Oxford Industries Inc (OXM) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Oxford Industries fourth quarter and fiscal year 2010 earnings conference call. At this time, all participants are in listen-only mode. Following the presentation, we'll 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.

And now, I'd like to turn the conference over to Anne Shoemaker, Treasurer. Please go ahead.

Thank you, Justin, 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 the forward-looking statements. Important factors that could cause actual results of the 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.

Also, during this call, we will be discussing certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our press release issued earlier today, which is posted under the newsroom tab of our website at Oxfordinc.com.

And now I'd 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'd like to turn the call over to Hicks Lanier.

Thank you for joining us this afternoon to discuss our fourth quarter and fiscal 2010 results as well as our expectations for fiscal 2011. We completed two major transactions toward the end of our fiscal year, the sale of Oxford Apparel Group and the acquisition of Lilly Pulitzer. These transactions were highlights during a year of solid accomplishments that also saw improved operating results in all of our continuing businesses, Tommy Bahama, Ben Sherman and Lanier Clothes.

For the fourth quarter of fiscal 2010, our adjusted earnings per share from continuing operations increased to $0.32, compared to $0.04 a year ago, on net sales of $157.7 million. For the year, our adjusted earnings per share from continuing operations were $1.26, compared to $0.48 in fiscal 2009. The adjustments include LIFO accounting adjustments, purchase accounting charges, reductions in an estimate for an environmental reserve liability, and certain restructuring and other charges.

We are very pleased with the improved operating results we achieved in fiscal 2010, and we are even more excited about our outlook for 2011. In the coming year, we expect to deliver strong results with increased revenue, expanding gross margins, and improved operating margins, while making significant investments in our lifestyle brands. For fiscal 2011, we expect adjusted earnings per share of $1.95 to $2.05, on net sales of $725 million to $740 million. During the first eight weeks of fiscal 2011, our direct to consumer results across all brands have been stellar. For the first quarter of fiscal 2011, adjusted earnings per share are expected to be $0.95 to $1.05 on sales of $200 million to $210 million, compared to $0.54 per share, and sales of $163.6 million in the first quarter of 2010. We believe the strategic moves we made last year have positioned us well for 2011 and beyond. The sale of Oxford Apparel and the addition of Lilly Pulitzer have not only left us with a collection of great aspirational lifestyle brands, but also the balance sheet and financial flexibility to support the sustained growth we expect from these businesses.

I'll reserve some additional comments for closing. I'd now like to turn the call over to Terry Pillow, the CEO of our Tommy Bahama Group. Terry?

Thank you, Hicks. Good afternoon, everyone, and thank you for joining us. Tommy Bahama reported net sales of $108.9 million for the fourth quarter compared to $94.8 million in the fourth quarter of fiscal 2009. The 15% increase in net sales for Tommy Bahama was due primarily to higher sales in our direct to consumer business. These increases include comp store sale increases, sales at new retail stores, and dramatically higher eCommerce sales. Our operating income for the fourth quarter was $15.6 million compared to $9.7 million in the fourth quarter of fiscal 2009. The increase in operating income was primarily due to the increased net sales, improved gross margins due to a greater proportion of the direct to consumer sales, and a higher royalty income.

As of January 29, 2011, we operated 89 retail stores compared to 84 at the end of fiscal 2009. We gained a lot of momentum in the fourth quarter and continue to see very strong results in our first quarter. Our owned retail stores are achieving comps in the mid teens, and eCommerce is growing at even a higher rate for the first eight weeks of fiscal 2011. Fueling this growth is the diversification of our product, from long sleeve wovens, knit polos and sweaters to jeans and shorts. Our brand is taking more share of a man's closet. We have made great strides in our retail stores to create a compelling destination for both men and women, with women's rising above 25% of our direct to consumer business. Our diversified product lines for both men and women continue to resonate in warm weather resort markets, but has also demonstrated real strength across broader geographic areas including non-resort markets in cool weather cities. For example, our current plans include a high profile Fifth Avenue store in New York City, and our third location in San Francisco in the San Francisco area, Marin county. We anticipate returning to a pace of 7 to 10 new store openings in 2011.

