Oxford Industries Inc (OXM) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Oxford Industries, Incorporated third-quarter 2004 earnings conference call. At this time all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. It is now my pleasure to introduce our host, Mr. Reese Lanier. Sir, the floor is yours.

Thank you, Anthony. Good afternoon, everyone. Before we get started, I'd like to point out some of the statements made in this call as part of the prepared remarks are in response to your questions which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties which are described in the Company's current report on form 8-K dated July 16, 2003.

A copy of this report is available online or upon request from Oxford Investor Relations Department. Oxford disclaims any duty to update any forward looking statements.

I appreciate your attention and now I'd like to introduce Hicks Lanier, Chairman and Chief Executive Officer of Oxford industries.

Good afternoon and thank you for joining us. With me today are Tony Margolis, President of our Tommy Bahama® Group, Ben Blount, our Chief Financial Officer, Scott Grassmyer, our controller, and Reese Lanier, our Treasurer and investor relations director.

Our third-quarter was stronger than expected. It resulted in record third-quarter sales in earnings per share. Tommy Bahama® continued to make significant gains and had an excellent quarter. We have continued to make good progress on the integration and could not be more pleased with this business. Our legacy business has faced some volume issues but performed at the level we had anticipated. We are expecting a gradual stabilization of the Sears Lands End business and are enthusiastic about a number of areas where our businesses are producing solid growth.

Here are the financial and operational highlights from the third-quarter. Sales increased 35 percent to a record $281 million versus 209 million in year ago quarter. Consolidated gross margin increased 10 full percentage points to 30.9 percent from 20.5 percent in the year ago quarter driven by the superior margins of the Tommy Bahama® group.

Consolidated selling, general, and administrative expenses increased 23.6 percent for sales from 15 percent of sales in the prior year's quarter reflecting the higher cost structure of the Tommy Bahama® Group. Operating earnings rose 87 percent to $21.5 million dollars from 11.5 million a year ago quarter. I would remind you that these figures include $1.7 billion (ph) in intangible asset amortization expense related to the acquisitions.

Fully diluted earnings per share were 58 cents better than our guidance and consensus estimates and an increase of 26 percent over last year's 46 cents a share. We are pleased to outperform our plan for the third-quarter and look forward to a strong fourth-quarter finish for the year.

As I'm sure you read in our press release, we have narrowed the range and reaffirmed our guidance for the fourth quarter.

Now I'd like to take a moment to discuss some specifics in our menswear and womenswear segments and then I'll turn the call over to Tony to discuss the Tommy Bahama® Group.

Menswear's revenues declined 18 percent to $100 million, in line with our expectations. There were two primary factors behind the decline. The performance of Sears Lands End and the wind down of IZOD (ph) Club Golf. Excluding these two factors sales growth was about 5 percent ahead for the quarter. With respect to the Sears Lands End situation we had $21 million in pipeline fill in last year's third-quarter that did not anniversary in this quarter.

I won't belabor this issue since we've discussed it in depth on previous calls. But I will say that we expect to see a return to growth in the Lands End business by the end of this year.

The balance of our menswear business is performing fairly well. We are particularly pleased with the recent performance of our Tommy Hilfiger dress shirt business and the launch of the new H. line by Tommy Hilfiger. Another bright spot has been the spring launch of Oxford Golf. We're in over 1000 green grass locations in our first season and the response to the product has been overwhelmingly positive.

Womenswear revenues declined 11 percent to $78 million. This was also in line with our plan. The reduction was due to lower shipments of women's apparel to Wal-Mart. We have enjoyed some terrific growth with Wal-Mart over the last three years by confining innovative styling and design with well-executed global sourcing and logistics. But we have faced some recent challenges with this customer, given Wal-Mart's increasing emphasis on direct sourcing along with their planned reduction in rack space for women's apparel and the narrowing of a women's assortment. We believe that growth in sales and profitability with this customer over the next few quarters will be very difficult to achieve.

That said, our business with Target -- our largest customer by far -- continues to be strong across all major product categories of women's apparel including top, bottoms, knits, wovens, activewear, swimwear, and maternity.

