Oxford Industries Inc (OXM) 2005 Q2 法說會逐字稿

Good day everyone and welcome to the second quarter fiscal 2005 earnings results conference. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Reese Lanier, from Oxford Industries. Please go ahead, sir.

Good afternoon, everyone. Before we get started, I would like to remind you of our Safe Harbor language. I'd like to point out that some of the statements made on this call is part of prepared remarks or 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 and 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 form S-3 registration statement dated September 24th, 2004. A copy of this registration statement is available online or upon request from Oxford's investor relations department. Oxford disclaims any duty to update any forward-looking statements.

Thanks for your attention. I'd now 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 Mike Setola, President; Tony Margolis, CEO of our Tommy Bahama Group; Tom Chubb, Executive Vice President; Scott Grassmyer, Controller, and Reese Lanier, Treasurer. We're pleased to report financial results for the second quarter of our fiscal year 2005, which ended November 26, 2004.

I'd like to start with a summary of the key financial highlights for the quarter. Consolidated net sales increased 23 percent to a second quarter record of 313 million from 254 million last year. Sales growth was driven by substantial increases in the Tommy Bahama and Menswear Groups, as well as the contribution of the recently acquired Ben Sherman business, which is included in the Menswear Group. The Womenswear Group reported a sales decline. Consolidated gross margins increased 170 basis points to 32 percent. The increasing percentage of our business represented by company-owned brands, primarily Tommy Bahama and Ben Sherman, was responsible for the gross margin expansion.

You'll notice that our royalty income was up sharply, rising 190 percent to 3.3 million versus 1.1 million in the year ago quarter. Growth in the number and the sales of Tommy Bahama licensees, as well as the inclusion of Ben Sherman's licensing income, generated the growth in royalty income. Diluted earnings per share increased 29 percent to a second quarter record of 53 cents from 41 cents last year. This was above our previously issued guidance range of 48 to 52 cents and the current First Call consensus estimate of 51 cents.

We performed well during the quarter, despite a challenging retail environment, in particular, our branded businesses were strong. Both Tommy Bahama and Ben Sherman cater to more affluent customers, sell at higher price points and are sold through the better luxury retailers (ph) at distribution, which performed comparatively well during the second quarter.

As you may have read in our press release, we believe it is prudent at this time to moderate our financial expectations for the balance of the year. We see a tough retail environment in our second half, which is reflected in somewhat softer spring bookings in certain sectors of our business than we had previously anticipated. We expect challenges in the Tommy Bahama women's businesses to continue as we make adjustments to improve and grow these lines. We view these issues as short-lived, and to be expected as we execute our strategic plans. Now I would like to ask Mike Setola to give us an overview of Menswear.

Thank you, Hicks. Good afternoon, everybody. The Menswear Group reported a second quarter sales increase of 57 percent to 181 million, from 115 million last year. Ben Sherman had a very strong quarter, contributing $53 million in sales. This was our first full quarter of operations with Ben Sherman, and we're very pleased with both performance of this business and with the management of the Company. We continue to have high expectations for this business and believe there are many opportunities ahead here in the United States.

You'll note that excluding Ben Sherman, the legacy Menswear Group performed well, and increased sales by approximately 11 percent. Growth there was driven primarily by strong sales in the tailored clothing and dress shirt categories.

Operating earnings for the Menswear Group increased 77 percent for the second quarter to 18 million from 10.2 million last year. The increase resulted from the addition of the Ben Sherman businesses. I will give the call back to Hicks, but I want to say that we are tremendously excited about the opportunity that Ben Sherman represents for us, as well as the opportunity we have to revitalize our historical businesses through initiatives such as the new Orvis signature and nick(it) (ph) programs. We're extremely enthusiastic about the strong team in place to support us, and thank you for your attention. Hicks?

Thanks Michael. Our Womenswear Group reported a second quarter sales decline of 27 percent to 45 million from 62 million last year. Much of the second quarter sales decline was attributable to Wal-Mart, which has narrowed its women's wear assortment, reduced rack space devoted to women's apparel, and placed greater emphasis on direct sourcing. As a result of the lower sales, we saw some deleveraging of operating expenses. This issue, as well as some margin pressure from the remainder of the business, resulted in second quarter operating income of $200,000 versus 1.9 million last year.

I would like to point out that profitability improved sequentially versus the first quarter, and we expect further improvements in the second half based on a more efficient sourcing structure that we already have put in place. I would now like to turn the call over to Tony Margolis to give you an update on Tommy Bahama.

Thank you, Hicks. I'm happy to report that Tommy Bahama had a strong second quarter. Our sales increased 13 percent to 86 million from 76 million in the year ago quarter. Operating income for the second quarter was 5.9 million compared with 7.6 million last year. This decline in operating income was due primarily to $2.2 million in marketing expenses associated with the Tommy Bahama Challenge. As previously announced, we served as the title sponsor of this PGA sanctioned tournament, which was played in November. We believe the tournament was an outstanding venue to showcase the Tommy Bahama lifestyle and hope everyone had an opportunity to watch the tournament, which was broadcast on CBS on New Year's Day.