To build on our current momentum in our direct to consumer business, we are increasing how often we talk to our guests through our direct to consumer marketing. Last year, our two mailers were incredibly effective in driving traffic and sales in our retail stores, and our eCommerce site. This year we're planning to increase the number of mailers and believe this will be very impactful in driving additional sales.

On the international front, I just returned from a trip to Asia last week and I have never been more excited about the opportunities for our brand in that important and rapidly growing region. We had planned to open a store in Tokyo but given the recent earthquake and tsunami we have put these plans temporarily on hold. We now believe that we will open our first store in Hong Kong and have begun work on that project. Our plan is to open a few stores in key international gateway cities in Asia, learn from those stores, and then use what we have learned to refine our roll-out plan. While we're excited about the possibilities in Asia and are anxious to get our first store open, it is very important that we stay focused not just on getting it done, but getting it done right. We believe patience and persistence will pay off in the long run. We are making P&L investments in this initiative but will probably be at least a couple of years before the Asian initiative has a material impact on our top line.

Now I'll turn the call over to Tom Chubb for details of our other three operating groups.

Thanks, Terry. Good afternoon, everyone, and thank you for joining us. From the acquisition on December 21, 2010, to January 29, 2011, Lilly Pulitzer's net sales were $6 million, and the operating income as adjusted was $600,000 for the six week period. It has now been a little more than three months since we closed the purchase of Lilly Pulitzer. We continue to be delighted with both the acquisition and the team, led by Scott Beaumont and Jim Bradbeer. During these months we've been working closely with the Lilly team in King of Prussia, and have been uniformly impressed with their quality, commitment and enthusiasm for the brand. Like Tommy Bahama, Lilly Pulitzer's gotten off to a superb start in 2011, with all channels of distribution -- retail, eCommerce, and wholesale, including signature stores -- performing very well.

Lilly Pulitzer is, by definition, a very social brand and lends itself extremely well to communication with its customers through social media. We believe that much of the success we are experiencing not only in eCommerce but also in the other channels of distribution is being driven by Lilly Pulitzer's extensive and innovative use of Facebook, Twitter and e-mail. The strength of our product offerings is also fueling sales increases. While prints will always be an important part of Lilly Pulitzer, we are also having tremendous success with both solids and patterns. For example, some of our strongest sellers this season have included a number of offerings from our white dress collection and items like the Blossom, a beautiful lace jacquard dress that is offered in several colors from Lilly's perpetually optimistic palette.

With the brand's resort chic positioning, spring is obviously Lilly's most important season. Spring '11 has gotten off to such a strong start that Lilly Pulitzer's first year with Oxford should be a great one.

Fiscal 2010 was a year of significant accomplishment for Ben Sherman, with adjusted operating income of over $500,000, as compared to an adjusted operating loss of $6.6 million last year. The improvement was driven by a mid-single digit comp store sales improvement and a double-digit comp store improvement in gross profit dollars. Outside of our own retail stores, we grew our concession business at House of Fraser in the United Kingdom, opened Selfridges in London, Manchester and Birmingham. And on the wholesale front grew at John Lewis in the UK., Bloomingdales and Nordstrom's in the US and Peek & Cloppenburg in Germany. Our distribution at premium specialty stores continues to grow, as well. We continue to reduce our exposure to moderate department stores in both the UK and the US to brand appropriate levels. The shrinkage in moderate stores is offsetting the growth in the better distribution. While this swapping of sales dollars is restraining the short-term top line growth in Ben Sherman, we are building the premium exclusive wholesale and concession distribution, as well as the direct to consumer business that is the foundation of all great premium global lifestyle brands.

In the fourth quarter of 2010, we had the opportunity to exit two poorly located, underperforming Ben Sherman stores, both in suburban malls in England. The exit from these two leases, together with a relatively modest fixed asset write-off, resulted in a charge of $3.2 million. These stores were not performing financially and due to their suburban mall locations were not enhancing brand equity. For fiscal 2011, retail is performing very well through the first eight weeks, and we expect it to continue to do so through the year. Softness in the UK due to economic conditions is being more than offset by strength in the US and Germany. Our premium wholesale and concession distribution continues to grow while our moderate department store business continues to contract.

