Oxford Industries Inc (OXM) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Oxford fourth-quarter and FY16 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the floor over to Ms. Anne Shoemaker for opening remarks and introduction.

Please go ahead.

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 operation 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 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 non-GAAP to GAAP financial measures in our press release issued earlier today, which is posted under the Investor Relations tab of our website at OxfordInc.com.

Please note that all financial results and outlook information discussed on this call, unless otherwise noted, are from continuing operations, and all per-share amounts are on a diluted basis.

As a reminder, the results from the Ben Sherman business are reflected as discontinued operations for all periods presented.

Also, on April 19, 2016, the Company acquired Southern Tide, which is presented as a separate operating group.

And now, I'd like to introduce today's call participants.

With me today are Tom Chubb, Chairman and CEO, and Scott Grassmyer, CFO.

Thank you for your attention, and now I'd like to turn the call over to Tom Chubb.

Good afternoon, and thank you for joining us.

As we begin our new fiscal year, I want to take just a few minutes to recap our 2016 results, and then spend some time elaborating on Oxford's strategies for growth and success in the future.

Overall FY16 was a year of mixed results for Oxford, with some important successes, as well as challenges and opportunities for future improvement.

In the fourth quarter, we recognized $0.27 per share of charges related to our Tommy Bahama business, which were not included in the guidance we issued on December 6, 2016.

Absent these charges, our results for the quarter and year were within our guidance ranges.

The charges were related to initiatives we are taking to improve the financial results at Tommy Bahama.

They included inventory markdowns, primarily of residual women's product; severance costs as back-office head count reductions were made in January; and costs associated with the closing of three outlet locations, including one in Japan.

In the first quarter of 2017 Tommy Bahama's results to date are encouraging, with modestly positive comp store sales gains to date.

So far, we have seen a strong response to our new 130-page direct mail piece, which offered a comprehensive view of the Tommy Bahama brand.

The catalog has driven traffic to our stores and website, and items featured in this piece, including men's, women's and accessories, have sold very well.

I will go into more detail about Tommy Bahama, but want to first spend a few minutes on the current environment and its impact on our industry and Oxford.

As we come out of 2016 and enter 2017, across the portfolio, we are dealing with several macro trends that are impacting our entire industry.

The first is a significant shift in consumer shopping patterns from brick and mortar to e-commerce.

This shift is being driven and enabled by innovation that uses commonplace technologies in new and creative ways that are disrupting traditional shopping patterns.

Thanks to mobile devices and the internet, consumers now have unprecedented access to information about brands, products and pricing, as well as the ability to communicate directly with brands and other consumers.

In addition, they have access to multiple responsive distribution platforms.

All of this makes it easy for consumers to find the lowest prices on products from brands they love, and find substitutes for products from brands they are not emotionally connected to.

This shift from bricks and mortars to on-line shopping is being exacerbated by the coming of age of the millennial generation.

Millennials are currently between the ages of 20 and 36 and have surpassed the baby boomers as the largest generation, at over 75 million members.

The combination of these two facts makes them very important from a consumer spending standpoint.

Finally, as the first generation of digital natives, millennials grew up with digital technology always in the hand, and are inherently comfortable with it.

Another macro trend impacting our industry is the rapid growth of the outlet mall, off-price, and fast fashion channels of distribution.

These businesses all continue to experience robust growth, and are putting enormous pressure on more traditional channels.

Interestingly and importantly, the outlet, off-price and fast fashion businesses are predominantly bricks and mortar, rather than e-commerce businesses.

So while there's a lot of attention appropriately being paid to the impact of Amazon and other e-commerce businesses on malls and department stores, a significant amount of pressure on traditional channels is coming from outlets, off-price and fast fashion.

The sum of macro trends is creating significant disruption in our industry.

The access to product and brands from around the world provided by the internet is diminishing the anticipation of discovery that once was part of the excitement of going to the mall, and is eroding the relevance of the department store's traditional role as a curator of brands.

The price transparency created by the internet, as well as the value offered by outlet and off-price stores, is making traditional department store promotions less effective, and forcing the department stores to become even more aggressive in their promotions.

