Oxford Industries Inc (OXM) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Oxford Industries Incorporated third quarter 2007 conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for your questions. As a reminder, today's conference is being recorded.

Now, I would like to turn the conference over to Mr. Reese Lanier, Treasurer of Oxford Industries. Please go ahead, sir.

Thank you, Robby. Good afternoon, everyone, and thank you for joining us.

Before we get started, I would like to point out that some of the statements made on 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 10-K filed with the Securities & Exchange Commission on August 15, 2006, and in our subsequent filings with the Securities & 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 would 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 would like to turn the call over to Hicks Lanier. Thank you, Reese. Good afternoon, everyone, and thank you for joining us. I would like to begin today with a summary of our key financial highlights for the third quarter of fiscal 2007. Then we will walk you through the consolidated and segment results in more detail. I would also like to remind you that the financial results for the women's wear Group have been classified as discontinued operations, as a result of our sale of the operating assets of the women's wear Group at the end of the fourth quarter of fiscal 2006.

Our financial review today will cover continuing operations. Consolidated net sales for the third quarter declined 3% to $267 million, from 275 million last year. The Tommy Bahama Group reported a 10% sales increase over last year, due to continuing strength in its wholesale and retail businesses. In the Menswear Group, we experienced a 12% sales decline from last year, which was due primarily to declines in our historical businesses, particularly in our tailored clothing business.

Consolidated gross margins in the third quarter increased to 40.6% from 39.9% in last year's third quarter. The expansion in our gross margins was due primarily to growth in the Tommy Bahama business as a percentage of our total sales, and to restructuring and asset impairment charges that we incurred in last year's third quarter.

Selling, general and administrative expenses increased as a percentage of net sales to 33.9% in the third quarter, from 32.2% of net sales in last year's third quarter. The increase in SG&A expenses as a percentage of net sales was due to the growth in Tommy Bahama as a percentage of our total volume, and to certain severance costs that we incurred in this year's third quarter. Diluted earnings from continuing operations per common share for the third quarter were $0.54, compared to $0.63 in last year's third quarter.

Our consolidated financial results for the third quarter were at the lower end of our guidance ranges for sales and earnings per share, due to results in our historical men's [class] businesses. It did not meet our expectations. However, the Tommy Bahama Group had another very strong quarter and continues to perform at a very high level. I will let Tony walk you through the details in a few minutes, but we continue to be very pleased with the results in Tommy Bahama.

In the Menswear Group third quarter net sales declined 12% to 147 million, from 166 million in last year's third quarter. The decline was attributable primarily to weakness in our tailored clothing businesses, where we have continued to account a sluggish demand at retail and downward pressures on our margins.

As a result, operating income for the Menswear Group declined 59% in the third quarter to $2.6 million, from 6.4 million in the third quarter last year. We continue to believe that the challenges we face in tailored clothing business are driven primarily by a cyclical downturn in this sector of the market, and are most pronounced in the most moderate price points.

Nevertheless, we remain one of the most significant resourcers in the industry, and have steadily improved our strategic position over the past few years. The addition of the Kenneth Cole brands for fall 2007 will bring the proportion of owned and licensed brands to better than half of our total tailored clothing volumes. With Arnold Brant, Ben Sherman, and O by Oscar de la Renta, targeted at the better to affordable luxury categories, we have a very compelling product offering and should be well positioned when the market begins to improve.

In the sportswear portion of our historical businesses, we have continued to narrow our focus on key product categories and big business segments, where we have appropriate strategic positions. We have also taken steps to reduce our cost structure. These initiatives have led to higher operating income on a slightly smaller sales base.

Globally our Ben Sherman business has performed reasonably well this year. In the U.K. we continue to face very challenging market conditions, but we feel very good about our brands positioning. Retail consolidation and increasing competition from value retailers has clearly validated our efforts over the past few years to push the brand up market in the U.K. The performance of our company-owned retail stores in the U.K. continues to be good, and we are looking for opportunities to expand our retail presence there.

On the international front outside of the U.K. the Ben Sherman business is developing at a fairly rapid pace. We are building on a solid foundation in Germany with prominent placement at many of the top retailers. Licensing and distribution partners in Australia and Scandinavia continue to grow the business in their whole markets, and have achieved significant success.

We are continuing to expand into new markets and to establish relationships with key licensing and distribution partners with both local expertise and the financial wherewithal to support our wholesale and retail expansion strategy. We are optimistic that we can build our current base of five licensed stores in the upcoming fiscal year.

