Oxford Industries Inc (OXM) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Oxford Industries Inc. third quarter 2010 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 questions. As a reminder, today's conference is being recorded. Now, I would like to turn the conference over to Anne Shoemaker, Treasurer. Please go ahead.

Thank you, Peter 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&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 forward-looking statements. Important factors that could cause actual results of our operations or our financial condition to differ are discussed in the documents filed by us with the SEC. We undertake no duty to update any forward-looking statements. Finally, during this call we may discuss some non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in prior press releases which are posted under the newsroom tab of our website at OxfordInc.com. And now I would like to introduce today's call participants. With me today are Hicks Lanier, Chairman and CEO, Tom Chubb, President, Scott Grassmyer, CFO, Terry Pillow, CEO of Tommy Bahama and Doug Wood, President of Tommy Bahama Thank you for your 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. Consolidated net sales and earnings were consistent with estimates reported on November 22. Diluted net earnings per share were $0.33 compared to $0.26 in the third quarter of fiscal 2009. The $0.33 includes $0.08 per share from continuing operations, and $0.26 per share from discontinued operations. We are pleased with our third quarter results, particularly the strong top and bottom line performance from our Tommy Bahama Group and another very solid quarter from Lanier Clothes as well as the year to date improvement in Ben Sherman. Based on the momentum we carried from the third quarter into November as well as holiday selling results to date in both our stores and e-commerce. We are expecting a significant increase in earnings for the fourth quarter and the year.

You will recall that on November 22, 2010, we announced that we signed an agreement to sell substantially all of the Oxford Apparel Group to Li & Fung for $121.7 million. We expect to report a gain of approximately $2.80 per diluted share on the sale and expect the net cash proceeds to approximate $90 million. We are pleased with the price we received and the flexibility that this transaction will provide us for the future. I'll return with some closing comments before Q&A, but I would like now to turn the call over to Terry Pillow to discuss Tommy Bahama's results for the quarter and some very encouraging updates on holiday. Terry?

Thank you, Hicks. Tommy Bahama reported net sales of $81.1 million for the third quarter fiscal 2010 compared to $75.4 million in the third quarter fiscal 2009. The increase in net sales for Tommy Bahama was primarily due to improved comparable retail store sales and higher eCommerce sales. Tommy Bahama's operating income for the third quarter of fiscal 2010 was $3.4 million compared to $2.1 million in the third quarter of fiscal 2009. The increase in operating income for Tommy Bahama was primarily due to the increased net sales, improved gross margins and high royalty income. These items were partially offset by increased SG&A. While the third quarter is Tommy Bahama's smallest quarter of the fiscal year, we were pleased to see growth in all major segments of our business. We've continued to see solid growth in our men's business and a much broader range of products. Our denim collection was especially strong and our strategy to grow our women's business is working in retail, eCommerce and wholesale, and we are confident that this category will continue to show growth.

We are delighted with how the holiday season has begun for us with the business continuing to be driven by key items, sweaters, heavy knits, and outerwear. Comp store sales are up significantly, and our inventory levels are in line to support this additional demand. Some of the markets that were hardest hit in the economy have rebounded. For example, we're seeing strength in our stores in western Florida, Scottsdale, Palm Springs, and Hawaii. Also, non resort markets like Texas, the Midwest, and the northeast are having some of our largest comp store gains.

Our direct mailing and gift card marketing programs have been driving strong business from the consumer to both our retail stores and our eCommerce site. This is our third year in sending a holiday brand piece directly to targeted customers. With the expansion of our database and what we have learned from prior marketing programs we believe we have executed this year's holiday program even better than ever.

In the fourth quarter, we opened three stores. Perhaps the highlighted recent opening is our retail restaurant Island location in Laguna Beach, California. It opened on November the 9, to great fanfare and we believe this is a fantastic location for Tommy Bahama. We are also pleased to have opened our second location in Denver, Colorado at Park Meadows. Our Cherry Creek store in Denver has been a great store for us, and we believe we can replicate that success at Park Meadows and continue to develop the Denver market. We also opened an outlet store outside of Houston in Katy Mills.