As a result, department stores are struggling and are no longer able to pull traffic to themselves or the malls that they anchor, the way they once did.

Availability of trend-following product and value at fast fashion retailers, combined with internet price transparency, mean that mall-based retailers that do not have distinct points of view, but mostly offer commoditized products are also struggling mightily.

As the department stores and mall-based retailers struggle, mall traffic is declining.

In the absence of any other reason to exist, in a bid to survive, these retailers are increasingly resorting to intense price promotion, which is impacting the entire marketplace.

At the same time, internet-based retailers, most notably Amazon, continue to grow and gain strength.

This year, Amazon is on track to become the nation's largest apparel retailer.

To date, Amazon has been particularly successful selling price-driven and commodity-type products.

That said, they are dedicating significant resources to becoming a more capable fashion retailer.

In addition to the changes that are happening in distribution channels, there are also massive changes in the way that brands communicate and market.

Like the changes in distribution, the changes in communication and marketing are being driven in large part by technology and millennials.

Traditional large-scale marketing campaigns run through traditional media channels are being supplanted by targeted campaigns, run through the modern media ecosystem, including e-mail, social media such as Snapchat, Instagram and Facebook, bloggers, influencers, and the like.

In the old world of brand communication, most communication was from the brand to the consumer.

This has been replaced with two-way communication between brands and their consumers, as well as communication between and among consumers.

The macro trends discussed above are also relevant to Oxford's strategy of operating a dynamic portfolio of businesses, that is capable of delivering sustained profitable growth.

As a result of the shifts that are happening in distribution channels away from department stores and mall-based retailers, and towards on-line outlets, off-price, and fast fashion, as well as changes from a consolidated to a fragmented communication environment, it is more important than ever that brands be very specific and definite in what they stand for, and that they remain true to that brand message.

We believe that going forward, there will be fewer multi-billion dollar mega brands, and more smaller more definite brands like Tommy Bahama, Lilly Pulitzer, and Southern Tide.

It will be more important than ever to be the first choice of a few, rather than the second choice of many.

Against this backdrop, we have seven key priorities for FY17: First, continue to monitor the impact of the macro trends I've just discussed on our business, and refine our operating and strategic plans accordingly.

Second, focus on improving the operating performance at Tommy Bahama.

More on that in just a moment.

Third, continue our conservative stance on new store openings, and renewals of existing stores.

This means that we will be exceedingly selective in new store locations.

In addition we will pay special attention to renewals, to make sure to make sure we get an adequate return on the remodeling capital that is typically needed upon lease renewal.

Fourth, we are going to play hard to our strength in e-commerce and mobile.

All of our brands have strong, profitable and rapidly growing e-commerce businesses.

We intend to fuel this strength with a particular focus on the increasing importance of mobile in our space.

Fifth, we need to revise our approach to outlet stores and clearance of residual inventory in Tommy Bahama, the only business where we have outlet stores.

Sixth, we need to manage our department store exposure very carefully.

Department stores still provide meaningful gross margin contribution in each of our businesses, and can still be a good vehicle for customer acquisition.

At the same time, we need to be careful to not let their struggles end up tarnishing the integrity of our brands.

Finally, we need to make sure we are staffed and organized appropriately to meet the challenges of today, as well as those that lie ahead.

I now want to go into more detail regarding our 2017 plans for improving the operating performance at Tommy Bahama.

We believe Tommy Bahama's results are closely related to the macro trends affecting our industry.

At the top of the list is the impact that shifts in the industry are having on traffic in our bricks and mortar stores.

Our in-store traffic was down 10% for the year, which negatively impacted our comp store sales in 2016.

We have historically been conservative with store openings, but our stance going forward will be even more conservative, and focused on making sure that any profit, any location we open, is expected to generate an acceptable return on capital.

In 2017, a handful of openings will likely be offset by a handful of lease expirations and result in no net increase in the number of Tommy Bahama stores for 2017.

