Oxford Industries Inc (OXM) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, Thank you for standing by. Welcome to today's Oxford Industries Incorporated third quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session and instructions will be provided at that time. As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Ms. Anne Shoemaker, Treasurer. Please go ahead.

Thank you, Miranda, 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 our operations or our financial condition to differ are discussed in the documents filed with us --by us with the SEC. We undertake no duty to update any forward-looking statement.

Also during this call 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 www.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; and Terry Pillow, CEO 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 today. We are pleased with the results that we delivered for the third quarter. Our 22% sales increase was driven by the inclusion of Lilly Pulitzer and growth in Tommy Bahama. We continue to develop a more meaningful fall seasonal business particularly in Tommy Bahama with positive momentum in all channels of distribution. Our adjusted EPS of $0.16 compares very favorably with last year's results of $0.07 per share. We have also been delighted with the results we are achieving during the early part of the very important holiday selling season. Our retail stores as well as our e-commerce website are performing very well; and as a result, we are increasing our adjusted EPS estimate for the year to a range of $2.30 to $2.35. I'll return with some closing comments, but I'd now like to turn the call over to Terry Pillow to discuss Tommy Bahama's results for the quarter. Terry?

Thank you, Hicks. Tommy Bahama reported increases in both sales and operating income. The 14% increase in net sales for Tommy Bahama was driven by high, single-digit comp increases, the operation of eight additional retail stores, strength in our E-comm business, and higher wholesale sales. Our denim mailer also helped fuel sales at the end of September and into October. We continue to reinforce the importance of denim and denim-related products in both men's and women's. At the end of third quarter, Tommy Bahama operated 94 retail stores, and we've added three more stores in the fourth quarter.

These higher sales, plus a modest increase in gross margin resulted in a 34% increase in operating income to $4.6 million. These increases were partially offset by increased SG&A associated with the cost of operating additional retail stores. We certainly weren't immune to the cost pressures in the third quarter. We are very pleased with how we navigated the situation. Our gross margins increased slightly, the proportion of direct consumer business grew, and we made selective price increases on the fashion -- on fashion items, which together more than offset cost increases. We are optimistic about the trends we are seeing so far this holiday season. We have effectively marketed to our customers through e-mail, holiday mailers, a holiday gift guide, and loyalty cards with excellent results.

We've seen solid selling in all men's categories. Items featured in our marketing like the island softwear half-zip sweatshirt and our women's sun worn cotton sweaters have sold particularly well. We believe our marketing efforts have played a big part in driving traffic up in our stores. Looking forward into 2012, our spring bookings are strong. And we believe that we will hit our target of opening 7 to 10 new stores in the United States. Now, I will turn the call over to Tom Chubb to discuss the results for the rest of our operating groups.

Thanks, Terry. Good afternoon, everyone, and thank you for joining us. I'll start with Lilly Pulitzer. While the third quarter remains Lilly Pulitzer's smallest quarter, we were pleased to see Lilly post a 17% sales increase over last year, to $16.7 million. Due to the third quarter being a low sales quarter, Lilly reported an operating loss of $400,000 impacted by a $600,000 purchase accounting charge. We believe this business has a long run rate of sustained and profitable growth ahead. To date, Resort is performing well in the fourth quarter and our spring bookings are very strong. E-commerce momentum is continuing and it looks like E-comm will represent almost 15% of Lilly's annual sales.

We also continue to see strong performances in all other channels of distribution including retail, department stores, specialty stores, and signature stores. For the year, we now expect Lilly's total sales to approach $90 million with an adjusted operating margin of approximately 18%. The growing strength of the Lilly brand is creating some fantastic opportunities to reinforce the brand image in some very high profile venues. Early in the fourth quarter, a Lilly Pulitzer at the Breakers store opened in the Breakers in Palm Beach. It would be hard to find a location that better epitomizes the essence of the Lilly brand than the Breakers. Also this fall, the expanded Lilly stop and shop at the 59th Street Bloomingdale's received a great deal of fanfare. We are also excited to begin rolling out new stores in 2012. Our first new store will be in the South Park Mall in Charlotte, North Carolina. We love this mall and the location within the mall for Lilly. At 2500 square feet, it also represents the footprint we will be using going forward. We obviously couldn't be more pleased with the Lilly brand, its performance, and its people.

