Oxford Industries Inc (OXM) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Oxford Industries third quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) Following the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded and now I would like to turn the conference over to Anne Shoemaker, Treasurer. Please go ahead.

Thank you, Gwen, and good afternoon, everyone.

Before we begin, I would like to remind participants that certain statements made on today's call and in the q-and-a session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause results of operations or the financial condition of the Company to differ are discussed in the documents filed by the Company with the SEC. The Company undertakes no duty to update any forward-looking statements.

For your reference, a reconciliation of the non-GAAP financial measures discussed during this q-and-a to GAAP financial measures set forth in our earnings release which is posted under the newsroom tab of our web site at oxfordinc.com.

And now I'd like to introduce today's call participants. With me today are Hicks Lanier, chairman and CEO, Terry Pillow and Doug Wood from our Tommy Bahama group, Tom Chubb, Executive Vice President and Scott Grassmyer, CFO.

Thank you for you attention, and now I would like to turn the call over to Hicks Lanier.

Good afternoon, and thank you for joining us to discuss our third quarter results.

Obviously we are disappointed with our absolute results for the third quarter. However, we believe we handled the business well despite what are undisputedly the worst conditions in decades. While we have been hurt by everyone else our wounds are not self inflicted. We believe we are on the right path for this environment, and we remain focused on three key areas, protecting the integrity of our brands, controlling and reducing costs, and maintaining and protecting our strong balance sheet and liquidity.

For the third quarter it's worth noting we were on plan in August and September but October was worse an expected as consumers acted negative to the deluge of bad economic news. Consolidated net sales for the third quarter ended November 1st, 2008, with $244 million compared to $286 million in the same period of the prior year. Earnings per diluted share during this period were $0.31 compared to $0.76 in the same period last year. These results include $0.07 per share of restructuring and other unusual items comprised of $0.04 for the writeoff of unamortized deferred financing costs and $0.03 per share of severance. In response to the extraordinary market conditions that exist, we taken deliberate but significant steps to ensure that our cost structure and balance sheet are appropriate for the current retail environment.

We have taken cost cutting actions across all parts of Oxford, primarily during the second half of the current fiscal year which will reduce our annualized employment cost on a going forward basis by over $18 million. Additionally we have moderated store rollout plans pending an improvement in economic conditions. While capital expenditures for fiscal 2008 are expected to total approximately $22 million, we currently anticipate less than $10 million in capital spending for fiscal 2009.

We have continued to manage inventory very tightly and year-over-year inventories are down by 30%, contributing to a very strong year to date, cash flow from operations of over $61 million. Finally in August we closed a $175 million asset based revolving credit facility, provides us with ample liquidity. I will reserve some additional comments for closing.

And now I would like to turn the call over to Terry Pillow, Chairman and CEO of our Tommy Bahama group. Terry.

Thank you, Hicks.

Tommy Bahama reported net sales of $84 million for the third quarter of fiscal 2008 compared to $103 million in the same period the prior year. Sales decrease was due to particularly difficult market conditions for both the wholesale business and the Company owned retail where, like virtually all our peers, we experienced a sales decline. This was partially offset by offset by a very strong performance in the e-commerce business, which celebrated its first birthday in October, and since that anniversary has performed well above last year's sales level. We've reduced costs, and our careful inventory management has left us in an excellent inventory position despite the weak sales.

Tommy Bahama's operating income for the third quarter was $700,000 compared to $11 million in the same period the prior year. The decrease in operating income was primarily attributable to decrease in income, for our company owned retail stores where comparable store sales created a deleveraging affect of our expenses. This effect was perhaps exacerbated because the third quarter period has historically been the weakest sales period for Tommy Bahama retail stores.

This year, the third quarter was particularly weak as a result of our significantly diminished traffic during September and October. This coupled with the expenses of 7 additional retail stores resulted in significant lower operating profits in the third quarter of this year compared to the same period last year.

Because of this challenging economic environment we are taking measures to address our holiday business. Over the last year we have been working diligently to develop our data base of customers. In November we mailed our Holiday brand book along with a loyalty card of $50 to 225,000 of our best customers. We believe promotions like this will bring our loyal customers in to stores without resorting to indiscriminate discounting as most other retailers done. Also starting December 1st, we're beginning our On the Flip Side promotion, which enables customers who purchase $150, a $50 card to be redeemed in January '09. We feel that these measures will be affective to drive traffic and increase sales in a very brand appropriate manner.

