Oxford Industries Inc (OXM) 2007 Q2 法說會逐字稿

We do thank you for standing by, and welcome to today's Oxford Industries Incorporated second quarter 2007 conference call. [OPERATOR INSTRUCTIONS] Now at this time, it's my pleasure to turn the conference over to Reese Lanier, Treasurer of Oxford Industries. Mr. Lanier, please go ahead.

Thank you. Good afternoon, everyone. Before we get started, I'd like to point out some of those statements made on this call as part of the 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 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 10-K filed with the Securities and Exchange Commission on August 15, 2006, and in our subsequent filings with the Securities and Exchange Commission. A copy of this report is available online or upon request from Oxford's Investor Relations department. Oxford disclaims any duty to update any forward-looking statements.

Now, I'd like to introduce today's call participants. With me today are Hicks Lanier, Chairman and CEO; Tony Margolis, CEO of our Tommy Bahama Group; Tom Chubb, Executive Vice President; and Scott Grassmyer, Controller. Thank you for your attention and now I'd like to turn the call over to Hicks Lanier.

Thank you, Reese. Good afternoon, everyone, and thank you for joining us today. As you can see from our earnings release, the second quarter in aggregate came in as expected. Tommy Bahama performed very well and the outlook for the balance of the year is very positive. The Ben Sherman recovery from last year is underway and we expect it to progress as the year unfolds. Our Tommy Bahama retail stores continue to be a bright spot and our Ben Sherman stores are starting to take off.

In our Legacy Menswear businesses, we are focused on transitioning away from our old model and refocusing the business on our strongest programs and opportunities. I will begin today with a summary of the key financial highlights of the second quarter of fiscal 2007 and then walk you through the Menswear Group in more detail. I would also like to remind you that the financial results of the Womenswear Group have been classified as discontinued operations as a result of our sale of assets of the Womenswear Group at the end of the fourth quarter of fiscal 2006.

Our financial review today will cover continuing operations, consolidated net sales for the second quarter increased 5% to $291 million from $278 million last year. In the Menswear Group, we had a modest sales decline of 2% to $183 million due primarily to a planned tightening of our Ben Sherman U.S. Business. The Tommy Bahama Group had a terrific second quarter reporting sales growth of 19% over last year to $108 million. Consolidated gross margins in the second quarter increased to 38.4% from 37% at last year's second quarter. The expansion in our gross margins was due primarily to growth in the Tommy Bahama businesses which represented a larger percentage of total sales in this years second quarter than in last year's second quarter.

Selling, general, and administrative expenses increased as a percentage of net sales to 30.6% in the second quarter from 29.7% of net sales in last year's second quarter. The increase was again due to the growth in Tommy Bahama as a percentage of our total volume. On a consolidated basis, our operating margin for the second quarter increased 60 basis points over the second quarter last year to 8.6%. Diluted earnings from continuing operations per common share for the second quarter increased 19% to $0.68 from $0.57 in last year's second quarter. Our second quarter financial results were in line with the guidance that we issued at the end of the first quarter.

The Tommy Bahama Group had another very strong quarter and continues to exceed our expectation. I'll leave the details to Tony to walk you through in a few minutes but we continued to be very pleased with the performance of the Tommy Bahama Group. In the Menswear Group, our second quarter results were mixed. The recovery in Ben Sherman's U.S. business is proceeding appropriately and the transitioning of our historical businesses will continue. In total, the Menswear Group reported a modest second quarter sales decline of 2% to $183 million from $187 million in the same period last year. The sales decline resulted primarily from a planned tightening of Ben Sherman's U.S. business where we focused on high quality distribution and more control sell-in to improve profitability.

Operating income for the second quarter declined 14% from last year's second quarter to $13.7 million. The decline in operating income was partially driven by the planned sales reduction in Ben Sherman U.S. business, but also by margin pressure in several of our tailored clothing businesses.