We envision a variety of growth opportunities for Tommy Bahama. We believe our owned retail stores expansion in the United States will be back to a pace of 7 to 10 new stores a year in short order. In its third year of operation, eCommerce is continuing to exceed our expectations. We will have revenue of well over $20 million in fiscal 2010 and it's continuing to grow at a rapid pace. To me this is a further indication of the strength of the Tommy Bahama brand. We recently mentioned international expansions to you and we are looking forward to updating you as this plan develops in our strategy. Now I will turn the call over to Tom Chubb for details on the other operating groups.

Thanks, Terry. Good afternoon, everyone, and thank you for joining us. I'll start with Ben Sherman. Ben Sherman reported net sales of $25.5 million for the fiscal -- third quarter of fiscal 2010 compared to $29.8 million in the third quarter of fiscal 2009. The decrease in net sales for Ben Sherman was due to the exit from and subsequent licensing of the footwear and kids businesses and the exit from the women's operations during fiscal 2009. Net sales in the third quarter of fiscal 2009 related to these exited businesses totaled approximately $4.3 million. Net sales were also negatively impacted by currency fluctuations. Ben Sherman's operating income for the third quarter of fiscal 2010 was $1.7 million compared to operating income of $2.3 million in the third quarter of fiscal 2009. The decrease in operating income for Ben Sherman was primarily due to decreased net sales, partially offset by improved gross margins.

For the year, there has been a dramatic improvement in Ben Sherman's financial performance. Last year, Ben Sherman reported a loss of over $8 million in fiscal 2009, $2 million of which related to restructuring the business. In fiscal 2010, we expect Ben Sherman to make a small profit. We believe the cost structure is now in line and gross margins are very good. Some top-line improvement in 2011 would make a big difference. We have seen a significant improvement in the performance of the retail stores. Not only have they comped up in sales dollars, but most importantly, they have comped up pretty sharply in gross margin dollars. While we have a lot of work left to do in Ben Sherman, we are feeling quite good about the trajectory that the business is on right now.

Net sales for Lanier Clothes were $30.8 million in the third quarter of fiscal 2010, compared to $35.6 million in the third quarter of fiscal 2009. The decrease in net sales for Lanier Clothes was primarily due to lower sales in the private label businesses. Operating income in the third quarter of fiscal 2010 was $5.3 million, compared to operating income of $5.2 million in the third quarter of fiscal 2009. The increase in operating income for Lanier Clothes despite a decrease in net sales was primarily due to improved gross margins resulting from sales mix with branded sales representing a greater proportion of Lanier Clothes sales in the third quarter of fiscal 2010. The improved gross margins were partially offset by higher SG&A, primarily resulting from the increased branded sales. Once again Lanier has posted exceptional results and demonstrated operational excellence.

The results of the continuing operations of Oxford Apparel, which is now comprised of the Oxford Golf business and the Lyons, Georgia distribution center operations, included net sales of $2.1 million for the third quarter of fiscal 2010 compared to $1.9 million in the third quarter of fiscal 2009. The operating loss for Oxford Apparel was $300,000 in the third quarter of fiscal 2010, consistent with the third quarter of fiscal 2009. The corporate and other operating loss decreased to $3.7 million for the third quarter of fiscal 2010 from $5.2 million in the third quarter of fiscal 2009. The decrease in the operating loss was primarily due to a LIFO accounting credit of $300,000 in the third quarter of fiscal 2010 and a LIFO accounting charge of $1.2 million in the third quarter of fiscal 2009. I'll now hand the call over to Scott Grassmyer to comment on our consolidated financial results.

Thanks, Tom. As a result of the planned disposal of substantially all of the Oxford Apparel Group, we have reclassified the relevant results from Oxford Apparel into discontinued operations. I'll now cover the results from continuing operations. Net sales for the third quarter of fiscal 2010 were $139.6 million compared to $142.3 million in the third quarter of 2009. Consolidated gross margins for the third quarter of fiscal 2010 increased to 52.8% compared to 47.9% in the third quarter of fiscal 2009. The increase in gross margins was primarily due to changes in the sales mix for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009.