In the U.S. we have made progress in our outfits to farm out distribution and to focus on appropriate sell-in by door. Our initial sell-through performance on the Spring/summer collections has improved over last year in our major accounts and specialty stores, though there is still much work to be done. Our company-owned retail stores have continued to produce encouraging results, and we are in discussions to add additional store locations in the U.S.

The fourth quarter will show a huge improvement over last year but will still not be quite what we were hoping for at mid-year. Nevertheless we continue to believe that our methodical approach to rebuilding our business in the U.S. will ultimately be successful. For the near term, reaction to our men's and women's fall collections has been very positive. Over the longer term, Ben Sherman has every opportunity to become a major lifestyle brand, and to become a significant driver of shareholder value.

Thank you for your attention, and I will turn the call over to Tony Margolis to walk you through the Tommy Bahama Group.

Thank you, Hicks. Good afternoon, everyone.

I am pleased to tell you that we had another very strong quarter in the Tommy Bahama Group. Net sales for the third quarter increased 10% over last year to 119 million. The growth was again balanced between our wholesale and retail channels of distribution, our men's business continues to be very strong in the Tommy Bahama, Indigo Palms, and Island Soft brands. Tommy Bahama Relax, Golf 18, and Women's Swim are also contributing to our growth and are performing well at retail.

Our operating income from the third quarter, for the third quarter increased 13% to 22.2 million, from 19.7 million last year, driven primarily by the increase in sales volumes. We opened three additional stores during the quarter in Carmel, California, Coconut Point, Florida, and an outlet in Vacaville, California, which brings our total store count to 66. Over the past weekend we launched our latest retail concept called Tommy Bahama Relax.

The Relax store located across the street from our compound in Naples, Florida, will showcase casual, resort, and weekend apparel under the Tommy Bahama Relax brand, as well as an assortment of our Women's Swim wear, cover-ups, spa, and accessories. The first weekend's results were very strong, and appear to have a positive impact on our compound across the street.

Overall, we continue to be very pleased with the execution of our retail strategy. As I mentioned last quarter, we are looking forward to the launch of our Tommy Bahama E-commerce site this summer. This is a natural step in the evolution of our retail strategy, and will provide us with yet another opportunity to interact with our core Tommy Bahama customer.

Lastly, I want to make sure that all of you are aware of the recent launch of the Tommy Bahama Rum. We have partnered with the Sydney Frank group, creator of Grey Goose Vodka, to launch a premium light and dark rum, called Tommy Bahama White Sand, and Tommy Bahama Golden Sun. The rum will be distributed through traditional channels, and should be available at your favorite package store, upscale bar, and restaurants in the coming weeks. More than just the economic opportunities, I think this speaks to the power of Tommy Bahama as an authentic consumer and lifestyle brand.

I appreciate your attention, and I will turn the call over to Tom Chubb.

Thank you, Tony, and good afternoon everyone. Since we already reviewed the sales figures, both consolidated and by segment, I will 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 third quarter increased to 40.6% from 39.9% in the third quarter of last year. The margin increase was due to growth in the Tommy Bahama Group as a percentage of our total sales, and to $1.6 million in restructuring and asset impairment charges that we incurred in last year's third quarter.

Selling, general and administrative expenses for the third quarter increased to 90.4 million, or 33.9% of net sales, compared to $88.7 million, or 32.2% of net sales in last year's third quarter. We incurred approximately $1.9 million in this year's third quarter in severance expenses in our historical businesses.

In addition, the Tommy Bahama Group which carries a higher expense structure than our other businesses, represented a larger percentage of consolidated sales in the third quarter than in last year's third quarter. Intangible asset amortization expense for the third quarter declined to $1.6 million, from 1.9 million in the third 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 third quarter, these non-cash charges reduced our reported diluted earnings per common share by approximately $0.06.

Our effective tax rate of 32% for the third quarter was consistent with last year's third quarter, but below our normalized last year's third quarter, but below our normalized annual rate of roughly 36%. We benefited from the release of certain contingency reserves, which customarily takes place during our third quarter, based on the timing of our tax filings.

Turning to the balance sheet, accounts receivable at the end of the third quarter declined 8% to $141 million, from $154 million at the end of the third quarter of last year, due to lower sales volumes during the quarter. Total inventories at quarter end increased to $161 million, from $133 million at the end of the third quarter of last year. The increase was driven by lower than planned sales in our tailored clothing business, which resulted in higher than optimal replenishment and seasonal inventories. The bulk of the inventory is supporting ongoing replenishment programs, and the seasonal inventories are properly valued for future disposition.

