Oxford Industries Inc (OXM) 2014 Q2 法說會逐字稿

Good day and welcome to the Oxford Industries Incorporated second quarter 2014 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anne Shoemaker. Please go ahead, ma'am.

Thank you, Amber, 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 operations or our financial condition to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC, including the risk factors contained in our fiscal 2013 Form 10-K. We undertake no duty to update any forward-looking statements.

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

And now I'd like to introduce today's call participants. With me today are Tom Chubb, CEO and 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 Tom Chubb

Thank you for joining us this afternoon. We are pleased with our results for the second quarter, which we believe demonstrate how strong brands like Tommy Bahama and Lilly Pulitzer can perform in a very tough and highly promotional retail environment. Our earnings for the second quarter came in at the high end of our guidance range and we are very happy to have reaffirmed our full-year earnings guidance.

Tommy Bahama had a good second quarter, with a modest top line increase and a good performance in our direct-to-consumer businesses, with positive comps in our full price business of 4%. As we mentioned on our call in June, we saw a decline in our wholesale sales, as retailers continued to battle weak consumer demand and lower traffic. As anticipated, we experienced some pressure on gross margin, as we had more spring goods to push through our outlets. The impact on gross margin, however, was fairly moderate, and Tommy was able to deliver a very respectable adjusted operating margin of 14% in an undoubtedly difficult environment.

As we head into the second half of the year, we feel good about our product assortment and our marketing plans and are optimistic that Tommy will deliver strong second half results. Terry Pillow will provide more color on Tommy Bahama after I give you an update on our other operating groups.

Lilly Pulitzer's positive momentum from the first quarter continued into the second, and we couldn't be more pleased with what we are seeing. With a top line increase of 22% and a 251 basis point increase in gross margin, Lilly increased its operating income by 17% over last year. Comp store sales were up a remarkable 19%. Once again, we believe beautiful product supported by fantastic marketing drove these impressive results. On the new store front, we just opened our 27th store in Birmingham, Alabama in mid-August and expect to open our second location in Sarasota in mid-October.

The primary clearance channel for Lilly Pulitzer are the twice yearly e-com flash sales and a warehouse sale. These events not only do a great job helping us clear end-of-season inventory at a good margin, but also generate an amazing amount of excitement and energy around the Lilly brand. Early in the third quarter, we completed the resort spring clearance sale, which exceeded our expectations. Sales for the three-day event approached $12 million, compared to $7.6 million last year, leaving inventories extremely clean. While Lilly's strength has historically been in the first half of the year, we expect to deliver a solid second half. Lilly Pulitzer will offer an assortment highlighted by truly resort product in some beautiful new prints, seasonal key items that build upon the success we have seen in recent years, and great fun, giftable items.

Our Lanier Clothes Group reported a 4% decrease in net sales in the second quarter. Operating income in the second quarter declined to $1.5 million, reflecting the lower sales. Our sales forecast for the second half is strong; and for the full year, we expect sales increases in the low to mid-single digits and an operating margin in the high single digits.

Moving to Ben Sherman, we continue to be encouraged by the improved performances of our retail stores and concessions, which contributed to the sales growth in the second quarter. With an increase in the DTC business driving improvements in gross margin, Ben Sherman took another step in the right direction and reduced its operating loss in the second quarter by approximately $700,000, in spite of the unfavorable impact of currency translation. For the second half, we expect top line improvements, particularly in the fourth quarter, which is Ben's biggest sales quarter, to drive additional reductions in Ben Sherman's operating loss.

Clearly, the consumer marketplace remains tough. However, we believe that with the strength demonstrated by our brands and the confidence and dedication of the people that operate them, we will achieve our goals for the full year. I'd like to now turn the call over to Terry Pillow to give more insights on Tommy Bahama. Terry?

Thanks, Tom. As Tom mentioned, we were generally happy with how we navigated this tough environment in the second quarter. While we are not planning for macro business trends to improve significantly in the second half of the year, we believe we have a good game plan and believe our plans will deliver positive results in the back half of the year.