The widely reported price inflation in cotton, labor and other apparel inputs, combined with the complexity of Ben Sherman's supply chain, will cause us to experience some meaningful gross margin pressure this year. The impact is reflected in our projections, and addressing this gross margin pressure through changes in our product development and sourcing processes, as well as selected price increases, is a top objective for this year. Net sales for Lanier Clothes were $19.7 million in the fourth quarter, compared to $22.3 million in the fourth 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 fourth quarter was $1.8 million, compared to operating income of $1.7 million in the fourth 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 branded sales representing a greater proportion of Lanier Clothes sales in the fourth quarter of fiscal 2010. Lanier Clothes has delivered outstanding results throughout fiscal 2010, which included an operating margin of 13.8% for the year and a sales mix that is less dependent on private label programs.

The corporate and other operating loss as adjusted decreased to $3.7 million for the fourth quarter from $4.9 million in the fourth quarter of fiscal 2009. The decrease in adjusted operating loss from the fourth quarter of fiscal 2009 was primarily due to improved results in the Oxford Golf business, as well as lower employment costs in the fourth quarter of fiscal 2010.

I'll now hand the call over to Scott Grassmyer to comment on our consolidated financial results.

Thanks, Tom. Hicks gave you our adjusted results for continuing operations. I'd like to share with you our results on a GAAP basis for fiscal 2010 for both continuing and discontinued operations.

For the fourth quarter of fiscal 2010, on a GAAP basis, earnings per diluted share from continuing operations were $0.10, compared to $0.07 in the same period of the prior year. Net earnings per diluted share, which includes discontinued operations and the $2.99 per share gain on the sale of Oxford Apparel, were $3.22, compared to $0.24 in the same period of the prior year. Discontinued operations reflect operations of our former Oxford Apparel Group that were sold on January 3, 2011. Net earnings from discontinued operations were $51.7 million in the fourth quarter of fiscal 2010, which included a $49.5 million gain on the sale. The fourth quarter of fiscal 2009 included earnings from discontinued operations of $2.8 million.

For the full year on a GAAP basis, we reported earnings per diluted share from continuing operations of $0.98, compared to $0.09 in the prior year. Net earnings per diluted share were $4.75 in fiscal 2010, compared to $0.90 in the prior year. At the end of the fourth quarter of fiscal 2010, we had $44.1 million of cash on hand, $145 million of availability under our US revolving credit facility, and $7.5 million in unused availability under our UK revolving credit facility. As of January 29, 2011, we had total debt of $147.1 million, compared to $146.4 million at January 30, 2010. With all debt consisting of our 11.375% senior secured notes which are callable at a premium of half the coupon in July 2012. We believe there may be more favorable financing alternatives available to us that would significantly reduce our interest expense in the future.

Cash flow from operations was $35.7 million in fiscal 2010, compared to $61 million in the prior year. Fiscal 2009 cash flow from operations benefited from significant reductions in inventory levels.

As Hicks mentioned earlier, we're expecting strong results for the upcoming year. For fiscal 2011, which ends on January 28, 2012, we expect net sales of $725 million to $740 million, compared to $603.9 million in fiscal 2010. The year-over-year expected net sales increase includes the addition of Lilly Pulitzer, which is expected to contribute approximately $80 million of net sales in fiscal 2011, compared to $6 million of net sales in fiscal 2010. We expect Tommy Bahama's net sales to increase approximately 10%. And expect mid single digit sales increases at Ben Sherman and low single digit sales increases at Lanier Clothes.

For fiscal 2011, earnings per diluted share from continuing operations before the impact of purchase accounting are expected to be between $1.95 and $2.05. Fiscal 2011 will be impacted by purchase accounting charges related to the purchase of Lilly Pulitzer, including a charge to cost of goods sold related to the write-up of inventory and anticipated changes in the fair value of contingent consideration associated with the earn-out agreement with the sellers. These charges are currently estimated to be $3.4 million in fiscal 2011, of which approximately $1.6 million is expected to be incurred in the first quarter. With the addition of Lilly Pulitzer, and the Oxford Apparel divestiture, the seasonality of both sales and earnings will be more pronounced. We anticipate that the first quarter will continue to be our largest quarter, both in terms of sales and operating income. And we'll further benefit from the strength of Lilly Pulitzer's spring selling season. Conversely, with retail demand for our brands being weakest in the third quarter, we expect that our lowest operating margins will occur in the third quarter.