We also had higher inventories in Tommy Bahama to support sales growth. Cash flow provided by operations for the first three quarters of fiscal 2007 was $20.6 million, compared to cash flow provided by operations of $22.3 million in the first three quarters of fiscal 2006. The decrease in cash flow was driven primarily by additional investment in the inventories.

Our Board of Directors declared a cash dividend of $0.18 per common share payable on June 1, 2007, to shareholders of record on May 15, 2007. This will be the 188th consecutive quarterly cash dividend paid since the Company became publicly owned in June 1960.

Thanks for your attention, and now I will turn the call over to Reese Lanier to update our guidance.

Thank you, Tom. As we just discussed, the Tommy Bahama Group has performed very well thus far this year and is expected to continue the strong performance through the balance of the fiscal year. In the Menswear segment, we are projecting year-over-year improvement in fourth quarter net sales and operating income for our historical businesses and for Ben Sherman.

However, the improvement will not be as significant as we expected at the time of last quarter's conference call. In addition, we expect to recognize an after-tax gain of approximately $1.3 million, or $0.07 per common share on the sale of real property that we vacated as a part of the fiscal 2006 restructuring activities in our historical Menswear business. For this year's fourth quarter we are now expecting consolidated net sales to be within a range of 285 million and $295 million, compared to our previous expected range of 295 million to $305 million.

Diluted earnings from continuing operations per common share for the fourth quarter of fiscal [2000] inclusive of the gain on sales, are expected to be within a range of $1.07 to $1.14. Excluding the gain on sale, diluted earnings from continuing operations per common share are expected to be within a range of $1.00 to $1.07.

In last year's fourth quarter we reported diluted earnings from continuing operations per common share of $1.02, which included repatriated foreign earnings of $0.17 per common share, and restructuring and asset impairment charges of $0.06 per common share.

On a comparably adjusted basis, adjusted diluted earnings from continuing operations per common share for the fourth quarter of fiscal 2000 are expected to be within a range of $1.00 to $1.07, compared to adjusted diluted earnings from continuing operations per common share of $0.91 in the fourth quarter of fiscal 2006, representing a year-over-year increase of 10% to 18%. Our previous guidance for diluted earnings from continuing operations per common share for the fourth quarter of fiscal 2007 was a range of $1.17 to $1.25. A reconciliation of GAAP and adjusted diluted earnings from continuing operations per common share is included in today's press release, which may be accessed on our website at www.oxfordinc.com.

Now I would like to turn the call back to Hicks for some closing comments. Thank you, Reese. The Tommy Bahama Group which currently represents the lion's share of our operating profitability is very strong, and continues to have numerous growth opportunities for its wholesale, retail, and licensing businesses. In our Ben Sherman business, we remain enthusiastic about the ongoing recovery efforts in the U.S., and the opportunities for growth in both wholesale and retail on a global basis. We are making steady progress, and we are confident that we will ultimately be successful.

Our historical businesses have faced very challenging conditions this year, particularly in tailored clothing. We are focusing these businesses on the key product categories and business segments that have the strongest strategic position, and best opportunities for improving profitability. We will continue to make additions and deletions to further our objectives, even if it results in a smaller yet more profitable business. We continue to believe that we have the right strategy in place, and we made significant progress over the last three years in improving our mix of business.

Our mission remains to establish Oxford as the leading global lifestyle brand company. We would like to thank you for your attention and support. With that, we will open up for questions, Robby?

Thank you. [OPERATOR INSTRUCTIONS] First to Patricia Oey with Morgan Joseph.

Hi everyone, thank you for the update. I have two questions I wanted to ask, the tax rate guidance for the fourth quarter, and just generally about the Menswear rationalization. Do you have rationalization expenses as part of the guidance for the fourth quarter, and then for severance in this quarter, who what was that for?

Well, let me take your second question first, as it relates to rationalization expenses and severance. The severance which was in the third quarter was for a variety of people that no longer are with the Company, but it was concentrated in a handful that we had reductions in our New York offices, and our Distribution Center, and south Georgia, and this is all legacy historical Menswear, and in our Hong Kong office. So it was pretty wide sweeping, and we have made some pretty significant expense reductions. So the bulk of that is behind us at this point, but we think we are leaner and meaner if you will, for the businesses that we have elected to continue in. As it relates to the tax rate, Fourth quarter, roughly 36% is what our projection is running now.