The three months that makes Tommy Bahama's fourth quarter has historically been its largest retail period and accordingly the retail stores have achieved greater operating leverage in those months. While we do not expect Tommy Bahama's fourth quarter operating income to reach last year's level we do expect to approach a low double digit operating margin.

Now I will turn the call over to Tom Chubb for details of our three other operating groups and holiday figures for the quarter.

Thanks, Terry. Good afternoon everybody, and thank you for joining us. I will start with Ben Sherman. The economic crisis is truly global in nature. In this instance in the UK, Ben Sherman's home market, are as bad or possibly worse than here in the US.

Ben Sherman reported net sales of $38 million for the third quarter of fiscal 2008, compared to $47 million in the same period of the prior year, due to lower sales in the United Kingdom. UK sales which account for over two-thirds of the Ben Sherman business, declined primarily due to the exit from certain lower tier customer accounts that were still active last year, the difficulty current economic environment and the impact of a 12% decrease in the value of the British pound versus the US dollar compared to the year ago quarter. The decline was partially offset by increased sales in other markets including the United States.

Ben Sherman had operating income of $3.2 million in the third quarter of fiscal 2008 compared to operating income of $5.6 million in last year's comparable period. The decrease in operating income was primarily due to the lower sales and lower royalty income partially offset by reductions in overhead costs.

Net sales for Lanier Clothes in the quarter were $44 million compared to $53 million in the same period of the prior year due primarily to the winding down of the Oscar De La Renta and other licensed businesses, the restructuring of the Arnold Brant business and the impact of the weak demand the the tailored clothing market. For the quarter Lanier Clothes reported operating income of $4.5 million versus operating income of $2.6 million in the year ago period. The increase in operating income was the result of productions in the SG&A expenses.

Oxford Apparel reported net sales of $78 million for the third quarter compared to $83 million the same period of the prior year. This anticipated decrease in net sales resulted from our continued focus on key product categories and decisions to exit underperforming lines of business. Operating income for Oxford Apparel was flat with last year, with $7 million for the third quarter of fiscal 2008.

The impact of the lower sales was offset by a significant reduction in SG&A expenses, during the third quarter of fiscal 2008. The same period of the prior year included charges totaling $1 million, associated with the sale of Oxford Apparel's last owned manufacturing facility. The corporate and other operating loss decreased to $2.9 million for the third quarter of fiscal 2008, from $3.7 million in the same period of the prior year. The decrease in the operating loss was primarily due to lower corporate SG&A expenses.

I will now move on to the consolidated results for the income statement, balance sheet and cash flow statement. As Hicks mentioned earlier, for the third quarter ended November 1, 2008, consolidated net sales were $244 million, compared to $286 million in the same period of the prior year. Consolidated gross margins for the third quarter of fiscal 2008, were 38.3%, compared to 39.2%, in the same period of the prior year. The decrease in gross margins was primarily due to the decreased proportion of Tommy Bahama and Ben Sherman sales in the current year, which generally add higher gross margins than Lanier Clothes and Oxford Apparel.

Sound inventory management as well as the fundamentally full price retail strategy of Tommy Bahama contributed to third quarter gross margins for the branded businesses remaining flat compared to the same period of the prior year. SG&A expenses for the third quarter of fiscal 2008 were $84.6 million, or 34.7% of net sales, compared to $92.8 million or 32.4% of net sales, in the same period of the prior year.

Reductions in employment and other costs in each operating group were partially offset by increased expenses associated with operating additional Tommy Bahama retail stores and severance expenses associated with staff reductions. Increase in SG&A expenses as a percentage of net sales was due to the reduction in net sales described earlier.

Amortization of intangible assets decreased to $700,000 for the third quarter of fiscal 2008 from $1.2 million from the same period of the prior year. Royalties and other operating income for the third quarter of fiscal 2008, decreased 8.3%, to $4.6 million, from $5.0 million, in the same period of the prior year. The decrease was primarily due to decreased royalty income of Ben Sherman, partially due to the impact of the decline of the British pound in the third quarter of fiscal 2008.

Interest expense increased 16.6%, to $6.4 million for the third quarter compared to $5.5 million in the same period in the prior year, primarily due to the writeoff of $900,000 of the unamortized financing costs when we entered in to our new credit facility. As a result of these factors, operating income for the quarter was $13 million, versus $23 million in the same period of the prior year. Earnings per diluted share for the quarter were $0.31 compared to $0.76 in the same period last year.

Turning to the balance sheet. Inventories at the end of the third quarter of fiscal 2008 were $108.6 million, compared to $155.8 million a year ago, a net reduction of 30%. While business conditions remain challenging, our inventory position is well managed, and at an appropriate level.