On a global basis, our Ben Sherman business performed reasonably well during the second quarter. In the United Kingdom, Ben Sherman's largest market, economic conditions and retail markets remain very challenging but we're continuing to maintain our strong brand position and market share. We are seeing accelerating growth in a number of developing international markets as we establish a foothold in markets like Germany and Scandinavia. In the U.S, We are executing our plans to tighten distribution, focus on appropriate sell-in by door, and buy to the order book to maximize full price sell-throughs and improve profitability. Sell-throughs for the fall and holiday collections have been good with our major accounts in specialty stores. Additionally, our Company owned retail stores have shown encouraging results.

Not only are these stores growth vehicles for both sales and earnings, but they're important in terms of their ability to showcase the Ben Sherman lifestyle and communicate the brand masses. We added a third full price store in London in October and now have a total of six full price Ben Sherman stores in the U.S. and the UK. We have also partnered with certain of our licensees and distributors to develop five retail stores in Australia, the Middle East, and the Far East. The early success of our retail strategy makes us increasingly optimistic about the opportunities for continuing retail expansion.

In our historical Menswear businesses, particularly private label, we continue to face pressures and margin compression during the second quarter. As you know, we have long believed that our historical business model which focused on private label programs and manufacturing was becoming increasingly subject to competitive pressures. We've done a good job of diversifying away from this model, but some exposure obviously reminds plant closures and facilities rationalization in the second half of fiscal 2006 have reduced our cost structure but continuing efforts to transition these businesses are required to position them for stronger profitability and competitiveness. Our strategy is to more narrowly focus our resources on key product categories and distribution channels where we have meaningful volume and competitive advantage. This will result in the rationalization of under performing businesses in the third fiscal quarter for which we expect to incur charges and expenses of approximately $2.5 million or $0.09 per share on an after-tax basis.

Additionally, the weakness in tailored clothing that we encountered in the first quarter has continued into the second quarter, negatively impacting our results. Sluggish demand at retail, particularly in the mid tier and department store channel has resulted in slower take out and higher inventories than we had anticipated. In light of these trends and lackluster sales for holiday, we think it prudent to reduce our expectation for the third quarter by approximately $0.14 per share on an after-tax basis. Thank you, and I'll turn the call over to Tony Margolis to walk you through the Tommy Bahama Group.

Thank you, Hicks, and good afternoon, everyone. I am delighted to again report that today, we have another very strong second quarter in the Tommy Bahama Group. Net sales for the second quarter increased 19% over last year to $108 million. We saw solid growth in both wholesale and retail and we're ahead of plan in both channels. Our mens business continues to be very strong. Not only in the Tommy Bahama Group but also in Indigo Palms and Island Soft. Our most recent initiatives, Tommy Bahama Relax, Golf 18 and women's swim are all off to a good start and will continue to contribute to our sales growth going forward. Second quarter operating income for the Tommy Bahama Group increased 38% to $13.9 million from $10.1 million last year. The increase in operating income was driven primarily by the 19% increase in sales volume.

Our retail stores turned in the strong results for the second quarter. We opened two additional stores during the quarter, a retail store in San Francisco, and a compound in Orlando, Florida. We continued to be very pleased with the development of our retail strategy which has become an increasingly important component of our business in the Tommy Bahama Group. We are preparing for the next phase of our retail strategy, an E-commerce site which is scheduled to launch this summer. After a great deal of study and analysis, we have begun to invest in personnel and infrastructure to establish and support a first class online shopping experience. We will begin slowly offering a relatively limited assortment of mens product only to ensure that we deliver the same high quality experience that our guests have grown to expect in our retail stores. This is an investment we -- this investment will reduce our profitability slightly in the second half but should begin contributing to our bottom line beginning in the first half of fiscal 2008. Thank you for your attention an I'll now turn the call over to Tom Chubb.

Thank you, Tony. Since we've already reviewed the sales figures both consolidated and by segment, I'll walk you through the key elements of the consolidated income statement, balance sheet , and cash flow statement for the quarter. Consolidated gross margins for the second quarter increased 140 basis points to 38.4% from 37% in the second quarter of last year. The Tommy Bahama Group, which generates higher gross margins than our other businesses, represented a larger percentage of our sales in this year's second quarter than in last year's second quarter. Selling, general, and administrative expenses for the second quarter increased 90 basis points to $89.1 million or 30.6% of net sales compared to $82.4 million or 29.7% of net sales last year's second quarter.