Okay. And then again what about fourth quarter, is there some other rationalization costs as part of the guidance?

There is some unusual costs we mentioned last quarter that we had some pretty significant website, Internet site expenses for Tommy Bahama, pointing toward a loss in mid to late summer, and those continue to be there, but nothing of significance I will say.

Okay. Thank you.

Sure.

Next to Eric Tracy with BB&T Capital Markets.

Good afternoon, guys. If we can just maybe get a little bit more color as to the delta between what you were seeing coming out of the first quarter, and excuse me, out of the last quarter heading into the fourth quarter of this year, in terms of reduction on both the sales and operating within the Menswear Group, is it possible to get a little clarity between the legacy business and Ben Sherman and sort of what the delta is there?

The lion's share of it was in the legacy business, and it was totally concentrated in the tailored clothing segment. We have had a big drop in expected sales, both in terms of the draw from our customers and replenishment goods, but we also had deferrals of shipments that we had planned to make in the third quarter, so it was virtually the entire thing was right there, in that situation.

Mostly on the legacy business and as far as Ben Sherman the turnaround there is very much progressing on plan? Any --

You know, it is probably not progressing as fast as we would like, but it is definitely progressing.

Is that from a sales and margin perspective, Hicks?

Yes, pretty much, but I must tell you that in Ben Sherman we are much more interested in getting the business properly positioned, regardless of the volume near term. We are willing to sacrifice volume to get it properly positioned, and we have some done that as you know from previous discussions, and we just feel very strongly to manage this brand properly, we can't go chasing every dollar that is out there, and we have been pretty disciplined on that, and it probably has caused some short-term disruptions, but it will pay off in the long-term.

So what inning would you say we are in, in terms of that vetting of the distribution and sort of where you want to be in terms of the right doors?

Well, I think we are, and here again, it is an issue with the U.S. and with the U.K. and the rest of the world. The markets outside of the U.K. and the U.S. I think we have been on a very consistent track right from the get-go, and we are headed, very consistent progress just step by step. It is not on fire, but we are getting increases every season. We expand the distribution every season, we are in the right stores that we want to be in.

In the U.K. for almost since we acquired Ben Sherman, there has been some repositioning of the brand there, as we have taken it more upscale, and that means we have dropped off some of the accounts on the lower end, and added some accounts on the top end, and kind of a breakthrough that we had just during this quarter, was the fact that we got in House of Fraser, which is an account we want to be in over there.

As you know, we dropped some accounts over there on the bottom end. So we are making good progress there. If we had done so in the top line, because if we are adding the desirable accounts, we are dropping the undesirable accounts, but as I say long-term, we just are very excited about that.

In the U.S. I think we have certainly bottomed out in terms of volume, and we are turning around as we said in the script of the press release. We are getting much better sell-through for spring and summer than we did at the same time a year ago. We have globally gotten the best reaction to the fall lines than we have had in five years. It is U.S., U.K., it is Germany, it is Scandinavia. It is Australia, New Zealand, just across the board with very enthusiastic about where our product is going forward, so we feel very good about it. It is just we have got to take our time, and let it flow the way we want it to, rather than try to force it too fast.

On the U.K. business given the retail environment there, I don't know we discussed, sort of maybe accelerating the potential of rollout of the company-owned stores. Is that still in consideration?

It is definitely, yes. We added one in the fourth quarter of last year. We have got a couple more under consideration that we will be deciding very soon. One of the most encouraging things about the U.K. is that in spite of the very depressed environment over there, we had dramatic same-store sales increases there last year, in calendar '06 over calendar '05, and that has continued into '07, so you know, we are doing something right there, because the customer is really reacting to our product there.

And if I could go quickly with Tony on Tommy Bahama, if you could kind of give us a sense again as the company-owned retail becomes a greater percentage of mix, sort of what you have ultimate target of the percentage you would like to see from a wholesale/retail perspective, and if so what is that ultimate cap point domestically from a store-based perspective?

I think there is not a specific percentage that I would say we have as a ceiling. I think a lot of the retail growth comes as appropriate opportunities present themselves. We are not on a mad dash to open 100 stores in the next two years or any of that sort of growth pattern. I think for quite some time we have said we think the appropriate pace is in the 8 to 10 doors a year. We have stayed in and around that pace.