Receivables at the end of the third quarter were $120 million, versus $156.4 million at November 2, 2007. The reduction in receivables was primarily due to lower wholesale sales, in the last two months of the third quarter of fiscal 2008.

Total liquidity at the end of the third quarter of fiscal 2008 was $125 million which included $8 million in cash, and $117 million of availability under our new $175 million revolving credit facility, which closed on August 15th, 2008.

Cash flow from operating activities for the first nine months of fiscal 2008 was $61 million, compared to $9 million in the same period of the prior year. Significant working capital reductions associated with the rationalization of our legacy business, has contributed to our strong operating cash flow. For fiscal 2008, we expect to generate cash flow from operations in excess of $65 million, incurred capital expenditures of approximately $22 million, and due the the timing of dividend payments to align with our new fiscal year, we expect to make five dividend payments totaling approximately $14.5 million dollars. With our strong free cash flow, and our new credit facility, our liquidity remains excellent.

In the fourth quarter, we expect to incur approximately $0.04 per share of additional restructuring charges. Including these charges, we expect diluted earnings per share to be approximately break-even on sales of $195 to $205 million.

Because of the intensity of the economic downturn, we are moderating our previously Q2 guidance for the full year fiscal 2008. We now expect sales to be approximately $950 million, and diluted earnings per share to be approximately $1, which includes approximately $0.45 per share of restructuring charges and other unusual items.

Thanks for your attention, and now I will turn the call back over to Hicks Linear for some closing comments.

Thank you, Tom.

We are prepared for a lengthy and very difficult market environment. While this environment might prove disastrous to many businesses we expect to remain profitable and continue to pursue our core strategic plans. To be sure we will be cutting back where appropriate and keeping our pencils very sharp.

We have changed much over the last several years. I think that our company's presence in the marketplace for over 65 years has given us an appreciation and a skill set to managing a business conservatively and navigating through difficult times. We are going to deploy capital very carefully and look to protect our brand and our business unit until conditions warrant a reacceleration of our growth.

Thank you for your time this afternoon, and for your continued support.

Gwen, we are now ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) We will go first to Eric Tracy of BB&T Capital Markets.

Good afternoon. Maybe, Terry, if we could just focus on the Tommy Bahama segment for a bit and walk through what you're seeing, particularly on your retail stores. Obviously the comps meaningfully decelerating in October, what you've seen since then, in the holiday, and obviously planning to slow the store growth there, but just bigger picture, any changes to the ultimate outlook for the growth in that business, and then secondly are you seeing stabilization in those regions in a wholesale or retail basis, where the housing was taking the biggest toll?

First of all, I can tell you, Eric, I've been spending a lot of time in our stores over the last couple of weeks, and they've never looked better. Our inventories, our product looks great. We continue to see the same trends or pretty much the same trends we were seeing at the end of October in to November, and to the fourth quarter.

Even though it's regional. We've got stores in regions that are doing quite well. We talked often about where we have a lot of stores that's been particularly hit by the housing, and that continues. We have some regions around the country that are performing quite well and stores that are performing quite well. It's sort of a day by day as we watch the sales as we do seeing where they are, it's pretty much a mixed bag. We have not seen much of a change from what we were seeing in November.

Okay.

And the second part of your question was?

Again on the retail growth, obviously slowing given the market conditions, that is there anything that changes your view from a longer term perspective of where you would like to take that store base?

No.

Okay. Maybe just thirdly on Tommy Bahama. Nordstrom's, I know they've taken a more contemporary approach in terms of their merchandising. Can you speak a little bit to that and if that's affected your square footage or anything?

Our business with Nordstrom, they continue to be a very important customer for us. They've reported their comps are down. We continue to monitor that business.

There has been some decrease in that business with Nordstrom as they fine tune their strategy but they are still very important customer for us currently and going forward for spring. We continue to partner with them closely, and we will continue to.

Okay. Thank you. Maybe Hicks or Tom, turning to Ben Sherman, are you able to break down and quantify for us the UK versus the US and then maybe markets outside of the UK or US and sales trends for Q3 there?

The sales figure that Tom repeated in his comments include the negative currency exchange. So that's a significant part of the sales drop that we are reporting. But as he also said, things are tough in the UK, and quite frankly, we have not found a place on the globe where they are particularly good. If you know of it, we will run right over there.

It's challenging and I think what we can say for Ben Sherman, Tommy Bahama and the legacy business is that we are very pleased with the inventory management that our guys have done to be $50 million approximately less than we were at this time a year ago in this environment where we have not met our sales goals. It's a pretty extraordinary feat that we are proud of.