Tommy Bahama continues to gain a lot of traction as a12-month brand. This year, we turned harder and earlier into the fall selling season. Our mailer, which went out just before Labor Day, led with men's fall product and the consumer is responding very well. The mailer included long sleeve woven and long sleeve knit shirts and denim. We also launched our Tommy Bahama NFL offering for men and women at the end of August, and are excited that this premium product is performing extremely well.

Going into holiday, we have a focused marketing strategy that we believe will inspire our consumer and drive sales. Our plan is to get our guests to come to us more frequently during the holiday season, using e-mail messaging, gift cards and direct mail. Throughout all our communication, print, digital and in-store, we will be using compelling imagery, highlighting our offering of cooler weather, fall product for both men and women. While an ever increasing amount of our communication is digital, the ability of our direct mail pieces to drive business is clear and we have added a fantastic non-comp mailer going out at the end of October. And as we grow our database, we will continue to find better ways to target and refine our marketing efforts.

In addition to developing beautiful product and compelling marketing, we have been busy getting new stores open. In 2014, our store opening cadence is really back half loaded. You may recall, we had no store openings in the first quarter. In the second quarter, we opened two full price stores and two outlets in the United States, as well as our seventh store in Australia, in Byron Bay, and an outlet in Japan. Things really ramp up in the second half, with six additional full price stores, two outlets and the Jupiter, Florida retail restaurant location. This will be our 15th restaurant and is located in what we can best be described as a very Tommy-friendly area of Florida. I'll now turn the call over to Scott Grassmyer to discuss our consolidated highlights. Scott?

Thanks, Terry. I'd like to walk you through a selection of highlights from our consolidated results for the second quarter of FY14. Our consolidated sales increased 5% in the second quarter over the prior year period. As Tom mentioned, Lilly Pulitzer was exceptionally strong, with a 22% increase. This increase, along with increases at Tommy Bahama and Ben Sherman, were partially offset by sales decreases in our Oxford Golf business and at Lanier Clothes.

On a consolidated basis, gross margin improved 82 basis points, to 59.1%. SG&A increased 9%, to $122 million, due to increased incentive comp, primarily at Lilly Pulitzer, incremental costs associated with operating additional retail stores, and continued investments in infrastructure and systems. SG&A also increased due to changes in foreign currency translation rates.

As we mentioned on our call in June, we expected a year-over-year decrease in operating income in the second quarter. We reported consolidated operating income of $27 million, compared to $28 million in the prior year. Our effective tax rate for the second quarter was 41.8%, compared to 40.7% in the second quarter of FY13. The rate in both periods was unfavorably impacted by our inability to recognize a tax benefit for losses in foreign jurisdictions. Last year's rate benefited from a reduction in the active tax rate in the UK.

Now on to the balance sheet. Total inventories at the close of the second quarter of FY14 were $141 million, compared to $102 million at the close of the second quarter of FY13. As you will recall, we carry a significant LIFO reserve for tax purposes. For reference, on a FIFO basis, after adding back the LIFO reserve, total inventories increased by 25%, to $198 million from $158 million. The increase in our inventory levels was primarily due to anticipated sales growth, particularly within our direct-to-consumer businesses.

Inventory levels also increased as a result of the earlier shipments from suppliers of fall goods, and the impact of currency exchange rates. We're comfortable with our inventory levels and believe each of our operating groups have effective brand-appropriate means to sell any excess or prior season inventory, as needed.

Our liquidity continues to be strong. At the end of the quarter, we had $108 million of borrowings outstanding and $124 million of unused availability under our revolving credit agreements. Our capital expenditures were $20 million in the first half and we have spent approximately $55 million in CapEx for the year. These expenditures consist primarily of costs associated with both new and remodeled retail stores and restaurants. We will also continue to invest in information technology and e-commerce capabilities and will make certain enhancements to our facilities.