It seems to be a comfortable growth rate for our third party wholesale clients to sort of live with. There is a small attrition of some of the lesser, independent small accounts on occasion when we open in their backyard, but for the most part, I think that is still the strategy to continue to slowly and judiciously place Tommy Bahama stores in appropriate marketplaces.

I think the other reality we are starting to chew on is that the expansion of Relax as a concept has sort of opened an opportunity for us to open doors in existing locales, but just contiguous with, or down the street from existing locations, so that we can actually just expand our presentation to the consumer of the variety that Tommy Bahama offers, so I think there is still significant growth available.

Every time I think we are sort of presented with an opportunity for retail to outpace wholesale, a little bit of the good news comes back and our wholesale company grows faster than we expected it to, so I am going to say that right now we are in the 50/50 range, and I would tell you that I don't see us falling out of that range in the foreseeable future.

Thanks. Lastly real quick on the women's concept that you opened in Vegas. I know it is still very early.

Actually, I would tell you that not just the Vegas store, but all of our stores are having a good comp performance in women's apparel. We are starting to see the signs that we've been looking for, of the turnaround in women's at least in our own doors, and I think as that starts to take hold, and as we, I am not going to tell you we don't still have imperfections in our women's presentation, but I think we have turned a corner there, and as that business starts to take hold, we think there is some not only significant growth for our own retail stores, but our third party customers as well.

Okay. Any want to give us when you think that starts to translate to wholesale?

[laughter] Any guess I would give you would be a guess.

Fair enough. Thank you, guys.

Thank you. We will take our next question from Tim Geyer with Piper Jaffray.

Just a couple questions for you. First of all, in regards to the ongoing rationalization of your legacy menswear business, I was wondering if you see any opportunity out there to divest part or all of that business, similar to what you were able to do with your women's wear business?

Our principal priority right now is to work on improving the strategic positioning out there, which leads to significantly better operating results, and that is taking place in the Oxford apparel segment, which includes our dress shirt business and our sportswear business. Unfortunately, we have made some good strategic improvements in our tailored area, but we have sort of got hit with a hailstorm in the marketplace, and we know from our peers who have publicly held it, and reported recently that that problem is not confined to us. So that is the first order of business, and then, you know, we'll see what happens.

Okay. And then any updates regarding the current M&A environment out there? I was wondering if you see any opportunities to layer in any additional lifestyle brands?

We are pretty active in keeping abreast of what is available, and what is going on in the market, and we are somewhat proactive on that front. There is no question that the private equity phenomenon makes that a little more challenging than it might have been in prior periods, but that has not dissuaded us from continuing to be pretty active.

Lastly in regards to your Ben Sherman business, you said it has been really well received by the retailers for Fall. I was just wondering where your bookings came in relative to your expectations?

Well, they are not totally complete, but they're almost complete, and I would say we are based on the product that we're offering, we probably think we should have gotten a little more business than we did. I got that a long ways through the catch.

Great. Thank you very much.

Sure.

Thank you. We will go next to Susan Sansbury with Miller Tabak.

Thanks very much. Tony, I have been out of the loop for awhile, and so my apologies if this is a stupid question. How is that? The third fiscal quarter is usually your peak quarter, and my question is, did sales meet expectations, or were they a little light?

Actually I think the answer to that is retail sales were probably a little softer than we would have thought they should be. I think in looking at specifics of that, a lot of the short fall seemed to come out of the state of Florida, which as you probably are aware is, you know, that's the 50-yard line for us in many respects, between Florida and California and Hawaii. Those are the three big regions in our Company.

Florida in particular seemed to come up short of our expectations, and I think that, I am talking about retail. So I would tell you that there was some disappointment there certainly. We don't see that continuing as we get into the early stages of fourth quarter. Some of it we think was the result of perhaps maybe reduced traffic patterns, and some of it we think we sort of shot ourselves in the foot, by maybe minimizing some of the inventory levels, or squeezing that rock a little too hard. As we have gotten into fourth quarter we are seeing that turn around very nicely.

Can I add one thing to that, Tony?

Certainly.

The fourth quarter for us is by far the strongest quarter for Tommy Bahama.

Yes.

As has been historically.

Yes.

Third quarter is a good one, but fourth is really the boomer.

I was just thinking of February and the extra week and gifts and Christmas and all of that stuff. Anything happen in Florida that I wasn't wasn't aware of? Why Florida?

You know, there is no clear explanation for it. I can attribute as much as I can to our own doing, and as I said I think our inventories might have been a little lower than they should have been to maximize the business, but I would just tell you that we did not perform as well in Florida, as we did in the rest of the country.