The Tommy Bahama men's business continued to perform well, generating strong margins and sellthroughs at retail. We have received good feedback on the performance of the line through the holidays from our major customers, such as Nordstrom's and from a variety of our specialty accounts. We continue to believe that we have solid prospects for growth in the men's business.

Our Tommy Bahama women's business is not faring as well; at least, not yet. We had planned the wholesale business to be down for the second quarter, but it was somewhat weaker than anticipated, and our spring bookings are running below plan as well.

In our company-owned retail stores, however, women's product was the largest percentage gainer against budget, and against last year for the month of December. As you may remember, we have made significant improvements to the fit and continue to make adjustments, season to season, in the styling and design. We're confident that there is a sizable opportunity for us in the women's market, but we must remain focused and patient. In the near-term, this will result in some moderation of our sales and earnings growth over the course of the second half.

I would also remind you that we made a strategic decision to terminate our private-label business to focus more fully on our core branded opportunities. This too will serve to moderate our expectations for sales growth for the balance of this fiscal year. We're projecting private-label sales for the second half to be down by approximately $26 million for the last year -- from the last year.

Our Indigo Palms brand continued to make progress in the second quarter. Our men's line sold extremely well at retail, and our bottoms were the single best performing bottom in our largest wholesale account during the holiday season. Spring bookings for Indigo Palms men's remained strong. The Indigo Palms women's line, which is still in its infancy, continues to undergo tweaks and adjustments as the line develops. In response to consumer and customer feedback, we have sharpened its focus on more fashionable, premium denim bottoms for the mature woman, a market that we believe is significantly underserved. While spring bookings for women's are somewhat weaker than anticipated, we remain optimistic that this performance will improve as the line develops.

Also this quarter, we opened three new company-owned retail stores, bringing our total to 48 locations. We opened a new Tommy Bahama store in the Dallas Galleria, and both a Tommy Bahama store and an Indigo Palms store in the Forum Shops in Las Vegas. We're extremely pleased with the new locations opened this year and the strong performance of our retail strategy. I would just like to note that the hurricane disruption in Florida last quarter had relatively minor impact on our retail sales, and our performance remains strong in that region.

As Hicks noted at the start of the call, we saw strong growth in licensing. We have continued to build our licensed product portfolio, most recently adding partnerships with industry leaders in fragrance, eyewear, handbags, ceiling fans, and sailing yachts. We believe these new categories are great fits for our lifestyle positioning, and enhance the strength and appeal of the Tommy Bahama brand, while also adding measurably to our profitability. We expect to see continued growth in this high margin income stream.

To support this growth, we've hired a new Director of Licensing -- Chrisann Fucciatto (ph). Ms. Fucciatto came to us after 18 years with Ralph Lauren, where she served most recently as Vice President. We're looking forward to benefiting from Chrisann's expertise in this increasingly important component of our business.

Thank you for your attention, and now I would like to turn the call over to Tom Chubb.

Thank you, Tony. Since we've already walked you through the sales figures both consolidated and by segment, I'll review the key elements of the income statement and balance sheet for the quarter.

Consolidated gross margins for the second quarter increased 170 basis points to 32 percent from 30.3 percent last year. Both Ben Sherman and Tommy Bahama generated significantly higher gross margins than our historical businesses, though our overall gross margins have continued to increase as these branded businesses grow as a percentage of total sales.

Total operating expenses for the second quarter increased to 82.5 million from 60.9 million last year. As a percentage of sales, total operating expenses increased 240 basis points to 26.4 percent from 24 percent in the year-ago quarter. The increase was due primarily to the inclusion of Ben Sherman, expenses related to additional Tommy Bahama retail stores, and additional marketing expenses in the Tommy Bahama Group.

Total operating expenses also included $2.4 million of intangible asset amortization associated with the Tommy Bahama -- excuse me -- and Ben Sherman acquisitions. These amortization expenses, which are non-cash, reduced second quarter earnings per share by 9 cents. For the third and fourth quarters, intangible amortization expenses are projected to be flat with the second quarter at approximately 2.4 million, or 9 cents per diluted share each quarter.

Second quarter operating income increased 22 percent to 20.8 million from 17 million last year. Our operating margin was flat versus last year at 6.7 percent of sales. Interest expense during the quarter increased to 6.9 million from 6.1 million in the year-ago quarter, due to higher average borrowings used primarily to finance the acquisition and working capital of Ben Sherman.

Diluted earnings per share for the second quarter were 53 cents compared to 41 cents in last year's second quarter. Diluted shares outstanding for the quarter increased to 17.2 million from a split-adjusted 16.6 million in the year-ago quarter. The increase was primarily the result of shares granted to the selling shareholders of Tommy Bahama, increased option exercises, and the higher dilutive effect of outstanding options due to the increase in our stock price.