Ben Sherman swung back to profitability in the third quarter with net sales of $25.2 million and an operating income of $300,000. As anticipated, gross margins declined for the third quarter impacted by increased product costs. Due to actions taken on the supply-chain front, we believe gross margins will begin to improve in the second quarter of 2012. The direct to consumer business is very important to the future success of Ben Sherman. Despite tough conditions, Ben Sherman retail stores both in the US and across the pond had comp increases and a significant improvement in average unit retail price.

We added a couple of new high profile, smaller stores in the London area and a licensed store in Toronto that are showcasing our Plectrum product. At the beginning of the fourth quarter, we launched Ben Sherman's new E-commerce site in the UK and Europe. It has gotten off to a solid start and I would encourage you to take a look. The new site will roll out in the US in the first half of 2012. Clearly, there is still work to be done but we remain encouraged by the strength of the product and the momentum in our direct consumer business.

While Lanier Clothes reported a 7% sales increase, operating income, as expected, was impacted by gross margin pressures. Net sales were $33.1 million in the third quarter of fiscal 2011 compared to $30.8 million reported in the prior year with operating income of $4.3 million compared to $5.3 million in the third quarter of fiscal 2010. Lanier continues to execute its business well with a very healthy operating margin of 13%. Corporate and other reported an operating loss of $2.1 million for the third quarter of fiscal 2011 compared to an operating loss of $4 million in the third quarter of fiscal 2010. The improved results were primarily due to lower incentive and stock compensation costs and income from transition service fees earned, which were partially offset by the net impact of LIFO accounting. The lower incentive compensation cost was due to a shift in earnings distribution among quarters as a result of the acquisition of Lilly Pulitzer and the disposal of the Oxford apparel group. For the year, total incentive compensation is expected to be relatively flat with last year. I'll now hand the call over to Scott Grassmyer.

Thank you, Tom. I will now walk through our consolidated results. Earnings from continuing operations on an adjusted basis increased 129% to $0.16 per share, compared to $0.07 per share last year. The adjusted earnings exclude the impact of the repurchase of a portion of our senior secured notes, purchase accounting charges, and LIFO accounting adjustments. I want to remind everyone that the operating results for Lilly Pulitzer, which was acquired in December 2010, are not included in our prior year results. As anticipated, consolidated gross margins for the third quarter at 52.1% were slightly lower compared to the third quarter of fiscal 2010. The decrease was primarily due to the decline in gross margins at Ben Sherman and Lanier Clothes as well as the impact of LIFO accounting. It is important to note the gross margins of both Tommy Bahama and Lilly Pulitzer were modestly higher.

We continue to gain operating leverage on our higher sales base, with SG&A for the third quarter of 49.8% of net sales compared to 50.8% of net sales in the third quarter of fiscal 2010. The increase in total SG&A from $71 million to $84.9 million was primarily due to expenses associated with the inclusion of the Lilly Pulitzer business and expenses associated with operating additional Tommy Bahama retail stores. While the third quarter remains our smallest, we are very pleased with the 24% increase in adjusted operating income for the quarter to $7.6 million. In the third quarter, we were able to repurchase in a privately negotiated transaction, another $5 million in principal amount of our 11.375% senior secured notes due 2015 bringing our year-to-date repurchases to $45 million. We now have $105 million of bonds outstanding, which are callable at half coupon premium in July of 2012.

Interest expense for the third quarter of fiscal 2011 decreased to $3.7 million, compared to $5.1 million in the third quarter of fiscal 2010. The 27% reduction in interest expense was primarily due to the repurchase of our bonds. Our liquidity remains very strong. In addition to reducing our long-term debt, at the end of the quarter we had only $1.6 million of borrowings outstanding under our $175 million US revolving credit facility. Total inventories on a LIFO basis at the close of the third quarter of fiscal 2011 were $91 million, compared to $63.5 million at the close of the third quarter of fiscal 2010. As you will recall, we carry a significant LIFO reserve. For reference, on a FIFO basis, total inventories increased by 29.5% to $131.4 million from $101.4 million.

We're comfortable with our inventory levels, which increased to support anticipated sales growth in all operating groups and new Tommy Bahama stores, and also include the addition of Lilly Pulitzer. A small proportion of the increase was due to higher product cost. We believe our capital expenditures for the year will be slightly lower than our earlier projections primarily due to the timing of new store rollouts. We now anticipate CapEx in the range of $30 million to $33 million. The information technology investments and distribution center enhancements we made earlier in the year have streamlined holiday processing and customer service capabilities.