There is a macro issue there with the home value reductions, that I don't think there is any question has had an impact generally in Florida.

Okay. That makes sense. Okay. So with respect to the fourth quarter, do we still look for a low double-digit gain year-on-year?

I think that is a fair expectation. We are seeing our trend at this stage of the fourth quarter, our numbers are coming in on or ahead of schedule.

Okay. The wholesale side of the house, can you make any comments about bookings?

They continue to be very strong in all of the male divisions, Women's Swim continues to outperform our budgets, so I would tell you that even women's wear, where we've sort of become gun shy about predicting, anything positive seems to be attaining the numbers we set for it, so our wholesale business is showing great continued strength I think is the right word.

Okay. A question I guess for one of the financial types. Inventory. If I strip out. Thanks, Tony, by the way. That was wonderful. If I strip out the excess goods, what do the core inventories look like?

Well, let me address that for a minute. Our inventories are up in two areas. One is Tommy Bahama where a year ago we were pretty low, we have got more stores this year. We want to be in a position to capture the business this year, where we lost some during this period, upcoming period of time last year, so that is very much by design and very planned for. The place where we have got unexpectedly high inventories is in the tailored clothing area, where they are up probably 12 or $13 million from last year at the same time, and part of that is this replenishment inventory that we expected to be pulled out faster by now, and part of it is seasonal inventories that has been deferred in their shipping dates.

On the replenishment, we do not think we have a risk issue there. It is just a timing issue as it relates to the seasonal ones, if they are taken out as expected, you know, we won't have an issue, other than the fact that they not have the length of time on the selling floor of it that was originally planned. We do have reserves, and we think they are properly valued, but everything being equal, we wish they had shipped on timing. And we had those top line sales, in that we didn't have the disappointment in the third and fourth quarters as a result of that.

Okay. So you don't expect any, you haven't planned any markdowns or writedowns of any of the seasonal carryover inventory, when you made the forecasts for the fourth quarter?

We have made reserves as we always do on an ongoing basis, to make sure that they are properly valued.

But nothing extraordinary essentially is what I am looking at?

The fact that we lowered our guidance in the fourth quarter, I mean some of that is right there.

Okay. All right.

Both third and fourth quarter the lion's share of the mess has been tied up in this weakness in the tailored clothing area.

Okay. And just one last final question about men's tailored clothing. You said it was a cyclical decline, that's what George Zimmer says at Men's Wearhouse, but it sounds like it is more severe at the lower price points, silly question I admit, but timing, any evidence of how long this is going to last? Any guess, or is there imperical evidence out there, in terms of how long it is going to last, and are these nested suits or sports--?

[multiple speakers] Can you start spreading the word that next Tuesday they are coming back?

[laughter]

I don't think we can give a timetable that would have much substance to it at this point. Obviously we are, with the situation we are in inventory-wise, we are going to be very cautious going forward until we see the whites of their eyes, and we are disappointed as [George Amor] is, as Homi Patel is, as everybody in this business, [Bob Welldrink], you name them. It is just a category, and Terry Lundgren, He has gone on record saying if they could just get their men's tailored area going, they would be in business, but it hasn't happened at this juncture.

I don't consider that some kind of strategic ill position for us. This has been a business that we have excelled in for a lot of years, and we have got a good team of people, and I think we will do better than most, and as well as almost anybody going forward in this, and we have managed to position ourselves as we mentioned in the call script, with some of the better price point merchandise. I agree.

It is a great business, but it does have cycles. Okay, gentlemen, thank you very much. I appreciate it.

Thank you, Susan.

We will go next to Robin Murchison with Suntrust Robinson Humphrey.

Good afternoon. I will piggyback off of Susan's questions and I don't know if you want to get this granular, but back in January we spoke, the conference call, et cetera, and presumably when did you begin to see it turn if you can get that granular? I understand if you don't want to, but it must have turned significantly to the negative sometime --

As it relates to the tailored area, it definitely did. There is no question about it.

Like post magic or --

Oh, no, it was before that. It was before that. We could see starting in January that the sell-through weren't where we had hoped for the replenishment, before it was announced, and what we had hoped for, or our customers had hoped for.

Then was guidance at that point in time just you hoped that it would get better and it didn't?

No. We gave our guidance in early January.

Right. That is what I am talking about, the difference between the guidance then and the guidance now, and then what happened --

We gave the guidance in early January with what we knew at that time. The disappointments have come since then.