We continue to be pleased with the condition of our balance sheet. Our total inventories at quarter end were up over last year at $162 million. The increase in inventory was driven by the addition of Ben Sherman, as well as higher inventory levels at Tommy Bahama to support retail store growth. We believe our inventories are properly valued and appropriate to support our business going forward.

Our accounts receivable totaled 175 million at quarter end, up 29 percent over last year's second quarter. Nearly all of the increase over last year was due to the inclusion of the Ben Sherman accounts receivables.

I would also like to point out that in connection with the amendment and restatement of our revolving credit facility in July, we also amended the agreements governing our lock box (ph) activities. As required by US GAAP, the terms of the new agreements resulted in the reclassification of all debt outstanding under our $280 million senior secured revolving credit agreement from a current liability to a non-current obligation effective in November of 2004.

You will note again this quarter a number of other changes in our balance sheet that result from the Ben Sherman acquisition. These include increases in intangible assets, goodwill and deferred income taxes.

I would now like to turn the call over to Reese Lanier, our Treasurer and Senior VP of investor relations, to walk you through the guidance for the remainder of the year.

Thank you, Tom. As Hicks mentioned earlier we believe it prudent to revise our guidance for the second half of the fiscal year in response to a challenging retail environment, softer spring bookings in certain segments of our business, and the termination of Tommy Bahama's private-label operations. We're now projecting sales for the fiscal year ending in May to fall within a range of 1.285 billion to 1.310 billion and full-year diluted earnings per share to fall within a range of $2.60 to $2.75.

For the third quarter, we're now anticipating sales of 350 million to 365 million, and diluted earnings per share of 65 cents to 71 cents. For the fourth quarter, we're estimating sales of 355 million to 370 million and diluted earnings per share of $1.06 to $1.15. Now I would like to turn the call back to Hicks for some closing comments.

Thanks, Reese. We continue to be very enthusiastic about the direction of our business and are looking forward to continuing to generate both strong growth in our branded businesses and improved profitability and growth in our legacy businesses. We've managed in a very short space of time to revitalize the Company. While the present environment is presenting some challenges and caused us to adopt a more prudent stance in our near-term financial outlook, we believe this will be a temporary issue of little significance to our long-term opportunities and performance. Thank you for your continued interest and support, and we're now ready to take questions. Now we will open it up for questions.

(OPERATOR INSTRUCTIONS) Jeff Klinefelter, Piper Jaffray.

I just had a few questions for you guys today across the business segments; I will roll them all into one. But first of all would be on the Ben Sherman line. Could we get a little bit of clarity on the growth of the business since we don't kind of have year-over-year numbers -- what was the growth of the Ben Sherman business in the U.S., year-over-year in the quarter that we just past? And then what was the growth in Europe? And then also, just an update on the timing of the juniors launch, and kind of how that's tracking.

My second question is just maybe a quick clarification, Hicks, on the Wal-Mart business. Obviously, a couple quarters ago, you guys took down guidance pretty significantly on Wal-Mart, by -- I think it was 30 percent at the time. Could you give us an update on now this down 20 percent in women's for the quarter -- how does that track with that guidance, or is it actually dropping even further than what we had expected?

And I guess I'd throw one out for Tony on Tommy Bahama. Can we get -- peeling back now this private-label business, getting rid of the 26 million in the second half, it sounds like that was a decision that was made during the last quarter, or within the last quarter. And it sounds in line with the overall strategy of the business. Could you give us a sense on a go forward basis, what are the expectations for actual growth of the Tommy Bahama brand for the next two quarters, backing that off? So what's the men's growth year-over-year, and then women's? And that would be great.

Okay, let me start with the Ben Sherman question, and I will let Mike add just some very general comments -- I'll make that, if he'd like to. The growth in the U.S. for the 10 months that we will have owned the business for this fiscal year will be roughly 50 percent increase relative to the same period the prior year. If you put that on an annual basis, we would be talking about going from roughly 30 million to 45 million on a 12-month period, and in rough numbers.

The business in the UK -- as you might recall, we have done some rationalizing of the lower tiers of distribution and in an attempt to basically clean up the distribution over there, and we have added on some upper tiers -- accounts, which we think is very healthy for the long-term aspects of the business. As a result of that, the UK business is relatively flat in total for this fiscal year over the same period last year when we did not own them. But it's mainly a case of strategic positioning. Mike, do you agree with that?

Yes. We had stated that basically as our strategy going in and the strategy is working exceptionally well in the UK. These better accounts, as we will call them, have performed very well through the holiday season, and we're encouraged by that. And here in the U.S., we had a strong retail season through Christmas. Specialty store and major department store growth. Those numbers clearly are in line. And with regard to the juniors question, the women's line launched here in the U.S. -- there's some product in retail stores now. The first real effect of any significant volume is coming for this spring and we're pretty encouraged by that initial placement, both again in specialty stores and in the premium department store zone. The business has been in place in the UK. We had a good season at retail in the UK in the women's business, both in concession shops and in direct retail.