The changes in sales mix included higher direct to consumer sales in Tommy Bahama, and Tommy Bahama sales representing a larger proportion of total net sales. Gross margins also increased due to fewer close-out sales in Ben Sherman and a sales mix change in Lanier Clothes towards branded products. Additionally, gross profit reflected -- reflects a LIFO accounting credit of $300,000 in the third quarter of fiscal 2010. And a LIFO accounting charge of $1.2 million in the third quarter of fiscal 2009. We anticipate the consolidated gross margins in fiscal 2010 will continue to increase compared to prior years. As our consolidated sales mix is more heavily weighted towards Tommy Bahama.

I would like to take a minute to address the cost pressures related to cotton, freight, and labor that are impacting virtually everyone in our industry. These increases are real and we expect some impact to our organization in the second half of 2011. That said, an important part of our strategy is to try to be in businesses that are differentiated and are not commodities where your main calling card is price. Our game plan is to try to mitigate these additional costs through a combination of aggressive sourcing and selective price increases. SG&A for the third quarter of fiscal 2010 increased to $71 million, or 50.8% of net sales, compared to $66.9 million or 47% of net sales in the third quarter of fiscal 2009. The increase in SG&A was primarily due to costs associated with resumption of our incentive compensation program, which was suspended in fiscal 2009 and is tied to financial performance. Resumption of the incentive compensation program impacted SG&A for each operating group. SG&A was also impacted by costs associated with opening retail stores opened during or subsequent to the third quarter of fiscal 2009.

Royalties and other operating income for the third quarter of fiscal 2010 were $4 million compared to $3.3 million in the third quarter of fiscal 2009. The increase in royalties and other operating income was primarily due to increased royalty income in Tommy Bahama, as sales reported by certain licensees increased and new licensees were added. As a result of these factors, operating income from continuing operations for the quarter was $6.4 million versus $4.2 million in the same period of the prior year. Interest expense for the third quarter fiscal 2010 was $5.1 million, flat with the same period of the prior year. Interest expense in the fourth quarter of fiscal 2010 is expected to be comparable to that of the third quarter.

Turning to the balance sheet, total inventories related to continuing operations at October 30, 2010, were $63.5 million compared to $54.5 million at October 31, 2009. Inventories increased by 16.5%, primarily due to an increase in both Tommy Bahama and Lanier Clothes, to support anticipated sales, which was partially offset by the decline at Ben Sherman resulting from the exit from the footwear, kids, and women's businesses.

At the end of the third quarter, we had total debt of $167.8 million, compared to $178.7 million last year. At October 30, 2010, we had approximately $124.7 million in unused availability under our US revolving credit facility, and $13.4 million in unused availability under our UK revolving credit facility. Our balance sheet and liquidity are strengthened by the sale of Oxford Apparel. As a result of this transaction, at year end we expect to have a significant cash balance and no debt outstanding under our $175 million revolving credit facility. Our long-term debt will consist of our $150 million, 11.375% secured notes which are callable at a premium of half the coupon in July of 2012. None of the interest expense related to the bonds has been allocated to discontinued operations.

Our capital expenditures for fiscal 2010 for continuing operations, including $9.4 million incurred during the first nine months of fiscal 2010, are expected to be approximately $12 million. The fiscal 2010 capital expenditures primarily consist of costs associated with new retail stores and investments in certain technology initiatives. For the fourth quarter we expect net sales from continuing operations in the range of $146 million to $156 million, and diluted net earnings per share from continuing operations of $0.28 to $0.33. This compares to net sales and earnings per share from continuing operations in the fourth quarter fiscal 2009 of $143 million and $0.07 respectively.

For the full fiscal year 2010, we expect net sales from continuing operations in the range of $593 million to $603 million. Diluted net earnings per share from continuing operations for fiscal 2010 are expected to be between $1.16 and $1.21. This compares to net sales and earnings per share from continuing operations in fiscal 2009 of $585 million and $0.09 respectively. We also announced our Board of Directors has approved a cash dividend of $0.11 per share payable on January 28, 2011, to shareholders of record as of the close of business on January 15, 2011. We have paid dividends every quarter since we became publicly owned in 1960. Thanks for your attention. Now I will turn the call over to Hicks Lanier for some closing comments.