With that, I will turn it over to Tony Margolis to bring you up-to-date on the Tommy Bahama® Group. Tony.

Thanks, Hicks. We were very pleased with our progress during the third-quarter. We contributed sales of 103 million, up approximately 15 percent over the same period last year when we were still a private company. Our sell through at retail remained very strong which was certainly a help during the marketing of the new fall lines.

We had an excellent reception at the Magic Apparel Show in Las Vegas and achieved our bookings targets for fall. We are now starting to focus on holiday and are highly optimistic regarding its potentials. Our men's business is having a fantastic spring season in over-the-counter sales. The lines are strong and incorporate some fresh new items and fabrications that have been very well received.

As the breadth of the line increases, we believe that we will attract additional customers, as well as increase our share of closet in our existing consumers. On the women's side while we expect to be in an evolutionary process for some time, we are turning the corner. We have received good feedback on the changes to fit that we've made with the line and believe that the fit and the target customer are now properly synched. We've also driven our performance with some new fabrics such as stretch cotton. The early feedback appears to confirm that the new direction of the line is correct.

We have already achieved our seasonal bookings goals for the fall season which is a good validation of our progress. And we've focused on doing the same for the holiday assortment. In general we are confident continent that we are on the right path.

Indigo Palms® is having a spectacular season. On a percentage basis -- and on a percentage basis but is of course working off a small base. The Indigo Palms® men's company is beginning to develop a significant business and we expect it to exceed projections for the year. The women's line is just now arriving in the stores but the fit is great and the consumer response has lots has been very strong. We feel good about the relative -- relatively aggressive development plans for this business.

On the retail front, we are extremely pleased with the overall performance of our retail stores. At quarter end, our store count stood at 39 which included Indigo Palms® store in Newport Beach, California, and a new large format compound in Scottsdale, Arizona. We expect to finish the fiscal year with a total of 42 retail stores after adding new Tommy Bahama locations in Charlotte, North Carolina, Troy, Michigan, and Mission Viejo, California during the fourth-quarter.

In summary, I'd say that we have continuing confidence in both our short-term prospects and in the development of the business over the longer time frame. Thank you and I'll give the floor to Ben to go through the numbers.

Thank you, Tony. During the third-quarter Oxford's consolidated revenues increased by 34.7 percent to a record 281.4 million versus 209 million in the same quarter of last year. The increase was driven by the inclusion of 103.4 million in revenues from the Tommy Bahama Group. This compares to Tommy Bahama revenues of approximately 90 million in the year ago quarter when the Company was still private.

Sales for the menswear group in the third quarter were 99.8 million, down 17.8 percent from the year ago quarter. As Hicks mentioned, the volume issue is specific to two situations that should be resolved over the next few quarters.

Sales in our womenswear group for the quarter was 78.1 million, a decrease of 10.8 percent from the prior year's third-quarter. The decline was due to lower shipments to Wal-Mart during the quarter. Gross margin for the quarter rose 10.4 percentage points to 30.9 percent versus the year ago level of 20.5 percent. The primary factor in the increase was the inclusion of the Tommy Bahama Group which carries much higher gross margins.

Selling, general, and administrative expenses for the quarter was 66.5 million versus 31.4 million in the year ago quarter. This year's expenses increased 860 basis points to 23.6 percent of sales versus 15 percent of sales in the year ago quarter. Again, this increase was the result of the inclusion of the Tommy Bahama Group which carries a higher expense structure than the corporate average.

You'll note that we once again incurred a 1.7 million of intangible asset amortization expense during the quarter. As a reminder, amortizable value was assigned to the Tommy Bahama customer relationships licensing agreements and other intangible assets.

For the quarter, on an after-tax basis, these nonoperational non-cash charges reduced our reported earnings per share by approximately 6 cents.

Operating income during the quarter grew 87.2 percent to 21.5 million with an operating margin of 7.6 percent. This is the 210 basis point increase in the operating margin versus the year ago level of 5.5 percent. Interest expense during the quarter reflected the debt associated with the acquisition and was 6.3 million versus 47,000 in the year ago third-quarter.