We believe the food and beverage component of the Tommy Bahama business, which generated both top and bottom line growth in 2016, is a unique competence of the brand, that we can leverage to our advantage.

Our Marlin Bar concept at Coconut Point in southwest Florida has been a huge success, and the restaurant has outpaced our expectations.

We have been particularly pleased to see how much business it has driven to the retail side of this location, with increased traffic, dwell time and frequency.

This location has comped at a very high rate.

We are excited about what we think the Marlin Bar concept can do, and are evaluating additional sites, as well as other ways we might use what we have learned at the Marlin Bar to drive profitable growth at Tommy Bahama.

Another area of focus is making improvement to our clearance strategy at Tommy Bahama.

Over time, Tommy Bahama's strategy to use outlets as a true clearance vehicle has become more challenging, and is less effective as a means to clear end-of-season residual inventory.

To improve this situation, we have developed a multi-pronged strategy that includes taking end-of-season markdowns selectively in our own full-price retail stores, which is a new practice for Tommy Bahama.

We will also improve the merchandising and product presentation in the outlets, by changing how we distribute product from the stores to the outlet locations.

And as mentioned earlier, we are closing a handful of outlets, and took markdowns in 2016 to work more quickly through prior season women's product that had been clogging our outlets.

In 2016, our women's product did not work as well as we had hoped.

While we received very favorable feedback on the aesthetic of our designs, our assortment did not have the right balance of styles to drive the sales that we had hoped to achieve.

As a result, on a comparable sales basis, our women's business actually took a step back during 2016.

In 2017 to date, we are seeing results with quintessentially Tommy Bahama women's products, like swim and cover-ups, breezy linen styles, easy to wear knit dresses, and our new handbag collection.

We are optimistic that products like these will help us gain much needed traction in women's.

At the same time, we have also taken more conservative approach to our forward inventory buys as we continue to develop this avenue for growth.

Our Friends & Family, Flip Side, and loyalty reward card promotional events continue to gain traction.

But as they grow in size, they put pressure on our gross margin.

We do not envision this trend reversing, and are therefore very focused on improving both initial and maintained gross margin by reducing input costs and making selective price increases.

All of that said, as I mentioned before, we are off to a good start in 2017, and are encouraged by our first quarter to date results.

Tommy Bahama's position as the island lifestyle brand distinguishes it in the marketplace, and we are confident we will achieve improved financial results in FY17.

Shifting gears to Lilly Pulitzer, FY16 was another terrific year for Lilly Pulitzer, with sales growth of 14% and our operating margin expanding to 22%.

The combination of excellent plans and excellent execution of those plans, unsurprisingly produced excellent results.

As we move into 2017, there are several key priorities for Lilly Pulitzer.

First, we need to continue our very careful approach to bricks and mortar store openings.

That said, with Lilly's small door count, only 40 right now, and very high productivity, at $840 in sales per square foot, we believe there is still room to grow.

Our focus will include both include traditional locations and smaller jewel box locations, such as Watch Hill, Rhode Island.

Opening in May, this will be the first Company-owned store in that area of the country.

To add to the fun, Lilly has collaborated with Ocean House Resort management to create a Lilly Pulitzer suite at the Watch Hill Inn, and we'll provide Lilly pillows and towels for the Ocean House Beach cabanas.

Second, Lily is already incredibly strong in e-commerce, digital marketing, and mobile, and we want to continue to play to these strengths.

We will continue to invest capital in both systems and people in these areas.

Third, Lilly is a proven leader in how to communicate market in the modern distributed media ecosystem.

In this fast paced world, we will work hard to maintain our edge in marketing and brand communication.

Finally, we will continue to manage our department store exposure carefully.

Lilly will stay focused on working only with department stores that can hit our brand standards and performance expectations.

We are optimistic and confident about Lilly Pulitzer's prospects for 2017.

While Lanier Apparel has executed admirably for the last several years, generating strong free cash flow with very little capital investment, the marketplace is presenting ever increasing challenges.

Lanier's traditional predominantly department store and big box markets are challenged.

We are working towards matching Lanier's operational competencies with sales and marketing opportunities for long-term profitable growth.