Thank you, Scott. With the announced sale of Oxford Apparel, we have made another tremendous step forward in our strategy of focusing on lifestyle brands. In addition, we are pleased with the results we were able to achieve in the third quarter and are excited by the holiday selling results that we are seeing. We look forward to updating you on our fourth quarter results in a few months. And now, Peter, we're ready for questions.

(Operator Instructions) And let's go first to Keybanc Capital Markets, Edward Yruma.

Hi, thanks very much for taking my question and congratulations on a good quarter. Can you talk about corporate and other line and how we should think about that line going forward now that you have -- or now that Oxford Apparel is in discontinued ops?

You want to take that, Scott?

Yes. The total cost, the cost base from the pace we're on this year will be a little bit less next year. We have that -- we'll cut some costs in corporate, but this year has a full incentive comp in it. So if results -- results would, of course, have to increase next year to maintain that level he of incentive comp. If the results increase, we expect a slight decrease in total dollars in corporate and other. And that would be outside the LIFO accounting piece.

There's the one that we have he a difficulty projecting, some charges quarter like this, but third quarter, it's just almost impossible to predict that.

Got you. And I guess just heading into an inflationary environment, at least on the product cost side, how should we think about that LIFO line for next year, particularly in the back half of next year?

You know, if inventories remained level, and the markdowns in inventory didn't change much, we anticipate some hits from LIFO. If inventory levels actually decrease, we get into eating into some old layers, which tends to offset any inflationary impact in the indexes. But we would expect some charges, if inventory remained flat, and there weren't substantial changes in the mark down, we anticipate some increase.

Got you. And may final question, I know that you've made some key additions on the Tommy Bahama management team from both an international perspective as well as on the restaurant front. Can you talk a little bit more about how we should think about your longer term Tommy Bahama growth opportunity? Thank you.

You're right, Ed, we did bring in Rob Goldberg to head up our restaurant division, and he's been here around six months, and it's been a great addition to our team, and helping our restaurant and our restaurant business is consistent with what we reported in Q3. It's also very healthy, and we like what we see in the restaurant group. Also, we brought in Martin Coles to help us formulate our strategy which we're working on right now and we feel very strongly about it. We've had a peek of that strategy and what it looks like going forward overseas, and it looks good. Also, in regard to just growth opportunity, we're embarking on some key stores in very high profile urban locations next year, which we feel like with the strength of our business right now, it's never been a better time for us to take an opportunity to open some of these much more high-profile stores.

We're very happy with our brand and how our brand is performing and how customers are receiving it. That gives us the confidence that we can do much better. As I mentioned in the call script, the success we're seeing in these cold weather stores and northern locations is very encouraging for us. So we're encouraged about a lot of things about our business and how it's performing.

Great, thank you very much.

Thank you.

And let's take a question from Jeremy Rob, SunTrust Robinson Humphrey.

Hi, congratulations on a nice quarter. Just had a few questions. Really wondering about kind of the operating margins in Ben Sherman and Lanier, especially Ben, as it's been, you know, getting a lot better, and we kind of look out into the next year, if could you just talk about where that could go, and then kind of along the same lines for Lanier as well.

Well, I think with respect to Ben Sherman, if you look at it, at the gross margin level, it's really got very comparable gross margins to Tommy Bahama. I think the reason why it delivers less at the operating margin level is just that the business is quite small. We've got the infrastructure there, although we've downsized it quite a bit over the last couple of years. We've still got the infrastructure that would actually support a bigger business than what we've got. So the key to success in Ben Sherman at this point is really not pushing up the gross margins but just pushing up the top line so that we can leverage the existing expenses. But over the longer term, it's, you know, not unlike Tommy Bahama, in that it's a premium priced branded business that commands very attractive gross margins and ultimately that should lead to quite attractive operating margins.

Lanier Clothes is a slightly different animal in that it's a mix of licensed branded businesses, as well as private label businesses. So it's got sort of a hybrid gross margin structure. They're very, very good at managing their expenses, and as a result of that, this quarter, and really for this whole year, they've just delivered exceptional operating margins. I think being as high as they are this quarter at over 17%, while we'd love to see it, I don't think we can count on seeing that every quarter going forward. Does that help you?