Those of you who are in New York may want to visit second floor Macy's Herald Square (ph) and see the presentation of the Ben Sherman women's product, it's doing quite well there, I might add.

As to your second question about the legacy women's wear business -- you can see the decline we talked about in the first half. In the second half, the percentage decline will moderate significantly. But we still expect the decline in the second half more on the order of a 15 percent decline. We do think that the marks (ph) -- we're confidence that the margins in the business have improved for the second half, and we actually expect our operating profits for the second half to exceed those of the year-ago period, even with the 15 percent decline in sales. And to your question about Wal-Mart -- we have indicated that we thought this year we had the potential to drop about a third in sales volume, and that is playing out pretty much as we had anticipated. So I don't know whether that answers that part of your question.

Yes, that's right. So we were talking about going down about 30 percent, and it sounds like it's tracking there. Is there any other moving parts that you want to highlight within that -- ?

We've got to issue of direct sourcing, and margin pressure, which is probably going to -- the 15 percent in the second half combined with the 27 percent in the first half. Some of that is based on making sure we don't take sub-margin business going forward. And some of it is just the increasing percentage that not only Wal-Mart, but Target and others, are doing in increasing share of direct sourcing. So when all the dust settles, I think your (indiscernible) women's wear business as did last year -- we did roughly 300 million; this year, we will do roughly 250 million. But in the second half, it will be more profitable than the higher volume was in the second half of last year.

Should we assume sort of a straight line from that point forward, Hicks, or do you think we will just wait and see (multiple speakers) ?

It's difficult to -- I wouldn't think we would project a straight line on that kind of volume decline into fiscal '06 and '07. But it's too early to tell. In fact, our projections at this point are to show an increase in the third quarter but a decrease in the fourth quarter, and part of that is just visibility into the fourth quarter at this point. We just are not sure and don't know what -- I think one thing we're committed to is that we're not going to take business just to "hold position," regardless of the margins. So it will be satisfactory from a financial standpoint.

I might add that, during the course of this past quarter, we closed our last women's wear manufacturing plant, which was in Honduras. And so our ability to flex up and down our expense structure relative to the sales is certainly pretty flexible at this point. Tony, do you want to comment on -- ?

Yes. First, Jeff, let me just say that the decision on private -- on our discontinuing our private-label effort is something we've batted around for a couple of seasons for sure, and potentially even longer. It was part of the topic of conversation at the time of the acquisition. As our -- what I will call our secondary brands have grown in importance, Indigo Palms in particular, the burden of those efforts on our staff makes you ask the question of, where do you put your assets to work, and where is the greatest profit potential available? Clearly, it was in the branded efforts. And the decision to move out of that private-label business was a no-brainer, as far as we were concerned. The growth that you see in our branded businesses are clearly going to offset anything that we were generating on the private-label side.

To answer the specific as to where -- what -- how the branded growth is coming, it's running at about 7.5 to 10 percent for the year, if you exclude the private-label from our calculation. Does that answer your question?

Is that including all of your new retail stores as well?

No, that's third party business only.

Okay, third-party business is growing 7 to 10 percent. And how has that been transpiring through the year? Is that decelerating?

No, I would say it's -- if anything, I think it's started to accelerate toward the latter part of the year. So one exception to that of course is the women's business, which has continued to underperform. But the men's side of the business clearly has continued to be growing at a very nice rate.

How should we think about Tommy Bahama as an entity going forward, if we think 7 to 10 for a core department store specialty store distribution? And then what kind of a retail should we be folding in for growth?

I'm not sure what the guidance has in it, just on an overall vision thing, I think we're going to expect our men's company to continue to grow at a nice healthy rate. Our women's companies, we think there's some early indications that we're starting to see a turnaround that we've been looking for, just to be specific about that. In the month of December, women's was actually -- had the largest percentage increase on comp store sales and the largest percentage increase against plan of all the divisions of our company. And we have said all along that we will see the turnaround that we're looking for in our women's company in our own retail stores before we see it at wholesale. It will take the wholesale community probably three to six months to start to realize things after we see them. And so the early indications in the month of December are that some of the effort that we have expanded on women's wear is starting to bear fruit. But the projections that we have going forward do not project women's wear to have an increase at all. And so, --

For this year.

For this year. I'm not sure that I fully answered your question, so if I've missed something, say it again.

No, that's great, terrific, Tony, I appreciate it. Last thing, I will let you guys go. Women's is clearly a challenge everywhere. I think it's hard to find a company that has not been challenged by difficult women's apparel, and it sounds like it's hitting you guys across branded and private-label. Does anybody have any thoughts or any insight into what has happened there, and what might be able to pull us out of this trend?

I think the key for us is what we're experiencing right now in our own stores. We're putting a product there that the ultimate consumer is relating positively to and we were not doing that in prior periods. And our accounting month of December ended on the 24th, and the trend of good performance in our own stores has continued up until yesterday. So it's not just a four-week period, it's now closer to a six-week period that we've had that positive performance. So it gives us, you know, real signs of encouragement that we're on the right track. And we've got the right team of people that are driving the bus there.