The holiday season has gotten off to a strong start. As a result, we have updated our guidance for fiscal 2011 and now expect adjusted earnings from continuing operations per diluted share in a range of $2.30 to $2.35. And net sales of $745 million to $755 million. This compares to our prior guidance of $2.20 to $2.30 in adjusted EPS, and net sales of $735 million to $750 million. This guidance reflects an expected effective tax rate for the fourth quarter of fiscal 2011 of 36%. For the fourth quarter, we anticipate sales in the range from $185 million to $195 million and adjusted earnings from continuing operations per diluted share of $0.50 to $0.55.

In the fourth quarter of fiscal 2010, sales were $158 million and adjusted EPS from continuing operations was $0.32. Our Board of Directors has approved a cash dividend of $0.13 per share. We have paid dividends every quarter since we became publicly owned in 1960. Thanks for your attention, and now I'll turn the call over to Hicks Lanier for some closing comments.

Thank you, Scott, and thank you for your attention today. Miranda, we are ready to take questions now if there are any.

Thank you. (Operator Instructions) And we'll pause for just one moment. We'll go first to Robin Murchison with SunTrust.

Hi, and good afternoon. And congratulations.

Thank you.

Just a few questions here. First of all I wanted to see if you could, let me start with Ben Sherman. We hear a lot about the UK and I wondered if you could comment on Ben Sherman in the UK. And also there was a divergence of performance I think last quarter, your US domestic retail stores compared nicely and the UK was a little bit weak.

Tom, you want to take that?

I will take that. Robin, the climate -- the sort of selling conditions in the market in the UK are obviously very tough. They've got these austerity programs going on over there, consumer sentiment is a little gloomy. On top of that, during this fall they have had unbelievably warm weather. But in despite of all that, Ben Sherman has managed to comp up over there. It's certainly not as strong as some of the other markets, but they have managed to get some comp store increases. Some of their other sort of KPI's like conversion rates and average unit retail and those types of metrics are also improving. And we think that those are the results of what Pam and the team are doing over there to try to build a stronger retail organization, because we're certainly not getting a lot of help from the sort of the market over there.

That's terrific. Tom, where are you in the distribution channel repositioning effort?

That continues. Devlins is still our largest customer in the UK, but it is not nearly as big a percent of the total business as it once was; and we continue to add some better customers at the top end and exit some customers who are maybe great retailers, but no longer really aligned with the direction that the brand is headed. As an example of a better customer that we added, this fall we've launched in three Selfridges stores. We are in the London door in a very small way, and then we've got slightly bigger presence in the Selfridges stores in Birmingham and Manchester.

But what about domestically?

In the US, our biggest customer is Nordstrom. They have been an important customer for us for a number of years. We are also doing well at Bloomingdale's, Lord and Taylor, and we do business at Macy's. Among the sort of the majors, that's the line up at this point.

So on Lilly, just obviously phenomenal performance. I think part of -- two areas if you could comment on, I think you've got a big initiative in the spring, a big white pant initiative; isn't that new in incremental? And then also, how are you thinking about Lilly in terms of second half? Maybe not so much second half this year, but second half opportunity to maybe build out some of the classification?

Okay, well, I'll talk about the first question first, the white pant question; and then the second one about second half opportunities for Lilly. And there is a connection between the two actually; but yes, for spring of 2012, Lilly has sort of from the ground up built a white pant program that consists of a white denim pant sort of a white jean that comes in two different fits, and then there will be a white twill pant that comes in two different fits. And this is in an effort to build more of a sort of an ongoing in-stock type of business, which Lilly is historically not had a whole lot of a white pant program as a natural for Lilly. And they've, as I said, sort of built this pant from the ground up. We are very meticulous in developing the fits and the fabrics and the construction and everything. The sell in on the white pant program has been extremely good. We've been very happy with the sell in, and now as soon as that comes out in the spring it will have a chance to prove itself on the retail floor by selling through. And we are optimistic that it will.

Moving on to the second question about sort of second half opportunities for Lilly. As you know, Robin, it is very much sort of a first half resort, spring-summer brand and I think it's always going to be stronger in the first half than the second half; but that said, we were very pleased with the selling results for fall. As we mentioned in the call script, third quarter sales were up 17% over what they were last year, of course, it wasn't part of Oxford at the time. But they were up 17%. We saw some good selling on some items that have given us some ideas for next fall. And one of the areas that we think we have an opportunity is in doing a bit more sportswear in the fall.