The tax rate for the quarter was 37.5 percent versus a rate of 39.5 percent in the year ago period. The decrease was due to the relative distribution of pre-tax earnings among the various tax in (ph) jurisdictions in which we operated. Net income increased by 37.7 percent to 9.5 million from 6.9 million last year. Diluted shares outstanding for the quarter were 16.7 million versus a split adjusted 15.1 million last year.

The increase was the result of 776,000 shares granted to the sharing -- to the selling shareholders of Tommy Bahama at closing increased employee stock option exercises and the increased dilutive effect of unexercised employee stock options due to the significant appreciation (ph) in Oxford stock.

We're very pleased with the condition of our balance sheet at quarter end. Inventories at the end of the quarter increased 34.8 million over the year ago period to 133.7 million. 36.5 million was attributable to the Tommy Bahama Group.

Overall we're comfortable with the quantity and valuation of our inventories and believe we're well positioned to support our order backlog for the remainder of the year. Accounts receivable were also in good shape, rising 11.5 percent against our 34.7 percent sales increase.

Long-term debt stood at 198.8 million for the quarter representing a total debt to capitalization ratio of 48.6 percent. We had 13.6 million in direct borrowings under our revolving credit lines at quarter end and had excess collateral availability of approximately 135 million. Through nine months this fiscal year we generated positive cash flow from operations of 3.3 million compared to 15.4 million in cash used by operations in the same period last year.

Higher net earnings depreciation and amortization were partially offset by increased investment in working capital after giving effect to the acquisition of Tommy Bahama.

We expect cash flow from operations for the full year to be approximately 40 million. After deducting capital expenditures of approximately 14 million and dividends of roughly 7 million, we expect free cash flow of about 20 million for the fiscal year.

During the third-quarter, we increased our quarterly cash dividend by 14 percent to 12 cents per share per (ph) quarter. Looking ahead, we have narrowed and reaffirmed our guidance for the remainder of the fiscal year to reflect an expectation of continued strong financial results. For the fourth-quarter, we now anticipate sales in the range of 300 to 310 million and diluted earnings per share in the range of 85 to 88 cents. This compares to our previous guidance of sales of 295 to 310 million and diluted earnings per share of 84 to 88 cents.

Please note that we've estimated the weighted average diluted shares outstanding for the fourth-quarter and full year at approximately 17.1 million and 16.7 million respectively. These figures reflect 485,000 shares expected to be included as dilutive shares as of the first day of the fourth-quarter in connection with earn out agreement with the selling shareholders of Tommy Bahama.

Based on our budgeting cycle, we plan to announce fiscal year 2005 guidance by the end of May. I will now turn the call back over to Hicks.

Thanks, Ben. To wrap up I would just like to reiterate how pleased we are with the quarter and more particularly with the Tommy Bahama business. Tony and his team have done an extraordinary job of building and managing the business and we are increasingly excited about the opportunities for growth that it brings to Oxford. With that, I think we're ready to open it up for questions.

+++ q-and-a.

{Operator Instructions}.

Our first question is coming from Jeff Klinefelter of Piper Jaffray.

Congratulations on another great quarter and great momentum. Couple of quick questions. You mentioned that your integration you feel is going as well if not better than you had anticipated. Can you give us a sense for what you mean by that? Are you thinking that there's maybe even a lower kind of status SG&A rate that you will be able to achieve because of that?

Well interestingly in the short-term there's going to be a higher rate because we've got some duplicate expenses as we are transitioning some functions particularly in the accounting area where we are moving it from New York to Seattle and Atlanta and we are sort of in the middle of that process. And right now, we've got expenses in all three locations but as we get into our new fiscal year, there will obviously -- we will not have that duplication. As a result of that that total expense structure will be down.

And then, also, could you just comment, Hicks, a little bit on the environments in the -- on the Oxford side of the business? You mentioned that Wal-Mart is narrowing their assortment of women's a little bit and that's pressuring your business on the flip side Target has actually been very strong. Can you give us a sense overall for that midyear and discount channel? Are you seeing improvements there. Is there a lag behind -- obviously there's a lag behind the department stores. What's your sense for that business stabilizing and starting to improve?