The Tommy Bahama Group carries a higher expense structure than our other businesses and represented a larger percentage of consolidated net sales in the second quarter than in last year's second quarter. The increase in gross margin exceeded the increase in expenses resulting in a 60 basis point expansion of our operating margin to 8.6%. Intangible asset amortization expense for the second quarter declined to $1.6 million from $1.9 million in the second quarter of last year. The amortization of intangible assets acquired in recent acquisitions was greater in the periods immediately following the acquisitions than in more recent periods. For the second quarter, these non-cash charges reduced our reported diluted earnings per common share by approximately $0.06.

Our balance sheet continues to be in very good shape. Accounts Receivable at the end of the second quarter increased 12% to to $167 million from $149 million at the end of last year's second quarter due primarily to higher sales volume and the timing of shipments during the quarter. Total inventories at quarter end increased slightly to $139 million from $136 million at the end of the second quarter last year. Higher inventories in Tommy Bahama to support sales growth were partially offset by lower inventories in the Menswear Group. Cash flow used in operations for the first half was $10.7 million compared to cash flow provided by operations of $1.5 million in the first half of last year. The decrease in cash flow was driven primarily by additional investment in working capital assets.

Our Board of Directors approved an increase in our cash dividend to $0.18 from $0.15 per common share, payable on March 2, 2007, to shareholders of record on February 15, 2007. This cash dividend is a 20% increase of the quarterly cash dividend paid by the Company during calendar 2006. Thanks for your attention and now I'll turn the call over to Reese Lanier to update our guidance.

Thank you, Tom. We're initiating guidance for the third and fourth quarters and revising our previously issued guidance for the full year to reflect a variety of factors. First, as Hicks mentioned, we expect to incur approximately $2.5 million in non-recurring pre-tax charges and expenses associated with the rationalization of certain historical businesses in the Menswear Group during the third quarter. This estimate equates to approximately $0.09 per common share on an after-tax basis. Second, we've taken a hard look at these businesses and believe that while we can improve the cost structure, the segment is likely to run about $0.14 per share under plan for the remainder of the year. I'd like to stress that this is not the result of a revision in the Ben Sherman business plan, but is related to our tailored clothing businesses.

Lastly, as Tony mentioned, we are investing in the launch of an E-commerce business in the Tommy Bahama Group which will result in approximately $600,000 in pre-tax expenses or $0.02 per common share on an after-tax basis, which was not previously in our second half operating plan. As a result of these factors, we are reducing our expected EPS range by approximately $0.25 to a range of $3 to $3.15 in diluted earnings from continuing operations per common share. Net sales for fiscal 2007 are now expected to be within a range of $1.14 billion and $1.16 billion compared to initial full year guidance of $1.16 billion and $1.18 billion.

For the third quarter of fiscal 2007, we're expecting net sales of between between $265 million and $2 75 million and diluted earnings from continuing operations per common share of between $0.52 and $0.59. For the fourth quarter of fiscal 2007, we're expecting net sales of between $295 million and and $305 million, and diluted earnings from continuing operations per common share of between $1.17 and $1.25. Now, I'd like to turn the call back to Hicks for some closing comments.

Thanks, Reese. I think that as you look at the third quarter, you'll see that the transformation of Oxford Industries is going to continue. The downward revision we made to our business plan for this year is obviously a bit disappointing, but from a practical standpoint, the pressures we are experiencing are only accelerating our timetable to get these remaining historical businesses positioned as well as possible and to focus our Company on proprietary brands and value-added program. This has clearly been our best path to creating value with the business. We continue to be very pleased with the outstanding results generated by Tommy Bahama, which have consistently tracked above our plan. The Ben Sherman business is continuing it's recovery in the U.S. and we are confident that if we exercise some care with regard to distribution and sell-in, we will see this plan develop into a leading lifestyle brand in the U.S. market and around the globe.