Our ability to deal with increased product cost has significantly improved with the shift from private label to lifestyle brand. We expect some cost increases in fiscal 2011, particularly in the second half of the year, and more pronounced at Ben Sherman and Lanier Clothes. That said, the shift in our portfolio to lifestyle brands has mitigated much of the impact of consolidated gross margins. We expect a slight uptick in consolidated gross margins and consolidated operating margins in fiscal 2011. In fiscal 2010, capital expenditures were $13.3 million. Capital expenditures for fiscal 2011 are expected to be approximately $30 million as we increase our pace of retail store openings and continue to invest in information technology and distribution center enhancements. We expect net sales in the first quarter of fiscal 2011 to be in the range of $200 million to $210 million. Compared to net sales of $163.6 million in the first quarter of fiscal 2010. Earnings per diluted share from continuing operations before the impact of purchase accounting adjustments are expected to be between $0.95 and $1.05 in the first quarter of fiscal 2011 compared to adjusted earnings per diluted share from continuing operations of $0.54 in the first quarter of fiscal 2010.

Thanks for your attention and now I'll turn the call back over to Hicks Lanier for some closing comments.

Thank you, Scott. We believe we have terrific brands, growth prospects in every business, a strong balance sheet, and excellent liquidity. We are confident that the transactions we completed this past year leave us in the best position in our Company's history, and are very pleased with the continued expectation we have for growth and profitability. The first weeks of fiscal 2011 have been very strong, and have set the stage for a very promising year. It remains our mission to ensure that we are returning the value that we create to our shareholders. We announced that our Board of Directors has declared a cash dividend of $0.13 per share payable on April 29, 2011, to shareholders of record at the close of business April 15, 2011. This represents an 18% increase from our dividend paid in the fourth quarter of fiscal 2010. We are very proud to have paid dividends every quarter since we became publicly owned in 1960.

Thank you for your time this afternoon and your continued support and interest. Justin, we're ready for questions now.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). And our first question comes from Edward Yruma with KeyBanc Capital Markets.

Hi. Thanks very much for taking my question and congratulations on a great quarter. Quick question about Lilly Pulitzer. I think you had mentioned that it was about $80 million or will be $80 million additive to top line. I know that you have some very specific earn-out targets. I don't know that you made this adjustment for purchase accounting. So I wanted to try and understand. I think in the earn-out you said that you had a target PBT of $10.6 million for this year. Is that now higher?

The target doesn't move at all based on the sales going up. Obviously, the chances of them achieving the target are better with the sales being larger than we had projected at the time that we announced the deal. But the targets are fixed.

Got you. But this change actually then validates that that's a likely target for the year then, is that a fair way to read it?

We would expect to achieve it.

Yes.

Got you. And your comments about Tommy Bahama being up for the year, I know that you had some obviously very constructive comments on the trends quarter to date. How should we think about the comp trend for the remainder of the year?

Edward, we like what we see in our business. The first eight weeks, like we said, have been very, very strong. Stronger than we anticipated. We've got some plans in place for the back half of the year that we think that will continue to fuel that growth. So we're feeling optimistic as we head into the back half of the year.

Got you. And your comments about gross margin, I know that you stated that your shift to a more rich margin given a higher focus on direct will allow you to show gross margin expansion. How should we think about your ability to actually the take up pricing on units, though?

In Tommy Bahama, we have been dealing with this. We have experienced price increases on some of the products that we do. But we've been able to merchandise our line where we take a look at key items, where we need to be, have a keen price point and make sure that we can keep those. But we have raised prices on fashion and we think that it's not so severe that our customers won't understand that and it be accepted. So we feel that it's not going to affect our gross margins.

Got you. And maybe one final question about the seasonality of the business. I think you indicated again that 3Q is going to be trough from the operating margin perspective because of the seasonality. Is the historic pattern going to hold or what type of operating margin or sequential operating margin change should we expect heading into third quarter? Thank you.

I think the historical pattern would give you a pretty good indication on that from our segment reporting. So we don't expect that to change much. We've got a different segment in there now. We've taken Oxford Apparel out and put Lilly in, and Lilly is going to have the same profile as Tommy Bahama in the third quarter, whereas the third quarter was a strong one for Oxford Apparel Group.