I would tell you in the Tommy Bahama brand, we cater to a very specific segment of the women's market. And I think for us, the key was, A, to get a product out there that fit properly, which we did not have last year. And I think that move alone will create and improve performance for us. And I think the tweaking of the design direction of the line is something that just makes the product more brand consistent.

Thank you very much. We can just take the rest of our modeling questions off-line. I appreciate it.

Lee Backus, Buckingham Research.

First, a couple questions for Tony. You talked about the growth of wholesale. Could you also discuss retail, give us a sense of how your comps are running? And also, licensing -- that was a pretty dramatic increase in licensing. Is that -- what do you see going forward for the second half in licensing?

I think again, the trend that we see at retail right up until through yesterday, is that it is starting to accelerate from where it was. I think I mentioned to you in the last conference call that we had seen a very noticeable loss of energy in retail shortly after Father's Day, and that again started to show a turnaround after Thanksgiving. The month of December was very healthy and into the first few days of our current months, we're seeing extremely aggressive increases on comp stores.

I do think that the trend will probably continue through spring, but again, we have our planned budgets and hopefully we will exceed them. The licensing royalty income I think was something that was a result of additional licenses being signed, and the impact that they're having will continue right on through the balance of this year.

But to that kind of level?

I would say yes.

That included the Ben Sherman licensing also, which was a significant figure. And I don't think you can count on that percentage level to continue ad infinitum.

But the dollar --

Ben Sherman for the next two quarters will be up against nothing, so you will see pretty significant increases.

Okay. Just also, could you talk about the impact of this year's Kmart deal on your business and how Land's End is doing?

We sort of anticipated that question. As far as how Land's End is doing and how our business is with them, I would categorize the initial reports we've got is that their holiday season was okay. It was not off the charts in either direction; it was sort of acceptable, but not cause for celebration. Our business there during the first half was up slightly. We expect the second half to show an increase also.

As it relates to the Land's End product in Sears and what the Kmart-Sears combination will hold, we don't have a clue on that one because I don't think they have a clue yet as to exactly how that's going to play out. But we think that our total Land's End business, including the Sears business, bottomed out last year and we're going to see modest increases this year.

Could you also discuss the J.C. Penney initiative that nick(it), when that starts shipping, what -- ?

Mike, why don't you take that one?

Lee, that will start shipping next month for spring '05 launch. There will be a 500-door launch at J.C. Penney stores.

Also maybe Hicks, if you could discuss, now that the China quotas are off, what does that mean as far as your sourcing? What kind of impact do you see going forward?

I guess we need to wait a little while to see how that plays out. But we think it will certainly make sourcing easier in a non-quota environment, as far as what your options and choices are. The whole quota system has been sort of a Rube Goldberg arrangement, and it's made for sourcing situations that really don't make much sense. And I think absent quotas, it will be a lot more straightforward. Of course, that will be the same for our retail partners who are doing their own sourcing.

Okay, thank you.

John Rouleau, Wachovia Securities.

A couple of questions. First of all, I guess maybe for Tony on the women's side, was there something different about the women's product in the month of December? Styling changes, fit changes, something to maybe help drive that business in December, or was it just a customer that responded differently that month maybe versus previous months?

Probably the accurate answer to that is all of the above. I think without question, fit is the number one issue. And when you have product out in the stores that doesn't fit properly, it doesn't matter what the design is or the price or anything else for that matter. So that change in itself was crucial. I do think that the product that arrived into the stores in December was probably closer to the demographic that we're shooting for from a design standpoint, so that certainly contributed. I think just the general retail, the traffic that we experienced in our own stores probably contributed to that. And so I would have to say it's all of the above.

And just kind of as a follow-on, you've got the Tommy Bahama women's business that you've been working on for some time, and then you've got a younger Indigo; not younger by age demographic, but just the fact that it's been around last (indiscernible). Can you just talk about the differential between the performance between those two brands, and what you're seeing in each one of those?

I think a lot of those issues, or the errors that we've faced in women's wear probably impacted both divisions. Our jeanswear company, which is the Indigo Palms effort, was again in many ways a little too mature in its original concept. And so adjustments are being made to that brand as we speak. We're out with our current fall collection, and the response to it has been phenomenal. So we're excited about that business as a completely separate segment of the market from what the Tommy Bahama segment is. And when we talked earlier about what's going on in women's wear, the women's wear market is a highly segmented business, much more so than the men's apparel industry. If you took a problem in men's wear, you could multiply that by five or six for women's wear, because there are so many different views of what's going on in fashion in that marketplace.

Jeanswear certainly has a tremendous opportunity, especially in the premium denim business. And we are targeted at a consumer that is extremely underserved and are confident that we're going to build a very significant business there over time.