To conclude, we are pleased with our strategic position, the strength of our balance sheet and our capability to further extend and develop our business. With that, we're ready for questions.

[OPERATOR INSTRUCTIONS] Our first question will come from Jeff Klinefelter with Piper Jaffray.

Yes, I have a couple questions for you. Maybe Hicks, starting with you on the men's division. Can you get any more specific on the rationalization steps that are resulting in that charge, and how would we get comfortable anticipating further charges in quarters in the future or maybe stated another way is there ultimately a sale of a business or a closure of a business coming that would conclude this sort of cycle of rationalization?

Okay, good question, Jeff. The process that we're going through with our Legacy business has been an ongoing one for the last couple of years. As you know, we've had a number of new initiatives there. The business in total has remained pretty flat from a sales standpoint but that does not denote at all that the business has remained the same because we've had a lot of additions and a lot of subtractions over the last couple of years and that is continuing going forward, just to sort of refresh you. We have added a number of brands over this period of time, brands such as Solitude, Wedge, which is a brand at Kohl's, all this -- in the dress shirt arena, we have added the Ben Sherman dress shirt-top portfolio, we are launching Tommy Bahama dress shirts out of our dress shirt operation for Fall of '07.

So we've added a number of new programs and at the same time , we have closed some plants which we did in the second half of last year. We have combined some distribution facilities. We have eliminated the less desirable parts of our business as we have added new parts, so I can't say that this is the last round, but we've certainly come a long way in getting that business precision a lot more appropriately.

As it turns out, the biggest part of the mess for the second half for us is in our tailored clothing business and that is a big part -- we didn't miss our guidance in the first half, but the weakness in tailored clothing generally, not just for our division but for the industry in total is pretty well chronicled at this point. I think it's been a very weak segment at Federated which is a major customer of ours, so this is a business that for a lot of years has been a very good business for us, but we're definitely in a cyclical downturn the last six months that we don't see turning around necessarily in this upcoming six months, but it's certainly one that's going to be here for the long haul and we've got ourselves, in my opinion, very well positioned as far as a branded matrix.

We've got Geoffrey Beene which is going to be our opening price point for the Federated Store Group and then we've got Nautica which is going to be in the mid price range and we are shifting our Oscar de la Renta business into O Oscar which is going to be a much more upscale brand for Federated, then we top that off with Ben Sherman and Arlo Brand which are targeted at the Nordstrom's tier of distribution, so we've really done a lot of work getting ourselves positioned with that brand portfolio that we're pretty pleased with likewise. I mentioned the additions in the dress shirt arena and that's another big business for us where we're successful and have a significant market share, so those two businesses, we're going to be subject to any cyclical patterns there, but I think we've sort of got the brands we think we need and like our positioning.

In the sportswear arena, as I mentioned, some of the brands we've added and some of the value-added programs we've changed to, we are gradually exiting the businesses that have any semblance to commodity products, so I'd like to say this is the last round on this but I'm not going to quite say that, but I think what you're going to see is a continuation of us changing the nature of that business to be a better fit for the future than it is currently.

As to your question about sales, we did sell our Womenswear business. We didn't feel it was a long term fit. There's a big difference between our mens business in terms of branded components than we had in the Womenswear but we're certainly open minded to anything that will enhance our shareholder value.

Okay, thank you, that's very helpful. Just one quick follow-up to that and then I have a Tommy Bahama question.

Sure.

In terms of the positioning of the Company and from an investment perspective as a Tommy Bahama investment, the Ben Sherman investment, clearly lifestyle brands and in one case global, not really cyclical in nature, given that they've just been sort of absorbing market share as they expand the breadth of the categories, it would seem that this mens business is in contrast to that but particularly the cyclical dress area, and just how would you sort of rationalize that in terms of building this branded portfolio going forward? Why is it that that piece of men's remains so important to you as a long term strategy?