Got you. Thanks very much.

The next question comes from Robin Murchison with SunTrust Robinson Humphrey.

Thanks. Congratulations. Good afternoon. I wanted to see if you could put any color around what you might be seeing. I understand that at wholesale you guys are seeing a good first eight weeks, but is there any other color, what things look like out there from your perspective? You've got some strong brands but I'm just wondering if there's any other color you can put around what you're seeing with your partners out there.

I think one thing you can -- even though it's just eight weeks into the year, we can certainly see the wholesale business out well into the fall season and almost to the beginning of the holiday resort season. So we feel pretty confident about that. And Tommy particularly, with the size of the retail component, we've gotten pretty good at projecting what we think our retail sales are going to be. So we don't have that big a margin for error, we don't think.

And Robin, this is Terry. Our business, as I said, has been strong the first eight weeks and there's a lot of reasons for that. But the traffic that we have coming into our stores has been increased by quite a bit, which should hold as we go into the fall season. And as Hicks said, the whole wholesale bookings that we have into fall for Tommy Bahama have been strong.

Terry, is that in units or dollars or both?

Both.

Okay. Everybody's probably glad to get out of winter. I can't think of a better brand to bring spring on. Okay. What about key markets, California, Florida, Arizona? I guess that's participating in the strength as well, notwithstanding this double dip we've had in housing.

It's generally over most areas. There's still some areas that aren't as robust as we would like. Southern California, and I'm not so sure it's just -- the weather has been, I hate to be a weather man but it's been very difficult in Southern California. But we've seen pretty much strength to get the numbers that we're seeing, it has to be widespread and we're seeing it pretty much across all regions.

Okay. And then maybe for Scott, looks like absent Lilly Pulitzer, that inventory was up about 23%. Can you comment on that and can you comment on the currency of it, of inventory?

The inventory is clean. The biggest -- obviously, the Lilly inventory is a good chunk of that increase but the rest is mainly in Tommy Bahama. And it's mainly through both the new stores that we added last year, and the increases we're anticipating this next year. So we feel good about our inventory levels.

I'm very happy to have a little extra inventory right now to continue to fuel our business. We've been in somewhat of a chase mode the first eight weeks, trying to catch up. I think we're in a great inventory position with our brand. Our inventory's never been more current and clean and it's in the right places which gives us more confidence that going into the back half the trend will continue.

Wish we had more.

And seven to 10 new Tommy stores this year?

That's what we're targeting, Robin, and it looks like we've got a lot of those already inked. There's still a few left to ink but it's still a good number, seven to 10.

And in terms of the compounds of the restaurants, don't you have two different formats now? Maybe I'll put it this way. The Grill, what are you learning with the Tommy Bahama Grill versus the other version?

They've both been good. There's not that much difference. We do have a tropical cafe and an island grill and then we opened a new version, yet a third one in Laguna Beach which all are performing well. We've seen not only -- we don't talk about it so much but the increases that we're seeing in our retail business has also transferred over into our restaurants. Our restaurant business is actually comping up significantly in the first eight weeks, as well. I don't think there's that much difference in the concept. They're all priced -- there's not a dramatic difference in price from one to the other. We think the quality of food and service is consistent across all of them. We're happy with all three. And it gives us three formats to continue to look at how and when we expand that so it's a good learning for us.

And then just a couple more, if I may. Scott, back to you for a second. I think you said $30 million in CapEx this year?

Yes.

Can you just break that down, since it's a pretty big jump?

Yes. There's probably between new stores and remodels including we're remodeling our Palm Desert restaurant and other store remodels, we're probably about close to $20 million of that's going to be centered around stores. We also have some IT and distribution center initiatives, where with the growth in eCommerce we're going to be putting some investments in our distribution centers to handle the increased eCommerce sales. So probably about $20 million related to stores and the rest due to IT and distribution center and other more routine initiatives.