I'd now like to comment on our outlook for the full year and third quarter. We were pleased to have affirmed our earnings guidance for the full year. We also provided our initial guidance for the third quarter in this afternoon's press release. We expect the third quarter to be the smallest sales quarter of the year, reflecting the seasonality of the Tommy Bahama and Lilly Pulitzer businesses. This, along with the meaningful fixed expense structure of the business, results in lower operating income compared to other quarters.

For the third quarter ending on November 1, 2014, we expect sales in a range of $220 million to $230 million. On an adjusted per share basis, we expect to be in a range between a loss of $0.05 and earnings of $0.05. On a GAAP per share basis, we expect to be in a range between a loss of $0.08 and earnings of $0.02. This compares with earnings per share of $0.10 on an adjusted basis and $0.05 on a GAAP basis in the third quarter of FY13 on sales of $197.5 million. The effective tax rate for the fiscal 2014 year is expected to be approximately 43%.

Before we take questions, I also want to mention that our Board has declared a cash dividend of $0.21 per share. Amber, we are now ready for questions.

Thank you.

(Operator Instructions)

Rick Patel, Stephens Incorporated.

Hello. Good afternoon, everyone. Congrats on the nice quarter.

Hello, Rick. Thanks a lot.

Hello, Tom. Can you comment on the wholesale channel? I know it's been pretty choppy for a few quarters now. So do you get the sense that department stores are done right sizing their inventories at this point, or should we expect some more volatility in the coming quarters? And then as a follow-up, what's the right run rate assumption that we should use for the wholesale business as you scale the retail channel?

I think with respect to the first question, I do think that from what we can tell, retailers have done a decent job of getting inventories to about the right place so that there's not a lot of inventory overhang remaining out there after they got through the spring/summer season. And Terry and Doug may want to elaborate on that in a minute.

As to the second question, as far as growth rate and wholesale going forward as we continue to ramp up direct-to-consumer, really in all of our businesses, I would say very modest increases. We're not really looking to shrink the business. But by the same token, we don't expect to see a whole lot of growth in the wholesale channel, either. And Terry and Doug, do you want to add anything to either of those points?

Rick, this is Terry Pillow. What Tom said about retailers, the people we partner with, our wholesale customers have been really conscious about making sure their inventories are clean. And they came out going into the fall season relatively clean and they've been planning their assortments much closer.

I can tell you that looking at the last couple of weeks, the retailers really brought in fall goods early. New goods are selling really well and they're having good experience early on, some early fall fashion goods. So gives us, as we've seen in some parts of our business that I mentioned in the prepared remarks, we've seen some early reaction to fashion goods going into the fall season and so have our retailers. So we hope that continues and we see a good fall and holiday season with our wholesale partners.

And any potential updates to selling the women's assortment into the wholesale channel?

Terry, do you want to comment on that and just give some highlights?

Yes, Rick. We're continuing to pursue that effort, and we've opened some new doors in the spring season and that's continuing into the fall. It's a little early yet to talk a whole lot about that performance, but they performed quite well in the spring/summer and we're looking forward to continuing that effort in fall.

But important to note, Rick, that you're starting from a very small base there and the growth rate is still fairly modest. So there may be some room long-term, but I don't think we're going to see any meaningful dollar growth in the nearer term.

And then just the last question on inventories. Can you parse out how much of the increase at the end of the quarter was due to the timing shift versus what you're investing in wholesale and retail? We're just trying to understand all the moving pieces and how they're contributing to the year-over-year increase.

If you take the -- you've got about 25% FIFO increase. And we have about $2.4 million of currency reflected in that and about $3 million higher in transit. So you're just a little bit over 20% up. And you've got a third quarter that should be in the double-digit sales increase range. So our inventories are maybe a hair higher than ideal, but no concerns.

Thanks very much. Good luck this fall.

Okay. Thanks, Rick.

(Operator Instructions)

Eric Beder, Wunderlich Securities.

Good afternoon. Let me add my congratulations on a solid Q2.

Thanks, Eric.

Could you just talk, just remind us, in Q3 what the pace of store openings are versus this year versus last, in terms of the incremental costs on those?

Hang on just a minute. Let us get our facts here, make sure we're not --

And let me throw another one in, while you're doing that.