And particularly as it relates to Tommy Bahama, it has allowed us to be a full priced retailer, and yes, we are in a disadvantage to a lot of our peers who are in terms of topline since they're promoting so heavily. But I dare say, on the gross margin line we are going to look pretty good against almost anybody out there.

As I said this inventory situation allows us to do that and we are quite pleased with that. I guess I'm like a politician I'm not going to specifically ask you a question I'm going to tell you what I want to.

You answered what was going to be my follow up question. Once again, you done such a great job from a inventory perspective, and that's clearly manifesting on keeping our gross margins up. Just this last point. As we look forward do you think that is sustainable and does that imply that Q4 given your earnings expectations that we are going to see huge deleverage on the SG&A or something going on in the SG&A?

Well,we feel equally strong about the work we've done on SG&A. What we don't have a great feel of still, with eight weeks to go in this quarter, there is no consistency in the sales pattern. And I think not only for us, but for anybody that we know about, and so we are a little cautious at this point.

But other than the specifics that Terry mentioned on our automatic mailer, and gift cards and the other enticements, we are not out there with dramatic sales, rent signs and discounts and that type of thing. And that's just our contrast to what else is going on out there.

We know that has moderated our top line, but we think its right strategy for us at this time and what we feel very strongly about is in consumption with the inventory management and expense reductions and the management of the brand, we will come out of this cycle whenever it turns in a very very strong position with our brands.

Great, thank you so much, and best of luck.

Eric.

We'll go next to Jeff Blaeser with Morgan Joseph.

Good afternoon. Could you give us a flavor for where you are in the rationalization of the legacy brands and the economy taken out, how much more reductions you would expect?

Here again not to blow our horn, but we are quite pleased with what has transpired in those businesses. In case of Oxford Apparel, we started this restructuring rationalizing close to two years ago, and what we've got today and you will see more of it in the fourth quarter, because we are going to be up against some programs from last year that we have subsequently exited, so a big part of our decrease in sales in the fourth quarter about half of it absolutely is going to come from the Oxford Apparel group.

What we've consistently done there is maintain the absolute profitability or close to it therefore enhancing our return on sales, our return on assets and obviously our return on equity. So we are pleased with the progress we made.

We think we are getting close to the bottom of exiting businesses and the ones we got are keepish for the future. And as I say I think we are pleased with that progress.

In Lanier Clothes you might recall in the second quarter we took some fairly significant restructuring charges and that showing is phased in, in the third quarter here, in the smaller business, better margins, much lower expenses and much better profitability with operating profits approaching (inaudible). So some fairly difficult and painful surgery there. But I think we are braced for the environment and for the future in both of those businesses. And we have not been able to say that up until now.

Okay. I'm sure you're not going to give us guidance for next year, but can you give us a feel for where you think SG&A will be? I know you mentioned $18 million in additional costs.

That was just on employment costs. There are other SG&A areas where we will have reductions. Until we see a turn in this thing, we are managing the things that are controllable for us and not bringing our hairs about things that are out of our control.

You can expect us to enter the fiscal year very lean and mean in terms of expenses, very lean and mean in terms of inventory, very dedicated to the positioning of our brand in the marketplace and we firmly believe that we will be in a position to take market share over the next couple of years as a result of our position.

One final -- how many in annualized sales does new store development account for? And what is a moderate level of growth going forward?

For next year it's going to be very moderate in terms of new stores. In Tommy Bahama, we've planned one new store in Newport Beach, California, and we've been working on that location for about three years. In Ben Sherman, we expect to open one store in the US in Boston. We have just opened a store in Cologne, Germany and expect to open one in Berlin, in the early spring of next year.

One of the ways we managed that Tommy Bahama inventory is we have opened more outlet stores than we have historically, but that's our principle vehicle for making sure our inventory is in the right position if we don't have to go to the dramatic reductions within our own stores.

So don't look for much of a kicker next year from new stores. But I think at this juncture, we are not trying to force growth in an environment that's not receptive to growth. But we are ready with all the resources including capital to turn that switch on when we see things improving.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) We will go next to Robin Murchison with SunTrust.

Thanks very much. Well congratulations on a good balance sheet. It is a tough environment out there.

Well, this is the time when that's pretty important, Robin.

Absolutely. With the stock trading where it is, there was expectations. I got a few questions here, and they are not particularly in any order, but let just me start with I want to ask you about China. Last year you guys sourced about 45% of the product from China, and just wondering with the deflation over there, does that help you any? How does that help you with managing your product on a go-forward basis?