For next year, I think you'll see some printed tops and those white pants will become colored pants for fall. We did some colored denim this fall, which performed very, very well for Lilly. And so that's one of the opportunities. We've also seen some very good sort of second half opportunities in sweaters and sweater dresses. A sweater dress I think is a natural thing for Lilly.

We've had some good selling this year in sweater dresses and the team at Lilly believe that's a very good opportunity for next year. And then we've also done quite well with some of what I would call more giftable, smaller type items. We have this Murphy scarf, which has been a perennial strength for Lilly for several years now. But some of the things like the agendas, which are very popular with the college age girls. Just as an example, last week I believe that our top-selling item was a tote bag that is sort of a Lilly print tote bag and I believe it retails at $88, a very good gift sort of price point. So like I said, Lilly's always going to be more of a first half brand, but we do believe there are opportunities to build in the second half. And some of that is coming to fruition this year, but we will try to build on those successes in subsequent years.

Well, it looks terrific. And if I could just squeeze one in for Terry, please, on the women's side. Terry, you indicated that the solid sell throughs in all the men's categories, I just wanted to get your commentary on the women's side of the business. I love the way it continues to evolve. But as you know, if you look out at the rest of the world, the women's business is really pretty iffy, particularly for the adult Missy customer. Could you just comment on what you guys are seeing since you did not call out women's as all categories performing well?

Absolutely, Robin. I'd be happy to. We continue -- women's is still a very important initiative for us in Q3. I did call out the one item, the sun drenched sweater that we have. And there are great items. And the business, the consistency of that business in Q3 and going into Q4 is consistent where it has been all year, it's still contributing double-digit to the total of our business, and we are still very, very bullish on achieving our target. We are not going to achieve it next year, getting the business to 50% women's but we're clearly in the 30% range on women's and very happy with the growth that we are getting in it. I might have been remiss in not mentioning, I definitely didn't want to elude that it was not performing well, because it is. We are very happy with the way our total business and the consistency of how our brand has been performing all year, and Q3 is even more testimony to that. And into Q4, as we said, we like what we see in Q4 in women's, it's clearly a contributor to that.

Much appreciated, thank you, guys, good luck.

Thank you, Robin.

We'll go next to Eric Beder with Brean Murray.

Good afternoon, congratulations.

Thank you.

Could you talk a little bit about the strength of Lilly? When you plan on opening your first store in Charlotte, and how are the newer stores that you converted -- excuse me, the prior stores that were larger, that you put to the ideal size; how are they doing now as you kind of go through the first year here?

Well, that's a great question. The Lilly store in Charlotte will open during the first half of 2012. Obviously, we are anxious to get it open as soon as we can, but it will definitely be in the first half. As to the size of the stores, we had one store in particular that we mentioned a couple of times and that is in Ardmore, Pennsylvania. And we had the opportunity to move literally a couple of hundred yards away from the old store, the old store was about 4800 square feet We moved into a new space, but like I said very, very close by. It is about 2200 square feet, and we are comping up this year in less than half the space. So that gave us almost as perfect, a controlled experiment as you could possibly have. We had a strong hunch and the team at Lilly had a strong hunch that something around 2400 to 2500 square feet was going to be a much better size for the brand, and certainly the Ardmore experiment has sort of proved that out.

Great. And can we update on the status for the New York City and Chicago branches for Tommy? I see they are closing the space with a prior store in New York City. We are they in the Chicago location?

I'm glad you saw that, Eric. I was very happy to see that going out of business, that they are clearing out of that space. It's been a while that we have been waiting so I will take New York first. We are taking over the space January 1st. We'll do some demolition, but we are still on target opening that store on October 1st, next year. You'll remember that is a big one. It's 6000 square foot store and a restaurant and two bars, so that is an aggressive project.

There has been a little bit of delay in Chicago, that is a new development in the Ritz-Carlton space, and we were just notified that there could be -- it's not specific yet, but there could be some slight delay. But we're still planning on getting that store open before the New York store. Hopefully July, August time period. We're very excited. Both those stores are a new format and their same format. We call it our urban resort format, which we're very excited about and we can't wait to unveil that. But two big ones for us.

Great. And just an accounting question on how much should we budget in now for the $5 million in terms of interest savings going forward?