Well, I don't think I said that. I think what I said is that we're working as hard as we can to make that business as well positioned as possible. I think it's very clear what our long term strategy is as far as where we're going to be growing the business, and that is in the lifestyle brands.

Okay. And maybe just quickly on the lifestyle, the M&A environment, you continue to have a very strong balance sheet. You're continuing too I would imagine just look at what's available and probably nothing specific to announce, but any other changes in the characterization of the M&A environment?

I don't think it's really changed materially since our last conversation. We're active in dialogue and we'll continue to be.

Okay. And just lastly, quickly I'll jump off, Tommy Bahama, congratulations to everyone, Tony, on another great quarter.

Thanks, Jeff.

Any quick updates on Womenswear, not to make that too much of a highlight because all of the other pieces of the business are going well, but I know that that was something at the last Magic that everyone felt very positive about. Any updates on the reads there?

I think that it's more of the same. The line that you guys got a chance to see at Magic is being delivered this spring. We have high hopes for the way it will be, the response will get to it at retail but we're too early to make any announcements on that end. We have just recently broken our fall collection and again, when I say just recently, I mean I was at sales meetings the end of last week, so way too early to say. We've had good response yet, but it is a line that continues the direction that we've taken which I think is consistent with our brand image in the marketplace. I think the women's consumer continues to like our product and our brand. We just haven't offered her the kind of design development that I think she expected from us and I think this new direction that we started with for spring is going to do that for us. So that's a long winded answer, but nothing new.

Okay, so no notable changes in door counts for either women's or Indigo Palm at this point?

No. I think if there would be anything to make note of, we've opened our first stand alone women's store in Las Vegas. Most of our other presentations are mixed male and female, but we try to test a very stand alone women's store in Las Vegas and actually have taken the volume levels that existed when we were mixed and added significantly to those, the increase in percentage of sell-through and the selling rates has been significantly higher.

Okay, great. Thank you very much.

Okay.

Just want addition to that, Jeff, the first spring group will be delivered in February, so we don't have too long to wait to get a reaction to that merchandise.

[OPERATOR INSTRUCTIONS] We'll take our next question from [Kelly Duvall] with BB&T Capital Markets.

Hi, I'm filling in for Eric Tracy. Just have a couple of questions for you, the first one regarding the Ben Sherman business. You mentioned that the business is on plan. Is that both from a sales and profitability perspective, meaning that profitability will return to normalized levels in the back half of the year?

In the back half of the year, we will have a significant improvement over the same period a year ago. So we have -- we are looking forward to that and for the total year, we will be up in profitability from last year.

Okay, thank you. And just one more question on Tommy Bahama. Can you give us an idea of where the growth is coming from, retail vs. wholesale, sort of a break down?

It's actually, there's been significant growth this year in both divisions. We, as you probably will recall, we've had some brand expansion. We've added the Tommy Bahama Golf 18, the Women's Swim division, Tommy Bahama mens, the original existing men's company has grown dramatically this year, and so we're experiencing it at wholesale and then of course on the retail side, we've opened I think about six doors this year and our comp store sales through the Christmas season have been ahead. So, we're seeing it on both sides.

Okay, thank you.

Our next question then is from Clark Orsky with KDP Investment Advisors.

Hi, just wondering if you care to add anything about the departure of Mike Setola.

Well, he had a three year term here and he made some great contributions and he's a good friend and we wish him well.

And do you plan to replace him or what's the plan there?

Not at this juncture. His direct report shall be reporting to me now and in the case of the historical businesses, these are guys that I know well and basically reported to me before his arrival.

Okay, and Reese, can you tell me what's out on the revolver and the availability.

We had a very minimal balance on the revolver at the end of the second quarter, which is the November month, and at this point, we're out of the revolver except for some letters of credit that have been issued against it, so the availability is running somewhere in excess of 80% of the line amount which is $280 million.

Okay. Appreciate it. Thanks.

And with that, there are no further questions. This does conclude today's conference call. We would like to thank everyone for your participation, and wish everyone a good day.