If I could add to that, Robin, we've gone the last few years well below our normal rate of capital expenditures with very few store openings and not much in the way of refurbishing. And that also goes to IT expenditures and distribution enhancements. So it's a catch-up year but I think this level is one you can expect to continue into the future, even though we're catching up a lot. We just think that with the opportunities we have and with the international initiative, we're going to be spending money. But we're happy to have that opportunity and we're particularly happy to have the balance sheet to do it. It's been a while since we've had the kind of cash on our balance sheet that we do and we're pretty excited about it. Obviously, we've got the high yield bonds out there that are priced pretty dearly for today's marketplace. But the good news is we've got an end in sight on that in that they are callable in about 14 or 15 months. And when we get to that point, well before that point, we will address it. But my guess is we will not need anything like that quantity in a fixed rate instrument because we haven't used our line of credit at all for the recent past. So we'll be able to use that vehicle to finance part of our business.

That will be great.

So we potentially have a pretty nice bump to EPS from interest cost reductions when we get out 15 months.

And then not to leave Tom Chubb off, can you give us any additional color on Ben Sherman?

He gave you his best shot.

We tried to lay it all out pretty clearly. But I think working through the pieces of the business on the wholesale front, we're growing in all the places we want to grow. We're contracting in places that -- I'm not going to say we ever really want to contract, but in some places that ultimately for the long term are better for us to have smaller exposure and that's the moderate department stores. The retail performed quite well in '10, has gotten off to a great start, comparable to Tommy Bahama's start in '11. We've got a good plan for '11 and we feel very good about the direction that retail is headed. The key issue in Ben Sherman that we're less than satisfied with is the gross margin situation. We face the same types of market conditions that everybody else in the industry faced and I think they ended up hurting Ben Sherman a little bit worse than they did a lot of people, including the other businesses that are part of Oxford. So we're pretty aggressively working to remedy that situation. We've already taken some important steps towards correcting that and we'll be continuing to work on it this year. And I think we can regain the lost gross margin points. But for this year, it's definitely going to suppress the operating margin a bit.

Thank you, guys, and good luck.

(Operator Instructions). And next question will come from Susan Sansbury with Miller Tabak.

Yes, thanks very much. A couple of questions. You provided some rather specific guidance for sales by division. Are you in a position to give us any color about margin by division?

I don't think we would at this point, this early in the year. I think the historical patterns are there. And I think we've said in our opening comments that we expect increased performance across the board in every entity, and that would be top line and bottom line.

Okay. What about eCommerce? Any way to describe how big it is currently, what you expect for 2011 and beyond?

It has defied our ability to forecast on the upside for the last two or three years and we just hope it continues that way. But it has been dramatic, particularly in Tommy Bahama and Lilly. And we're just afraid to look under the covers, it's so good.

Is it 5% or 10% of their volume? 2%? Do you want it to be 10% of volume?

I would say in those two entities, it is in that neighborhood.

5% or 10%?

At Lilly it's over 10%. At Tommy last year it was 6% but it's growing at a dramatic rate, so it will be a much bigger percentage, be a bigger percentage in 2011.

I assume it's profitable but you did mention that you had some distribution initiatives in this CapEx.

Yes, it's probably the most profitable piece of business we have. But it does, it requires investments because you're dealing with a lot of one and two garment packages, so you're dealing with a number of cartons running through a DC. Certainly is going to take some infrastructure as we grow the next level. So it will require some periodic investments but it is probably the most profitable piece of business we have.

The financial model, both from a P&L perspective as well as the return on the required investment is -- it's, as Scott said, as good as it gets.

But can you refresh -- who is doing fulfillment? Are you doing fulfillment or do you have an independent party?

Yes. We do it ourselves.

I'm sorry, yes?

Yes, we are doing it ourselves.

Okay. The good will amortization expense, in out years, frankly, I admit to not being up-to-date on current GAAP accounting for this.

We've got a few things in the purchase accounting. One, we have a customer list, it's getting amortized and up in amortization which will be about less than $500,000 next year. But of the things that we called out in purchase accounting, we have a step-up to inventory which is more of you step up your initially purchased inventory to what they call fair value which is really starting with selling price and you knock it down a little bit. But it results in your first turn of inventory going through at a very, very low gross margin. Some of that flushed out in the fourth quarter at Lilly. The rest will flush out in the first quarter. It will be about $1 million. And then we also have the earn-out agreement which is also going in a fair value valuation. It gets pretty complex but what happens is each quarter we'll have to take some hits. As the time gets closer to earn-out payment we take some hits. There is some earn-out value put on the books but it's at a rate discounted. It's discounted at a very high discount rate and we amortize it up to full value over time. So we're projecting hits for that of about $2.4 million in 2011. So we've got some pretty big purchase accounting adjustments that will run through. And those amounts get reassessed during the first year under the purchase accounting rules. So those amounts could move on us some but those are our best estimates at this time.