I think that would be the big case for Target, certainly. In fact, their business through the holiday season and the first quarter of this year our perception is that it's been pretty good. {inaudible} with all of these retailers you tend to have a situation where they will have two or three good weeks and then they will sag a little bit unexpectedly, but that's just the nature of the beast, I think.

Let me clarify the Wal-Mart situation a little bit. I think they came to the conclusion that their floors were very crowded and, particularly in women's apparel, because they did not meet their sales targets for a number of months in a row. So inventory accumulated and their floors got to be pretty crowded and their rack pretty well stuffed. So they're taking an approach which has been successful for other retailers of trying to open up the space, make the product offering more focused. As a result they actually have lower product in the same square footage but they're hoping for greater turnover. And that is a situation JC Penney encountered about three years ago and had pretty good results from. So we will see how it works. But the women's business at Wal-Mart has been a little bit on the sluggish side for the past really four or five months. And they've pointed that out themselves so it's nothing I am pinning the tail on the donkey on.

Okay, great. And then just, lastly, for Tony on the Tommy Bahama product. Two things. One, you said you expect to continue to attract new customers and expand share of wallet, certainly looks like the product assortments of spring are accomplishing that. Can you share a little bit more on, either, certain categories of product? Are there certain areas where you think you're -- at this point -- you're leveraging and penetrating further into, say, the pants category or the sweater category that's going to give you that greater share of wallet? And then any more color on the women's products? What were people particularly impressed with with the fall bookings for the new product? Thank you.

Sure, on the men's side there is always sort of an ebb and flow of the strength of one product category versus another where some season knitwear may outsell woven tops and another season it's sort of -- shifts the other way. But over the life of our Company our bottoms business was probably dominated by silk product and, in the last three seasons, we have been introducing on a steady basis more and more butter-soft (ph) cotton product and that cotton product has been extremely well received. It is not necessarily coming out the cost of that silk customer but sort of opening the door for us for new customers that were not necessarily silk bottom people.

So that type of thing is happening in a noticeable way in the men's business. I think similar moves are occurring in the tops area as well where woven tops have always been dominated by silk. Today, we do, although it's still -- it's still the dominant piece of the line, we show more cotton product than we have in the past and we're getting good reaction to that.

On the women's side, it's very exciting for us because the early feedback on items that are sort of coming from the new direction, the slightly younger, slightly more fashionable zone, are performing extremely well. As I mentioned in the earlier part of the call the fit characteristics were changed in a noticeable way and of course there were some of the -- what I'll call the old school customers who have been a little put off by that. But there's been a tremendous positive response directing that, getting the customer who is more fit conscious into the product and they're walking out the door with it.

So that's showing great strength. But the -- key items that are -- exist in the line today that I would describe as foundation pieces for the new direction of the line are selling very well and that bodes well for us for the future.

Okay, great. Thank you very much good luck with the holidays and fall.

Lee Backus from Buckingham Research.

First let me add my congratulations to a great quarter. Good job guys. First Tony, on the sales in the quarter versus 90 million last year. I know you'd talked before about getting out of some private label business? Was any of that included in the 90 million last year? And on an apples to apples basis, what would the sales increase be like?

Actually, Lee, I am going to yield to one of my numbers guys. Where I don't have some of that information in front of me, they do.

{inaudible} For the quarter there was no perceptible business in private-label, there was actually a small increase in the private-label for the quarter this year. (inaudible) the quarter. For the year there's been a reduction in private-label and most predominantly in the women's private-label category.

And the guidance you've given for Q4? How would you break that down between Tommy Bahama and the core business? And maybe you can give me a sense of what quarter you would expect to -- the core business to stabilize?

Well, you know, we've talked about the core business, specifically, with respect to the Lands End Sears scenario and I was just out there Monday and Tuesday of this week. And there's some encouraging signs there. There's still some inventory to work through. There have actually been some pretty signal (ph) success stories in selected Sears stores like Paramis, (ph) New Jersey (indiscernible). The Lands End product has been very successful there. And they are now trying to pick out about 25 of Sears's stores that are performing well. And sort of make them models and make sure they treat them right in terms of display, in terms of the assortment, in terms of the replenishment and then sort of build on that success.