You want to take that, Tom?

Yes, I'll take that. p Deflation, if you remember, Robin, as recently as six months ago, people were talking about inflation coming out of China. And now there is clearly some deflationary forces that have started to come into play with China, but I think it's a little bit early to see what if any impact that's really going to have on our cost of goods. Certainly the inflationary pressure's gone away, though.

Okay. Terry, you mentioned the $50 gift card, for redemption in January, what is the threshold, there must be a threshold spend associated with that that?

Robin, it used be that we've done this program historically once a year. We added a program this year to the deal with economic conditions. Heretofore the threshold was $250 to receive a $50. For this promotion that we're offering now in December, we've lowered that to $150 that you have to spend to redeem that coupon, which we think that lowering that will enable us to attract more customers to that with the lower threshold. It's been a very successful promotion for us historically, and we think it will be for us in the fourth quarter.

As we've said repeatedly that when somebody walks into our stores the conversions continue to be at historic levels and average dollar amount on the sale.. So these promotional activities are trying to drive traffic, that's where the issue has been not only for yourselves but everybody around us, the traffic is up dramatically.

With the holiday mailers that we had in the $50 gift cards with, we're expecting people to come in with that $50 card and walk out with $150, $200 worth of product. That's all holding up and the same with the January promotion.

Well, given that you don't discount in the stores, you don't typically walk in and see a lot of sale merchandise, I would expect your AUR, or your average selling price is being maintained. It's a matter of traffic.

Yes.

Absolutely.

Do you keep a separate measure for your outlet stores?

Certainly.

How is AUR in your outlet stores?

Our outlet store, the funny thing about outlets now is outlets are suffering the same type of traffic decline that we are seeing at full priced stores, go from an average retail staying about the same as we historically have shown. So a lot of this has to do with how much inventory to do we have in the outlet, which the way we have been managing our inventories, two things, we have actually kept our inventories in line. We've also added outlets this year, which has allowed us to keep our average retails up.

But the outlet stores in general not only for us, but for everybody, are not the relative value that they were before this cycle because of the heavy promotions in the regular priced stores excluding us.

Right.

Okay. If you separate your Tommy Bahama customer base from the larger department stores, and look at the remainder, maybe the Green Grass Golf Shops or some of the specialty retailers out there. Are you under any pressure because of bankruptcies where some of these guys going out of business? I'm sure their orders have to be down.

Absolutely they are down. In an area like the Green Grass Golf business is really is weakest I've ever seen it. With golf clubs closing right, left and some are losing membership, because of economic scenario. Scott and Tom and their credit team are spending a huge amount of time evaluating the information we have in depth of our industry peers on the whole credit situation. We expect that not only some of our customers some of them haven't made it already and we expect there will be more that will go before the cycle is over, just as we expect some of our peers probably will not make it through the cycle.

Okay. The only distribution for markdown Tommy Bahama product is through the outlet stores or if you choose to mark it down in the store. We shouldn't see it anywhere in any other venue?

Well, there are some isolated incidents where some of our customers will divert it to acquire it. Or if it's a discontinued product, we might put it through an all price channel. But no current merchandise. The bulk of it goes through our outlet stores.

Okay. We don't know, I don't think we have because of the restatement of the years what sales growth in fourth quarter was last year for the division. I think we do know the operating margin of the division was 15%. Is there anyway to get the sales growth for Tommy for last year? I will tell you where I'm going with this. It seems given the environment that if you're expecting a low double digit operating margin, I'm trying to figure out how you're expecting a low double digit operating margin in the fourth quarter of this year, versus the 15% last year and wondering if it's just tied to sales volume or if you can help us out there. How we should think.

Okay. I would say that you're looking at maybe a 10% reduction in top line this year with additional stores.

Okay.

And that deleveraging aspect is what is going to take us from that 15% or so down around low double digits, high single digits.

Okay. Then lastly, just generically hearing chatter in the channels about the department store orders, the preliminary orders look for 2009, down 10% to 15%, could you comment on that.

That's excessive with our wholesale business right now.

All right. Thank you, very much, guys. Good luck and Happy Holidays.

Same to you.

And there are no further questions at this time. I would like to turn the conference back to our speakers for any closing remarks.

Thank you, Gwen. Thank you, everyone, for attending. These are tough times we are in. I hope we projected that we understand the environment we are in. I think we are doing the right things, maybe not on a quarter to quarter basis but certainly for the long-term. We are going to stay the course and look forward to future success.

Thank you, everyone. That concludes today's conference. You may now disconnect