That is what I am trying to get at. That is what I am trying to get at. Okay. Okay. And then in terms of the Ben Sherman product, sounds like the Fall product is incrementally more positive than the spring/summer, the reception, correct?

I would say that is true. We have just gotten very diffused on Fall.

I thought I understood you to say something a little while ago about a little bit about you would hope that it would have been even a little more positive for the Fall, or did I misunderstand?

I think and you follow us pretty closely, you know we went through a few seasons particularly a year ago spring and summer, where we were off the mark product wise.

Right.

And some of our customers have been a little reluctant to jump back on board too heavily, no matter how much they personally like it, until they get some positive results, and we are getting, with each season we are getting better, but I think this is going to be a breakthrough season, this coming Fall '07 as far as our sell-throughs are concerned, and really get the momentum back in the business.

Very good. Good luck and thank you for answering my questions.

Thank you, Robin.

[OPERATOR INSTRUCTIONS] We will go next to John Rouleau with Wachovia.

In looking at the tailored clothing market, not to beat a dead horse, but is it suits that is primarily the weakest category, is it separates, trousers, all of the above?

I would say you can put a hat over it. It is all pretty weak. Suits are definitely weak, but separates are also weak. That is where most of on you replenishment programs are is in the separates area. Historically that has just been a an annuity type business for us, but it has not been recently.

Okay. And then would you put dress pants or trousers in there as well, or do you do less on that category?

Pretty much they are sluggish also.

Okay. And then --

Dress shirts have been pretty good, though. You figured that one out.

I guess we are all wearing jeans and dress shirts, maybe.

I guess.

You know, going back last two quarters I know tailored has been kind of weak, but prior to that for a couple of years it had been on an uptick, but then prior to that I don't mean to date myself too much here, but prior to that we were in a pretty sluggish tailored clothing environment for quite a while.

That is correct.

So I guess my question is how is this, does this feel any different? Does this look any different?

If you go back to the first period that you referred to as far as in the past, that was really when the whole --

casual thing hit.

Dress came in and business casual came in and it affected tailored. I don't think this situation is that scenario.

Because guys still seem to be dressing up a little bit, maybe just not buying, maybe their closets are a little bit full, or they bought what they need for the moment.

And maybe it's a case of coming out with something that is compellingly different.

Right.

As a for instance, in Arnold Brant, we have come out with some fabrications that are new to the market. One is using bamboo fibers that we have had a lot of success with in terms of sell-throughs. Another is mink blends, MINK, mink, believe it or not in men's tailored clothing, and yet the differentiation factor has caused those things just to fly off the racks.

Yes. Okay. So sounds like there is going to be more emphasis on product development, technology, newness, introducing some things to help drive that side?

Yes.

And then kind of switching gears a little bit, but you made the comment that the principle priority is kind of to strategically improve the positioning of dress shirts and sportswear, so it sounds like there are some things you can do there, but as far as tailored clothing is concerned, you have kind of made the adjustments, and other than product development which we just talked about, you know, do you just ride it out, or are there some other things that you do there?

Well, we are constantly trying to come up with more creative strategies to move that business forward, but I guess we don't feel that we are ill-positioned there.

Okay.

And we can always improve our operational skills, and we are working on that, and turn times and quality service, all the basics, but it is not like, you know, we have got ten guys that are ahead of us that have got us just strategically out-positioned. That is not the situation there.

Let me flip that around, then. Going to the dress shirt and sportswear side, do you feel like strategically you could be a little bit better positioned, and maybe you could drill down?

I think what I would say there is we did a pretty comprehensive review towards the end of last year, and found that we were somewhat unfocused, we were trying to be a little bit of everything to everybody.

Okay.

Too broad a customer reach, too broad a product factor, and we have really narrowed our focus, and that is one of the things that has enabled us to shrink the business a little bit, but also shrink the overhead more than correspondingly, and make for a better strategically positioned business and a more profitable business, so we feel pretty good about the way we have moved the needle on that one in the last four months.

The heavy lifting has kind of been done there?

A lot of it has.

Okay. Okay. And then if I were to try to get you guys to comment one way or the other on the relative operating margins, let's say legacy versus Ben Sherman, is legacy kind of losing money and Ben Sherman is making some money, or are the two operating margins fairly close at this point?