Okay.

Could you talk a little bit about -- Lilly Pulitzer last year, they did a negative -- the comps were negative. What are you doing differently this year to make sure that -- fall historically is not Lilly Pulitzer's biggest quarter.

That is true. And I think for the foreseeable future, fall will continue to be Lilly Pulitzer's smallest quarter. But what we're doing this year, which is a little bit different, is that we're playing print and resort much harder than we have in the past. We're sort of doing this idea, you may have seen the hash tag campaign, #Resort365. And as opposed to moving away from resort during fall, we're sticking with it during fall. And we think that's a very appropriate path for Lilly to take. Obviously, this is the first year we've done it that way, so we'll see what results that generates. But we're enthusiastic about it thus far.

Eric, on your store question. We're going to open -- we're planning on opening 8 stores in total, 6 at Tommy and 2 at Lilly in the third quarter this year. And last year in the third quarter, we opened 4 at Tommy and we didn't open any at Lilly. So we're opening twice as many stores in the third quarter. The pre opening, it will be a little bit higher. It's not that significant on just a regular store. None of these opening in the third are restaurants. We will have one in the fourth. So we have a little bit of pre opening there. So we probably have a couple hundred thousand dollars more pre opening, but it's not going to be that material.

Okay. And just quickly, a question on Tommy Bahama. You've done the Major League Baseball rollout, now you're doing the NFL. When you look at it, how should we think about those as growth vehicles there? I know that those are -- the sporting pieces are premium product. They're very expensive, relatively speaking, compared to the similar product without the logos on it. How do those look in terms of demand? And how do you foresee those going forward?

I'm going to let Terry and Doug jump on that one in a minute, Eric. But I would start by saying the way I look at those things is that they're really primarily marketing initiatives that are designed to add a little spark and excitement to the brand by bringing something in that we know is part of our guest's life. These guys are sports fans. They like MLB. They like NFL. And we do ladies product, as well. And so Tommy Bahama is still about Tommy Bahama and inspiring the world to relax, and these are just bringing in other pieces of the guest's life to create a little excitement. Terry, do you want to elaborate?

Eric, I'll let Doug. Doug's been on the front end of those two projects. So I'll let Doug talk.

Tom said it best. If there's anything we've learned is that our guests really react to exciting product. And there's part of their life and it involves sports. So these are things that we've laid out. It's been years in the making, actually, courting both MLB and NFL. And we have a very specific strategy. We're looking for the season ticket holder, the suite guest, and we're really taking a very high-end special approach. And it's working.

And what's exciting is that when you drop product like this in time frames where our guest is looking for something unique, they're reacting in just a real positive way. And that's what's fun right now with NFL is that especially in a time frame like third quarter, where we may not be the first go-to brand, we put this NFL product out there, and boy, our guest has really responded, pretty much all over the country. So that's exciting.

Great. Thank you. Congratulations again.

Thanks, Eric.

Jessica Schmidt, KeyBanc.

Hello. This is Ed Yruma. Two quick questions. I guess first, on inventory, specifically as it relates to Tommy Bahama, I know you had a soft sales quarter in the first quarter, a respectable second quarter. How do you feel with the overall quality of the Tommy Bahama inventory?

I'll comment briefly and say that I think we're very comfortable with where we are there. And Scott may want to elaborate a little bit on it.

Yes, yes. We're very comfortable with it. One event we had this year was a flash sale over the Labor Day weekend, which is the first time we've done the flash sale at that point in time. So that moved some inventory at some really good gross margins. So overall, we're comfortable. We think we have the right number of outlet stores, also. So we think we can move through any prior season inventory in a very clean and brand-appropriate manner.

Got it. And one other follow-up. There's obviously a lot of discussion about secular pressures in Golf. I know that performance at Oxford Golf was weaker than last year. How do you view that business strategically and how important is it within the portfolio? Thanks.