Just to make sure I understand, this $2.4 million is part of the $3.4 million

Yes.

Or is this incremental? Oh, it's part of the $2.4 million.

Yes.

What happens in out years? Your amortization of expenses for Tommy Bahama, for example.

It will come down some but it depends on the -- the likelihood in our discount rates will be reassessed so they most likely will come down somewhat in the out years. But it's hard to tell right now what that assessment will be because it has to get revisited towards the first year period.

And then, finally, could you explain to me why increased product costs, particularly for fabric, when I think of Lilly Pulitzer, I think of cotton, is not going to be an issue for you? Have you made some opportunistic inventory purchases? Can you just explain to me? Can you give me an idea of what you think product costs are going to increase for Tommy Bahama and Lilly Pulitzer in '11, why they would be -- it sounds like they're de minimis? Anyway, let's start there.

Susan, this is Terry. As I mentioned, when we saw these prices creeping up, we remerchandised our line to make sure that prices increased on some product, fashion products, where there's no real comparison, and made sure that we had the right balance of basic product to fashion product. And on fashion product, where we get cost increases, we can pass that along. It's not about necessarily making advantageous purchases of raw materials and stockpiling it. We don't do that. It's just being good t at merchandising our line, knowing our business and making sure we know what prices we can get with consumers and where the consumers will grant us a bit of leeway and where they won't. So therefore, we end up with a well-merchandised collection where we don't think it's going to be -- we showed our fall collection to our wholesale customers and it doesn't appear to be an issue. Our bookings are up year on year, so just not an issue. It's just a merchandising job. And, plus, we've done some on the supply side. On my trip I wasn't just working on retail locations in Hong Kong. I met with our suppliers and talking about it to our partner there, our partners, and talking our business. So we're addressing it on both sides. On the supply side we're not just paying what everybody asks, we're doing a better lot negotiating. But in merchandising the line we can pass that on to our customers appropriately.

And I think those same comments that Terry made as to how Tommy Bahama managed it would apply to Lilly Pulitzer, and, thus, they have not been severely impacted. Obviously, some of those same things that Terry talked about are the types of things that we're working on in Ben Sherman who was impacted more seriously by the market conditions.

But I think the real point here, Susan, is that we've worked pretty hard to get out of the commodity price business. And that is at the nexus of our strategic repositioning, to try to get brands that are strong enough so that you have some pricing flexibility. And in the case of both Lilly and Tommy Bahama, we have had selected price increases. And where we have, as Terry mentioned, is generally on fashion product, which is differentiated and the consumer's not balking on it to date. But I think it's real important that you understand that that was the old Oxford that was in the commodity price business .

(Operator Instructions). Next question will come from James Ragan with Crowell, Weedon.

Yes, hello, thank you. Congratulations. Sounds like the year is also off to a very good start. I had a question first about the comment made about the Tommy Bahama women's business, about 25% of revenue on a direct to consumer side. Can you just talk about how that's changed from, say, a year or two years ago, in terms of percentage?

It's been growing to get to the 25%. Going back a year ago it was in the low 20s and then the high teens. It was a significant strategic initiative that we had. And the good news about it, James, is that it's growing but not in our own retail stores in eCommerce but not at the expense of our men's business. With the size of the business we wanted to see the women's business grow but we also wanted to increase our men's business at the same time and that's how we're achieving the results that we are achieving right now. So it's been terrific and we'll let it continue to grow as long as we can continue to grow our men's business, and it's incremental and not at the expense of men's. We're very happy with it. And it's good for the brand when we can spread it over not being just a men's brand but a relative important piece of the business. I think that's one of the other reasons that our traffic and conversion is up the first part of this year because women that are coming into the store are finding products that they're responding to and buying them. So we couldn't be happier about it.

Great. And can you talk a little bit about comparing the Tommy Bahama women's line to Lilly Pulitzer? Is there a bit of overlap on some of the product? And then, also, is it logical or would you consider carrying some of the Lilly product in the Tommy Bahama stores?