That is not the case. We're making money in each of the three major segments in legacy menswear, I mean what we call the menswear group. Oxford apparel and Lanier clothes, I think Oxford apparel here has been on an upswing, in terms of profitability, operating margins as a percent of sales. Lanier Clothes obviously with the situation we have got there has been on a decline, and Ben Sherman is sort of in the process of what we think is a turnaround, so we think it is right at an inflection point to start improving like Oxford apparel has been.

Can we assume in looking at like Ben Sherman margins, you know, on an absolute basis, are they higher than Oxford or are they, you know, are they still better than Oxford apparel or--?

I would say if you looked at the U.S. margins, they are not as good.

Okay.

That's where the big fix has been for us the last couple of years.

Okay.

If you looked at the U.K., they are probably better or the rest of the world.

Okay.

So it is you can't get quite that simplified with it. They are different parts of these.

Yes.

We got both Lanier clothes and Oxford apparel that are handsome profitable, and meet all of our financial targets, but we have got some that don't, and the same would exist in Ben Sherman.

That is very helpful. So in looking at the inventory, when do you expect do you think in the next quarter you can kind of get the replenishment side of the inventory down? Do you just slow the pipeline a little bit, and -- ?

I think we will reduce it, but this is a pretty major situation when you got your inventory at cost up by the amount we do, so I would say that is a six to nine-month proposition.

Okay.

It took us six to nine months to get there, and hopefully we can get back to where we want.

Do you just slow the production side down, and just sell through the existing replenishment?

If you get to the point where you say, well, you know, this inventory at this rate we got a six-year supply, then we got to go to Plan B.

Right. Right. Okay. And then last, I guess, for Tony, given some of the changes you have made in retail, Tony, and by that I kind of mean adding, coming up with the men's only concept and the women's only concept, adding Indigo Palms in to the Women's business and presenting both of those brands under one store, and the same with men's, I am wondering what the rationale for launching a separate Relaxed, or is it really just a square footage thing, you just can't get Relaxed in the existing stores, and present it the way you want it to?

There is some of that, John, but if you look at our wholesale businesses, we launched Relax as a separate concept from, the what I will call the heritage Tommy Bahama business, which had become a silk-dominated business, and we felt that were missing out on an opportunity to pursue products that we had been known for at the time we started the Company, and just sort of went by the wayside, because of the demand for silk products, and that met with great success, so the decision to try a freestanding Relax store was prompted partially by a space issue, especially in Naples where we are jammed for space, and is usually a successful and profitable store, but also by the fact that we see them as somewhat different concepts, and somewhat different in some cases, different customer base. It is a little more youthful customer base as well.

Agreed. That sounds a little counterintuitive, though at magic you talked a lot about one umbrella and the brands all sitting underneath one umbrella.

If you were to see the way it is presented, I told you you can sort of almost pass product from door-to-door. It is directly across the street. We are looking as I told you if this thing continues at the success level it has shown in the first week, we will be looking for contiguous doors wherever we can find them.

Let me make sure that I am clear. With Indigo Palms, the intention is to pull that into the existing stores, --

You mean as a retail concept?

Correct, correct.

I think that there is some of that has already occurred, I think we've expanded out of just just the three basics presentations into stores that have the space. We are starting to show an enhanced presentation of Indigo Palms where we are able to capture the additional space like we did in Las Vegas, by putting, by moving women's out, that Indigo Palms presentation was expanded dramatically.

Right.

We are taking it on a case by case approach where the opportunity presents itself, new doors that are being built are still keeping a lot of that sort of potential as part of the process when we are looking for space.

Is it a 3,000 square foot space, could it be a 4,000 square foot space, which would allow us to do something greater with Indigo Palms? Is there a door down the street that could be an Island Soft store, I mean a Relax store, so those things are being looked at in each location that we have.

And I guess last question here, but Relax, when you open up a Relax store in the same mall, is there a significant amount of product that is coming out of the existing stores?

Of course, and significant amount I would say that whatever Relax represented to those stores is coming out. What we have found thus far in Naples is that it had absolutely no impact. We were able to comp our stores on a daily basis, and the Relax business was all plus.

Right. One plus one is greater than two. Absolutely. Thank you.

It appears at this time, we have no further questions, I would like to turn the program over to Hicks Lanier for any additional or closing comments.

Thanks, Robby. I think we told you everything we have got to say today. We appreciate your interest, and we will look forward to communicating again some time around the first of June, as we start our next fiscal year with some comments about what we think our fiscal '08 will look like. We will look forward to talking to you then. Thanks for your interest!

Thank you. That concludes today's conference. You may disconnect your lines at any time.