest quarter were down 16% on a two-year stack. We believe LE's brand asset has eroded, but this doesn't mean it can't be recovered. A change in leadership and a return to the roots should help LE get back on track. With competition flooding the industry from the high and low ends of the market, LE needs to clearly define its concept and identity if it's going to stand out.
To be fair to Mrs. Marchionni, though, some of the problems at Lands' End were out of her control, and it's because of these issues that we can't recommend LE for long-term investment. LE isn't the only apparel retailer having trouble. The US economy is slowing down which is forcing consumers to be choosier with their discretionary income. Rather than spend on physical goods, consumers are increasingly spending on experiences such as travel and entertainment. There are exceptions, but growth has either decelerated or turned negative at almost every apparel company we can think of over the past year. The economy will get weaker before it improves, and we are bearish on apparel stocks as a whole. Another problem with Lands' End is that it is stuck in the middle of the market between relatively affordable high-end luxury brands and fast fashion retailers who target the more price-sensitive consumer. Restoring the brand should help LE recover some lost share, but it won't fix the problem of operating in the middle of the market where the consumer base is diminishing. The attitude with consumers seems to be that if you're going to pay up for clothing you might as well splurge at the high end, otherwise it's best to go with comparable quality fast-fashion items that sell for less.
The latest selloff seems like an overreaction and we think the CEO's dismissal is good news for Lands' End. We expect shares to rebound relatively quickly after the dust settles. There may be a trading opportunity here, but we wouldn't recommend LE for long-term investment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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