Separate question. There was some talk, and I think on the last conference call about doing a private product for Kohl's, or working a little bit more with Kohl's. Is that still in the works, or where does that product discussion stand?

I think that was men's wear related, John, and we've got numerous programs in work currently, shipping currently and going forward with Kohl's.

Okay. And then if I may, on the guidance side, the way that we've kind of talked about the legacy business, men's I think in the past, the guidance was up maybe low to mid single digits; women's being down by a likewise type amount, with that legacy business kind of being flattish. So if you revise the guidance here, is it all in women's? Is some of it coming out of men's? What would be the update on that, given the new guidance?

The update on that is that the legacy business we said going into the year, we thought it would be roughly flat with men's wear increases offsetting women's wear decreases. And last year, we were looking at 300 in women's and 450 in men's, basically, for a total of around -- it was actually 745, I think. This year, we're probably going to end up at around 750, of which 250 will be women's and 500 will be men's. So we're going to end up with some very nice sales growth in the men's area, particularly in the second half of this year.

Okay. Very good. Maybe a final question regarding the sourcing side. I know Wal-Mart has been aggressive in sourcing directly. And with China quotas going away, it seems like that is becoming maybe easier, if you will. I don't want to call it easy, because I know it's not. But you've obviously got some consolidation going on on the sourcing side. With Wal-Mart and Target maybe a few others are looking to do, is that kind of the writing on the wall? Are some of these more basic programs going to fall by the -- to the direct sourcing model? Is that what we can kind of anticipate with quotas going away? Could you speak to that maybe?

That phenomenon is one that we've been looking at for a number of years, and I think was one of the elements that crafted our overall strategy to change our position. Because historically, that has been a very important part of our business. We still think it will be important for us going forward because it's the term we've used pretty consistently is we don't want to be in the commodity business with those people. We don't think there's a chance of having a reasonable financial model on the commodity products. But we do think there are areas where we add value and can get paid for it, and so we're looking for what we call high value added private-label programs.

And in women's wear, the design part of it, as well as the sourcing, have been important, and particularly in collection-type things where you've got to source 8 or 10 different products in a group that all have to go live and logistically hit the floor at the same time. And that's something that -- as advanced as their sourcing networks are, they're not particularly good at that at this point. So where there's going to be a business going forward, but that's not as much of the future for us as it was in the past. And as I say, that's a key part of why we have done the repositioning that we've done in the last couple of years.

Great, I will jump off and let somebody else have a chance.

Elizabeth Montgomery, SG Cowen.

I don't have too many questions left, but I wanted to ask a question on Ben Sherman's profitability, if no one has asked that before. Are we still looking for around a 10 percent operating margin for that business for the year?

Yes.

And has the transition of the UK sales force already been accomplished, or is that tent still unfolding?

That has been accomplished, and in fact, they're at their first sales meeting this week.

Great. And then I apologize for going back to the legacy business, but I think I may have gotten confused about the guidance. Did I understand that the women's legacy business is actually planned up in Q3?

That's correct.

Could you give a bit of an indication as what would be driving that?

It's basically programs in hand.

So it's just a (multiple speakers)

The fourth quarter is not quite as measurable as the third quarter at this point. So we've got it planned down at this point. A total decrease in women's for the second half, so down about 15 percent.

Because you have Q4 planned down?

Yes, right. Even with Q4 planned down, we've got operating earnings up for the second half.

Right, because of the last sourcing thing? (multiple speakers) manufacturing.

More because we've got better gross margins. We had really depressed gross margins in the first half, and part of it had to do with the expiration of quotas and, which meant that in some cases, we had to change sourcing arrangements. As quota categories filled up, we actually had a few goods embargoed. We had to fly both piece goods and finished goods to service our customers, and we don't anticipate that happening in the second half.

Just one little ad lib, you may want to know what effect the tragedies in the Far East have had on our business. As it relates to the manufacturing plants we operate in, there has not been much effect. In terms of the logistics and moving goods, there have been some fairly significant ones that we're coping with right now. But we don't think they will have a material effect on the business.

Just one more question on the legacy business. If sales slow at some of the retailers that you do some specific programs for, or if they decide that they can source that directly from someone somewhere in Asia, what's the process or procedure for them to back out of those sales? Can they do that, say, with very little -- very limited visibility for you guys? Can they say we just don't want that program three months from now?

I don't think it would be on quite that type of timeframe.

But I guess that's the idea for having the value-added product, as opposed to the commodity?

Exactly.

So, it could be six months out?

Hypothetically, it could be almost anything. But in most cases, we've got long-standing relationships that -- we've got people that are on the customers' floors daily. So I don't think we're going to get hit from the blindside on this.

Great, thanks a lot.

Eric Tracy (ph), BB&T Capital Markets.

Most of my questions have been answered. Real quick, Mike, with respect to the men's wear business, it seems like even excluding Ben Sherman, the core men's wear business was up over what was planned. Just trying to get a sense of some of the initiatives that you all have taken there, and if they kind of came a little but early and what you see on a go forward basis.