So how long that process takes remains to be seen but there are some flickers of encouragement there. It's hard to quantify the exact timing of it. But I would say, from our standpoint, we expect that we will be in a growth mode at some point during the first half of the upcoming fiscal year.

So that the Q4 assumes your legacy business down on the offset by higher sales in Tommy Bahama.

We definitely expect growth in Tommy Bahama and in men's we -- in men's and women's like I said, we expect a small decrease but in total, a fairly significant increase.

Okay. Tony, could you just talk about comp store sales and productivity in the stores and how it was in the quarter?

I wouldn't want to quote you specifics. I will tell you on a general basis as I mentioned it on the last call. Since about last Thanksgiving, we have noticed what I will call improved selling rates in our own stores and in third-party accounts. I think within our own stores the -- what I'll called the leak that was occurring on comp store sales due to womenswear -- has slowed dramatically. And so we have what I will call extraordinary growth going on in men's wear. The leak is down to maybe a dribble at this point on the women's side. And so we are experiencing what I would describe as exceptionally good performance on a comparative basis on comp stores.

Susan Sansbury of Maxim.

Everybody's asked most of my questions, but Tony, can you quantify how much fall bookings are up? Is it a double-digit number?

Reese or ... ?

I can answer that question. At this juncture basically as Tony pointed out earlier, we have matched our plan and the plan was for about a 10 percent increase. Last year we got further fall bookings after this time frame so you know ... I think we can look for a low double-digit increase at this juncture comfortably. And quite, frankly, the wild-card in that is within our fall goals which we have already met is a portion of at once business principally in the Indigo Palms area, (indiscernible) which -- we weren't counting on this early so we still expect to get that. So my guess is we will -- by the time all the dust settles -- we will be comfortably ahead of our goal which was, fundamentally, a 10 percent increase.

You know I bought three more pairs of Indigo Palm jeans, so that's the reason huh?

(MULTIPLE SPEAKERS)

You know I have to buy them blind from New York --

Working on that for you.

Second question. I guess going back to the legacy business, specifically, Lands End. Has the -- refresh my memory. Weren't you looking for a stabilization in the Lands End business sooner than you just indicated to Lee or am I all wet?

You are dry as a bone. This thing has continued to move a little bit on us, but I'll have to say I was comforted by this trip cause the specific most important issue for me was to get a handle on exactly where it was and the one category that they still seem to be heavy in happens to be one of our big ones which is dress shirts. But say that we are actually beginning to get some calls from them for rush-rushing our merchandise so -- which is a very good sign for us.

And the dress shirts are still in the catalog or is it (MULTIPLE SPEAKERS)

Well, not to get back in the swamp on this thing but if you'll recall we put exact sleeve-length dress shirts into the Sears stores, much against our objections. We subsequently have pulled those out and put them back into the catalog distribution center. And that's a big part of our overhang. And we put average sleeve lengths into the Sears stores.

Okay so the issue -- well -- I think in the last conference call you talked about the Sears business being down. I can't remember -- $30 some odd million? It now sounds like it's going to be down more than that.

It is going to be down slightly more than that.

Slightly more. Okay. Now and the other thing that seems to be taking longer of course is the Wal-Mart issue (inaudible).

That one -- that issue I don't think we ever indicated that that's necessarily a quick turnaround or a turnaround at all. So we're not going to take business that doesn't make financial sense for us with Wal-Mart and it is what it is.

Okay.

We've got a very vibrant situation at Target that in total, we're going to be in good shape between that -- for that tier of distribution.

Okay. Sounds good. I appreciate it. Thank you very much.

Carol Cranmer of Morgan Joseph.

I'll add my congratulation. Actually my question has been answered as well but I will ask a follow-up on Indigo Palms? Would you share what you've learned from your one store and what it might take to make you decide to open more?