Yes, definitely. That's really kind of what I was wondering, so that's very helpful. Just one more question, kind of wondering, in terms of modeling, if you could give us any idea of kind of the effect of the incentive compensation impact for 3Q and how -- so we can think about that going into Q4.

Third quarter would be our lowest increative comp quarter, just because it's a lower earnings quarter. And so the first -- the first quarter had the heaviest incentive comp hit. So the fourth quarter will have probably a million more in it than the third quarter, as far as incentive comp.

Great. Thank you very much. Congratulations again.

Thank you, Jeremy.

And a question now from Jim Ragan, Crowell, Weedon, please go ahead.

Yes, thank you, everybody. First question, just a quick cleanup regarding the continuing operations of Oxford Apparel, golf, and the distribution center. Will you continue to break that out separately, or are you going to fold that into one of the other categories?

You know, it's possible that that will be forwarded somewhere else, but for right now just plan on it continuing as is.

Okay. And then a question on the inventory levels. You talked about in the last quarter how you were bringing in some inventory to prepare for the sales, and that seems to still be the case. Can you just talk about what your inventory goals might be as we get through fiscal 2011?

At the end of the third quarter there will be an inventory peak, because it is there to support the holiday shipping season. We should end up a hair above last year. Last year we were extremely lean, both at Tommy Bahama and at Lanier Clothes. We were very, very lean on inventory, probably actually a little less than we might have liked to have. So we'd anticipate the year end to be slightly above last year's levels, but below the end of the third quarter levels.

And I think we feel very good about where inventory levels are.

Oh, great, thank you. And regarding the increase in royalty income for the quarter, you made the comment that there was some new categories but also growth in existing categories. Can you just talk about maybe what some of the categories were that you had the largest contribution to that?

Jim, one of the biggest ones was new outdoor furniture license that we've brought on, which has done extremely well, plus our home license, just in regular furniture with Lexington, is also doing well, but the increase is primarily the new outdoor furniture license. We're very happy about. We also have another very exciting new license, bikes. But it's not generating the level that the outdoor furniture is so it's probably going come to from furniture and outdoor furniture.

As you look at Ben Sherman going forward, can you just talk a little bit about the growth strategy? I guess specifically, I mean, do you see the most growth right now, domestic versus international, and also wholesale versus retail?

I think the biggest market for Ben Sherman obviously is the UK, which is the home market for them. Frankly, we don't see massive growth opportunity there, because we're pretty fully penetrated there. I think the biggest growth opportunities for us and Ben Sherman for the next couple of years are in Continental Europe and the United States, and I think that's both wholesale and retail. There's opportunity for both there.

Great.

And that's where we're actually growing now, and in the UK wholesale business, actually contracting a bit. Retail is up in the UK, but our wholesale business is contracting a bit. Europe and the US are growing nicely.

Great. And then my last question, with the positive event of the sale of Oxford Apparel, it certainly puts the spotlight on, you know, the strength of the Tommy Bahama business, and now that you have that spotlight and growth really has been sustained here recently, do you see -- are there going to be any changes to either advertising strategy or how you reach customers? Are you considering doing anything different in that area?

Yes, Jim, I mentioned in the call script how excited we are about this holiday mailing, and the response that we've gotten. Historically, we do one in the spring. But based on last spring, and then this holiday, we are very excited about what happens when we communicate directly with our customer and we're seeing the results. Marketing is one thing, just running print, which is not something that we're planning on doing much more than we are right now, but mailing more of these pieces and increasing our database to our own consumers is something that we're definitely going to ramp up and feel very, very strongly about. You can see a direct -- when we drop that book this year, our business, which had been strong, anyway, but it just got much, much stronger as we put these brand pieces to our consumers. So I'm glad you asked that, because we are, and we feel strongly about communicating with our customers directly, and we're going do it more and more in the future.

Great. That's it. Thank you.

(Operator Instructions) And we have no further questions in the queue at this time I would like to turn the conference over to Ms. Shoemaker for any further remarks.

This is Mr. Lanier. I'll make just a brief remark. We thank you for joining us today. We appreciate your time and interest, and we one you all the best at the holiday season.

With that we conclude today's presentation. Thank you very much for joining us today.