Primarily, the growth in this past quarter was related to two of the existing businesses -- the dress shirt business, some new private-label programs, as well as some success in some of the branded businesses. And in our tailored clothing Lanier division, both in suited separates and in pulse (ph) tailored suits. The new initiatives really don't start kicking in until this coming quarter. So those are existing businesses with some new customers, and some new programs. But specifically, they're not part of, for example, the new Orvis programs or the new nick(it) program.

With respect to Ben Sherman, certainly this is a longer-term kind of strategy you're looking at. But just from the retail side, speak a little bit to that from a timing standpoint.

You're talking about retail stores?

Yes.

I think as we stated in the last call, we do in fact have a desire to implement a retail strategy. There's currently one store open on the Carnaby Street area of the UK. We are approaching a second store there in the UK; not in Carnaby, but in a mall location, a more mainstream, non-tourist kind of venue. We're pursuing U.S. opportunities currently both on the east and west coast.

And Tony, with respect to Tommy Bahama, I still recognize it's a minor piece of the business. I'm just trying to get a sense of where Island Soft is going. It seems like within the Company on retail stores, that is becoming a greater percentage of the mix. Not really talked about it too much, just trying to get a little bit more color there.

You're asking about Island Soft or Indigo Palms?

Island Soft.

Island Soft is still a really better specialty store targeted business. Within our own stores, it's still just a splash, a sprinkling, is what I would call it. We see that business as a sort of a guidance business, more than something that we think could turn into a 100-plus million dollar business. It's an opportunity for us to continue to have interaction with stores that I would say are fashion trend makers. It allows us to put our best foot forward with some of those people, offer them an opportunity to have some product that's not as widely distributed and continue to have the kind of communication that we think helps us keep all of our companies headed in the right direction.

Thank you all.

Robert Raiff, Centurion Investment Group.

My question's more general in terms of the process, and what could happen in the next six months that could be on the positive side. Because I know there's been a pickup in your business from what you're suggesting in the last couple of weeks. Where do you see them (indiscernible) over the next year or two? Where do you see the opportunities, other than getting the women's business right at Tommy Bahama on the outside?

I would say, as we have repeatedly said, we think that is a terrific opportunity for us. But we expect to continue to roll out our own stores. They're becoming increasingly important to us in Tommy Bahama and Indigo Palms. The same exists for both Ben Sherman, as Mike Setola just indicated. So that's certainly an opportunity.

The new initiatives that we've got, we know what the opening orders are for the 400 stores at Penney (ph) for nick(it) and we sort of know what the original efforts on this Orvis will be within the Orvis organization, but a lot of it is going to depend on how well those things do.

But I guess -- the comment on a general nature, since your question was general -- we couldn't be more pleased with the two brands we've acquired in the course of the last two years. We think we've got brands that are extremely well positioned, that have organic growth and have a lot of expansion possibilities. So we've repeatedly said that Tommy Bahama is not just about growth, it's about managing the brand. But properly managed, we certainly see growth there. I think we feel the same way about Ben Sherman.

One of the things that I was curious about is, watching you guys since the acquisition and been a happy investor, but I noted from every other quarter, we're reducing the estimates or increasing them a few cents. And I know it's not that precise of a business. And I see these relatively wide ranges, and I know -- there was a golf tournament, there was this, there was that, but you're becoming such a big company. And the estimates get reduced, then they get increased. I know there's a need to be conservative. But it seems like it's sort of a fluid event, and I just wonder what brings this about (multiple speakers)?

I would say, number one, the adjustments we've made we think are fairly minor. And I would say that the most significant factor in our moderation of our guidance was the holiday season that we just went through and the mood of ultimate consumer and retailer out there. And the results are still coming in, but it appears to us that with the exception of the better (ph) to luxury market, this holiday season we just went through was pretty underwhelming. And that even though there was a flurry at the end of it, most of it was generated by pretty intense price promotions, which doesn't turn out to be too satisfactory for anybody, except the ultimate consumer. So I think your characterization that we've been waffling back and forth is really not quite on the mark.

The only thing is, there has been a few occasions when -- you've reduced estimates only to raise them later. And I see this is a great company and it now has all the legs in place. And I look at the valuation and I suspect it has to do, the discount valuation, with getting confidence in the long-term growth. And I have it, but I don't -- it seems from every other quarter, we have a headline. And it has always been a great opportunity for -- but I'm a little bit concerned that we're trying to be too precise in a business that's fluid, you know? Tomorrow, the customer comes in and buys more. So from time to time, I try to understand the adjustments you make, and I don't always understand them. Maybe that's just me, but -- because I see over time, like when we started with the acquisition of Tommy Bahama, it was just so far ahead of what you had indicated earlier on.

I guess we have a tendency to be a little conservative.

I know. Okay, thanks a lot.

Jeff Kobylarz, Salomon Brothers.