As to the second piece of it, it's less than 2% of sales. So in some respects, all our businesses are important, but in terms of materiality, it's really quite, quite small. As to the decline in sales during the second quarter, that was largely because last year we had a large pipeline fill for an online program that we're supporting with a major online retailer. And of course, once the pipeline is filled, you don't typically anniversary that, which is the case this year. We think that business, while it's still really just a year old, we think it's going to be a nice steady piece of business for us in the long term, and we're not particularly concerned about that one quarter decline in sales. All that said, I'll bring you back to my initial comment, which is this is less than 2% of sales for the corporation.

Great. Thanks so much.

Okay. Thanks, Ed.

(Operator Instructions)

Mike Richardson, Sidoti.

Yes. Good afternoon, and thanks for taking my questions. I'm just wondering, are you guys still projecting a $7 million to $9 million operating loss for Ben Sherman? And then I was hoping maybe you can give us an update on the performance of Tommy Bahama, both in Asia and then as far as the women's category goes. Thank you

I'll start with Ben Sherman. And we are currently projecting a $4 million to $5 million reduction in the operating loss for the year, which I think would get back to your number, Mike.

As to Tommy Bahama Asia and women's, I'll let Terry and Doug comment on that in a minute. But we did have a modest improvement in the operating loss during the second quarter. And that was coming both from Australia and Asia. I would remind you that we really have two markets that we're focused on in Asia, or in that Pacific region. One being Australia. That's a market that we bought back from a partner. We're very happy with that market. We have what we view as a good business there and our focus is on growing it.

The other key market that we're emphasizing is Japan, that we entered last year. We are learning a lot there. The business is improving, but we're still not where we want it to be; however, we think we can get there. We're very focused on doing so and we believe that long term, it's an excellent growth market for us, so we're very committed to it. And I think now maybe Terry and Doug can give you a little additional color on that.

Yes, Mike. As Tom said, we couldn't be happier about the Australia business. It's comping up very nicely and it's exceeding its budget. As I mentioned in the prepared remarks, we opened one store. We're opening another store. So we've got big plans for Australia. When you move to Hong Kong, it again is doing very well, with very healthy comps this year.

We think we have tremendous upside in both Hong Kong and Tokyo. We've adjusted the assortments. We were over there about this time or a little later last year, and we saw some improvements that we could make in our assortments to be heavier and have more of a fall assortment. We've done that this year. I'm on my way over there next week, to both Hong Kong and Tokyo, to see that. And we think that the adjustments that we've made in both those markets will pay dividends for us in the back half of the year. So we're very excited.

As far as women's, we're on track this year to grow the women's business as a percent to our total to about 32%. We're on track to do that. The sportswear is doing well, primarily in knits and knit dresses; however, the big shining stars are women's accessories, scarves, jewelry and shoes. We've launched this Relaxology platform in both men's and women's, and it's working in both and we're seeing a significant increase in that. So again, we talk about we are interested in growing that women's business. As a percentage, it gets harder as men's continues to grow, but we're making progress.

The other thing, as you'll see this fall, I mentioned it in the prepared remarks, we've really shifted -- this non-comp mailer is primarily a women's fashion mailer. We always used the term that at Tommy Bahama we have the appropriate amount of sand on all the product we do. But this book is entitled "New Sand", which we've gone to the high desert and got a high desert holiday theme, which we're very excited about in not only in our women's, but in our men's and our marketing efforts in the back half of the year. So we're feeling good about women's and we're feeling good about our growth in Asia. So thanks a lot, Mike.

Thanks. Just one more question, I guess probably for Scott. Just directionally in the third quarter, how should we be thinking about gross margin year-over-year? Thanks.

So it'll probably be down just a little bit in gross margin. And some of that will be some higher private label programs out of Lanier will be the main wild card there. But less than 100 basis points, maybe, something in that range, modest.

Thank you very much, and best of luck for the second half of the year.

Thanks, Mike.

It appears there are no further questions at this time. I'd like to turn the conference back over to Tom Chubb for any additional or closing remarks.

Thank you again for your time this afternoon. We very much appreciate your interest and look forward to talking with you again in early December.

That does conclude our conference. Thank you for your participation.