Of course, the conference call is not going to last long enough for us to tell you everything that we've learned but I think some of the key and obvious things that we did learn are that the initial store size was which was about 1600 square feet was probably 400 to 600 square feet too small to properly show both men's and women's product. And so, for future sites, we are working on finding sites that are more in the 2,000 to 2400 square foot range which -- where we think we can properly present both male and female product in separate ways. I think, probably, the most exciting bit of news came out only in the last two weeks where women's product -- new spring women's product -- has actually hit the stores and, actually, for the first time in the history of that store, women's outperformed men's. And that, obviously, was our expectation all along. But the decision to open that first store was, actually, the timing of that didn't permit us to have a broad selection of womenswear in the store. And so not only has men's held its own and grown but now the women's pieces is taking on what I will describe as its appropriate share of the business. We do have on the plan on our books at this point the plans to open, I believe, three door indigo palms doors in the early half or first three quarters of the fiscal '05.

In fact, we just signed one of the leases yesterday for Santana Row in San Jose.

Thank you and on another subject, Mike Setola hasn't been with you long but for whatever you might share about his initial focus or...?

I'd be glad to do that and happy. He will probably be on subsequent calls but he just got on a plane a few minutes ago after being down here for several days. He was actually with me on the Lands End trip and then came to Atlanta, back Tuesday night with me and was over in our slacks group in Monroe, Georgia, yesterday and then back here today, but he has been with us 4 1/2 months. I'd say at this juncture we are absolutely delighted that he's part of our team. He's initiated a lot of projects and new ideas and new opportunities and we're sort of at the point now where we're trying to pick and choose between them. But I think he's going to be a very vibrant part of our Company and a real agent for our change and growth.

{Operator Instructions}.

Clark Orski (ph) of KDP Asset Management.

I was wondering if you could give us an idea where you think inventory and receivables will be at the end of the year?

Clark, I don't have the ending balance sheet in front of me. This is Ben Blount, the CFO. But we are very pleased with where both of them are now. And we really anticipate about the same -- the same level in relation to -- in relation to our business. Actually, I do not have them. We expect receivables at the end of the year of 147.8 million and FIFO inventory of 138.2 million.

Okay, thanks very much.

I might add to that that the free cash flow figure of $20 million that Ben mentioned earlier compares to our projections when we started this fiscal year of basically a breakeven on free cash flow this year. So we're pretty pleased the way we've managed our assets during the year.

Yes. What's your intention as far as the excess cash there? Just hold on the balance sheet or ... ?

For the near-term (ph), yes.

Susan Sansbury of the Maxim Group.

This is an awkward question because I thought you guys were going to -- I thought this was the quarter when you were going to talk about next fiscal year. But I obviously was wrong. I don't know how to phrase this. Are you comfortable with consensus estimates out there for next fiscal year I guess is the way to ask this as directly as possible?

There's a reason that we did not give our guidance for next year at this time. And the principal reason is because we have not gone through our budgeting and planning process for next year. We have historically tried to put that off till fairly late in our fiscal year. Principally because the private-label end of our business does not have the visibility out into the future that our branded businesses do. And, hopefully, we will be able to -- as we shift more and more of our business to a branded environment -- it will sort of solve a big part of that problem.

But at this juncture we plan to give guidance between now and the end of May. And we will be pretty specific about it. And I think it will be pretty good. Were we to give it now, we'd probably in our private-label area would probably tend to be overly conservative as we usually are. And I'm not sure that would have served any of us well.

So we are going to try to do it in a time frame where we've got more information but in the future we will try to be more responsive to your needs on there.

Okay, but -- so you're going to talk about or initiate talk about next fiscal year sometime between now and the end of May? In other words, you're not going to wait until you report May results.

That's right, that's correct.

Well, that's encouraging. You're off the hook. Thanks very much.

{inaudible}

At this time, there appear to be no further questions and I'd like to turn the floor back over to management for any closing remarks.

We'd would like to thank you again for your interest and participation. And I guess I can't stop saying how pleased we are with our Tommy Bahama® addition and the results we've generated through the first three quarters. And we feel highly confident about the fourth-quarter and, Susan, even though we didn't give you anything specific we're pretty confident next year is going to be a good one. So with that, we thank you and wish you a good day.

Thank you. And thank you, callers. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.

Thank you.