Well, the $5 million, it will come out at 12% annually. But in July of 2012, we have the opportunity to take the rest of the bonds out and we have $105 million outstanding. And we'll be certainly in the early part of next year being really -- start focusing on what type of financing we'll put into place to take those bonds out. But we think it is a material opportunity.

And just last question, the weather has been strange all over for the last two or three months. Have you seen any regional differences at Tommy or Lilly, driven by the weather or has that just not been an issue with your customer?

Terry, you want to take that first?

Well, last week it snowed in Scottsdale, it wasn't a good sign, but it happens. We've had some strange weather in the East and running across the West; but it's December, and we had those a year ago and we will deal with them. But the fact that our business is performing the way it is right now going into November and December, we're not going to let the weather get in our way. We'll, no pun intended, we will weather anything that comes up.

Eric, for Lilly, they are very much concentrated on the East coast and particularly their heaviest concentration is in Florida; and yes, weather might affect a day or something, but it's not been a big issue overall I don't think. And, I would say the only area where we've had a sustained weather issue is it truly has been exceptionally hot in Europe this fall, particularly during the months of September and October. And I think that was a little bit of a headwind for Ben Sherman because in those European stores, once September 1st rolls around, they are loaded up with real outerwear type coats and heavy sweaters and that kind of thing. And when it's 85 degrees out, being a men's brand in particular, it's hard to sell that stuff.

Great. Again, congratulations on a solid quarter and good momentum going into holiday.

Thanks.

(Operator Instructions). We'll go next to Edward Yruma with KeyBanc Capital Markets.

Thanks so much for taking my question and congrats on a nice quarter.

Thanks.

While I know you haven't provided 2012 guidance yet, could you provide a little bit of a window in terms of your product cost thought process? When should we start to see a benefit from lower cotton?

Terry, you want to take that one on?

I think the area, Ed, where we've been most impacted by the raw materials cost has been in Lanier Clothes and in Ben Sherman. In Ben Sherman, as we mentioned in the call script, they are the most heavily cotton oriented -- between Ben and Lanier, Ben's the one that's going to have more of the cotton impact. They'll start to see an improvement in gross margins in the second quarter of 2012 we expect. In Lanier Clothes, their primary fibers are going to be wool and then polyrayon, which have also experienced some pretty meaningful increases in raw material costs. The difference with Lanier Clothes is that being in sort of a private label and licensed, branded world, and being a little lower from a price point standpoint than our three brands, I think the competitive pressures on them are a bit greater.

They are going to have a tougher time recovering the margin erosion that they experienced in the third quarter, and I think the type of operating margin that we saw in Lanier this quarter of 13% versus 17% last year, I think the 13% is probably closer to where we are going to settle in for next year. It is sort of the new normal. And we knew that when we were making those 17% operating margins, we talked to you guys about how they were exceptionally good; and while we would like to sustain them, probably not long-term sustainable. Not that we won't strive to improve our operating margins, but I think sort of the lower double digits is a more realistic number for Lanier.

Got you. And I know that you've seen obviously very strong performance in your Tommy Bahama stores. Have you seen any impact from a decrease in tourism traffic particularly at those stores that have a high tourist component?

Ed, no, we haven't. Our traffic has been up pretty much across all regions. It's kind of hard to tell the composition of that traffic, but we haven't seen -- it's been consistently strong, our conversion continues to increase, and so we are very happy; again, and the results reflect what we're seeing as far as foreign.

I think that's a commentary on our Tommy Bahama customer and the affluence they have to be able to continue to travel as well as buy our product.

Super. One final question. I know you've given obviously guidance for Tommy Bahama store openings or at least 7 to 10 for next year as a thought process. And you've obviously discussed the Lilly Pulitzer store opening. Will that be the only Lilly Pulitzer store that you'll open in '12, or is that just the first one? Thank you.

That is the first and that is the only lease that we have signed at this point, but I would expect that we will open a handful of Lilly stores in 2012.

Great, thank you.

And we have no further questions at this time. I will turn the conference back over to Anne Shoemaker.

Actually, I'm going to turn it over to Hicks Lanier.

Okay, and I'm going to turn it --. We are encouraged with the progress made in all our brands this year and are particularly pleased with the momentum we have seen in holiday to date. Thank you for your interest and we look forward to reporting our fourth quarter results and our thoughts on 2012 to you in March.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We would like to thank you all for your participation.