The answer to the second question is they're both great brands and I think housed in their appropriate environment. We wouldn't carry Lilly Pulitzer in the Tommy and vice versa.

I would agree with that. And as to the first question, Lilly Pulitzer's positioning is resort chic. Tommy Bahama's positioning is all about relaxed. There's definitely some adjacency there. But we really think that we're selling to a bit of a different customer. The price points are a bit different. And frankly, the women's market is a huge market, and together the two of them are a tiny, tiny little sliver of that market. So I think there's plenty of room for both of them to continue to grow.

Okay. Great. And then just switching over to Lilly, clearly off to a good start based on your guidance, a little higher than what you had talked about even three months ago on the acquisition. The spring line was pretty much all taken care of as you acquired the Company, but can you just talk about some of the maybe help that you're -- has Tommy Bahama been able to help the sales process so far this year or was that pretty much all underway?

We'd love to take a little credit for their stellar results in the first quarter but I don't think we can do that. As we talked about at the time we announced, part of our decision to buy the business was not just about the business, but about the management team there. We kept the entire management team including the two guys that we bought the business from. They're doing a great job and they're going to continue to do a great job and they're going to run the business. That said, I do think that they would tell you that they're enjoying being part of a larger company that has a group of brands. We had the two guys, Scott Beaumont and Jim Bradbeer down in Atlanta yesterday. They were here with Hicks and Scott and Anne and myself and Terry Pillow from Tommy Bahama. And I think they've enjoyed having the access to some people that understand the business. As Scott and Brad say, through their whole 17 year history, up until we bought them, they had each other to confer with. Now they can pick up the phone and call Terry and talk things over. They can talk to Hicks or me or anybody else in the Company. And I think that's benefiting them quite a bit, at a more operational level with some back office things. Clearly, we're working on helping them out and trying to look for opportunities to leverage, and that's all going well also.

Great. And then my final question just has to do with the international expansion of Tommy Bahama. This will clearly be a big year as you put that together. And you mentioned a little bit about the retail store, perhaps the first one being in Hong Kong. So, as you're sitting here today, is the international expansion looking like it's going to be more of an owned retail expansion or would you look to go into partners or some type of wholesale business?

James, we're looking at both. We're prepared. We know how to open retail stores. We're prepared to do that. On my trip I did a little bit of both, trying to firm up locations for our first store in Hong Kong. And we also talked to some people that had contacted us that are very interested in our brand in those markets. So it was good to hear that we're not the only one that feels that we have a big opportunity in that market. These are -- the people that have reached out to us are very qualified and we'll listen. But the one good news is that our brand in that market has tremendous opportunity. I've been to that market many, many times, but not in about less than a year, but I've been there. The market changes very, very quickly. And it's changed in our favor. Our brand in that market is going to have a tremendous opportunity. So we'll look at both right now as we finalize our plans in that market. And as we've talked about, it's a three-pronged approach to international, and Asia is clearly -- China is a big part of that, Tokyo and then phase three that we plan to take this to Europe. So we have big plans for the brand.

Great. Thank you very much.

And we'll go back to Susan Sansbury with Miller Tabak.

Hi, thanks. Can you provide more meat on the increase in wholesale backlogs for Tommy Bahama and Lilly Pulitzer? Can you describe the size of the elephant or can you tell me how much they were up?

Let's put it this way. We are either on plan from which our guidance came or above it at this time.

Okay. And going back to the price increases since you've already implemented, and I assume are on the floor for Lilly and Tommy, any description of the magnitude? High single digits? Mid single digits?

Susan, if it is, it's going in the right direction because our business is actually good. So any price increases we've taken to date, obviously the customer is responding to the fashion and accepting it and paying the price. Otherwise our business wouldn't be as good. So we're happy that whatever we've done thus far is being accepted quite well. ECommerce and in our own retail store.

We've had a long period of having nobody in the stores so I'm sure you're thrilled. Thanks ever so much and good luck.

At this time, there are no further questions. I'll now turn the conference back over to you.

As you can tell, we're pretty enthusiastic about the way our year has started and look forward to continued progress and report our next call. Thanks for your interest.

And that does conclude today's conference call. Thank you for your participation today.