I may have missed this comment, but I was wondering if you had said what Ben Sherman's organic growth was in this quarter?

I think I addressed the position of the Ben Sherman growth, both on the U.S. and in Europe. And the growth rate we were talking about for the U.S. was roughly 50 percent. And the growth rate in the UK we had laid out as being relatively flat, because we were rationalizing the bottom tier of distribution and adding in the top end.

Okay. What is your mix of Ben Sherman revenues generated in the U.S. and generated in the UK?

(multiple speakers) U.S., 75 percent, the rest of the world, with the bulk of that being in the UK.

Okay. And then also, you had mentioned, Hicks, that the men's business is going to be up to 500 mil (ph) and the legacy men's business is going to be 500 million or so this fiscal year, up from 450. And that means it's going to be up over 20 percent in the second half. And so should we expect continued growth like you've experienced in this second quarter, and then just adding in the nick(it), the Orvis and the Kohl's business -- is that the right way to think about it?

I wish it was that easy. I think -- as I said earlier, a lot of it depends on the success of some of the new ventures. But I think we have, in a pretty difficult environment, have done a pretty good job of generating new business opportunities, not only the nick(it) and the Orvis, but the new programs we've got with various retailers in most of our men's product categories. So I have every expectation that Mr. Setola will continue that thrust, and have his resources performing up to par.

Can you say how big the Orvis initiative is?

It really depends -- Mike, you can answer that.

It's a two-tiered strategy of direct supply to the Orvis customer, them as a cataloger and a retailer, and a secondary launch to the general consumer public of the better department stores and specialty stores. That second initiative is just getting underway and I think we will have a much better feel for it in our next quarter release.

And Hicks, you mentioned about due to the quota situation that you had to shift some other resources and you had to fly some products in the first half this year. Can you quantify what that dollar impact was in the first half?

I don't have those numbers at my fingertips.

Roughly, was it less than 10 million, less than 5 million?

It would be (multiple speakers).

Less than three?

Right (ph).

Lastly, any comments about use of free cash flow in the rest of this fiscal year?

I guess our principal issue there would be just to strengthen our balance sheet.

Thank you very much.

(OPERATOR INSTRUCTIONS) Douglas Pratt, Mesa Capital Management.

I wonder if you could give me a little feel for what you think SG&A is going to run. You've done a wonderful job in getting gross margins up, and there was a bit of an uptick this quarter in SG&A expenses. What should we look for generally over the next couple quarters for that metric?

I think a lot of that increase in percentage in the second quarter was that we did have the Tommy Bahama Challenge expenses in there. But the other factor, and we included the Ben Sherman versus a year ago, because it's a higher margin business and carries higher expenses. I don't think you'll see our expenses quite that high as a percentage of sales going forward, because we will get more operating leverage on it as we reach the higher volume periods of the year for Tommy Bahama.

I see. So analytically, we'd probably want to back out that 2.2 million, in terms of what's your real run rate of expenses for SG&A?

I don't know that you would want to do that, because we've got other types of marketing expenses. Since you've mentioned it, I will point out that in the Tommy Bahama Challenge, that was not all flush expenses because we re-altered our whole marketing budget for the year. From a timing standpoint, (indiscernible) in the second quarter, though. But in total, our marketing expenses for Tommy Bahama are going to be up less than 10 percent for the year. We just reallocated the venues.

Okay. Thank you very much.

Glenn Krevlin, Glenhill Capital.

I was wondering on the Tommy Bahama business, whether you could give me some sense whether there was a difference in trend between specialty and department store for the Tommy Bahama men's business?

It's a little hard to report on specifics out of the specialty store business. I will tell you that as a general statement, the feedback that we're hearing is that everybody had an extremely strong holiday season. Although it did come a little leader then they are used to seeing, I think that's a trend that's been going on for a couple years. It ended up being a pretty healthy timeframe for us, both in independent specialty stores and our better department stores. You get weekly selling reports from the department stores, you get month-to-date reports the following week. And in every case, we had relatively strong increases, certainly in all of our major stores. The independent specialty people, it takes a longer time to gather that information. Our people are all out working with them on fall of '05, starting yesterday, and over the next two to four weeks, we will get a more specific answer to that question. But the early indications are that they all ended up having a pretty good Christmas.

Any significant regional variations that you can see in your business?

None that I've heard. We've gotten great reports from actually all of the majors. Some of them are national, nationwide. And certainly, we hear from a cross-section enough to know that it was a nationwide trend.

Perfect, thank you very much.

That does conclude our question and answer session. I will turn the conference back over to Mr. Hicks Lanier or for any closing remarks.

We would like to thank you for your interest and your patience, I guess, this one lasted awhile. But I will just sum up by saying everything considered, we couldn't be more pleased with our positioning at this point. And despite some rough spots in the external environment, we're pleased with where we're going and have what we think is a very good game plan. So without further ado, we will look forward to talking to you again in three months.

That does conclude today's conference call. You may disconnect at this time. We do appreciate your participation.