For example, last year, we folded the Oxford Golf business into Lanier Apparel, and we have just repositioned Oxford Golf as the Oxford Brand, a complete line of terrific-looking men's sportswear suitable for sale not only at green grass pro shops and resort shops, but also at top tier off-course independent specialty stores.

The Oxford Brand was officially launched at the PGA show in January, where we presented the fall 2017 line.

We are not walking away from Lanier's traditional businesses, but believe more sportswear opportunities like the new rebranded Oxford line, will provide Lanier with alternative avenues for growth.

Southern Tide, the newest and smallest of our businesses, is now well integrated into Oxford, and delivered a nice performance in 2016, despite the environment.

Key opportunities for this brand include growth in its traditional wholesale business, where they are now seeing some early success with a small women's line, the expansion of the signature store concept, and growth in the e-commerce, which represents roughly 20% of their business.

We are excited about the future of Southern Tide, and believe they will make a meaningful contribution to our Company in the years to come.

As we move forward with our strategic plans for our operating groups, we believe our plans for capital allocation are well-aligned with the changes to our strategic environment.

We are spending more than ever on IT and infrastructure, designed to enhance our ability to delight our consumers on an omnichannel basis.

Our capital allocation policy is well balanced between prudent, carefully-vetted investments in organic growth, a reasonable dividend policy, our willingness and determination to add brands that have the potential to create long-term value for our shareholders, and maintaining financial flexibility as our industry transitions.

With that, I'll now turn the call over to Scott Grassmyer to discuss our consolidated highlights and plans for 2017.

Scott?

Thanks, Tom.

I'd like to walk you through a selection of highlights from our consolidated results for the fourth quarter, as well as our guidance for FY17.

Please refer to our press release issued earlier today for the complete results for the fourth quarter and full fiscal year.

In the fourth quarter of FY16, consolidated net sales were $261 million, compared to $260 million last year.

Lilly Pulitzer sales increased 26%.

About half of that increase was due to the January e-commerce flash sale, which was significantly larger than last year.

Inclusion of Southern Tide's sales this year also contributed to the increase.

Sales at Tommy Bahama were lower this year than last year, as both our wholesale and direct to consumer businesses were affected by declining consumer traffic.

Lanier also had lower sales, due to a lower volume of private label business, in part due to shift at Tommy.

Our consolidated adjusted operating income in the fourth quarter was $16.7 million, compared to $29.1 million last year, negatively impacted by the $0.27 per share or $7.1 million of Tommy Bahama-related charges and the lower operating results in Tommy Bahama and Lanier apparel.

Adjusted earnings were $0.63 per share, compared to $1.09 per share in the same period of the prior year.

Now, on to the balance sheet.

Our balance sheet remains strong, and we have a capital structure well positioned to support growth.

We believe inventory levels in each of our operating groups are appropriate for our future sales plans.

Inventory increased to $142 million, reflecting the inclusion of Southern Tide.

And as of January 28, 2017, we had $91.5 million of borrowings outstanding, and $186 million of availability under our revolving credit agreement.

Our capital expenditures for FY16 were $49 million, primarily related to opening, relocating and remodeling retail stores and restaurants, IT initiatives, and facility enhancements for distribution centers and offices.

Of the $49 million of capital expenditures, $6 million was funded by landlords through tenant improvement allowances.

Cash flow from operations was $119 million, compared to $105 million in 2015.

Free cash flow for 2016 was $69 million, compared to $32 million in the prior year.

I'd like to walk you through our projections for next year.

In 2017, we expect our earnings to be negatively impacted by a higher effective tax rate.

The tax rate increase is due to the impact of how divesting of certain restricted stock awards are treated, due to a change in an accounting standard.

In 2016, we also were able to take advantage of some operating loss carryforwards that will not be available to us in 2017.

As a result, our effective tax rate is expected to increase to 39% from 37% last year.

For the full year adjusted earnings per share is expected to be between $3.50 and $3.70, on a sales range of $1.08 billion to $1.1 billion.

On a comparable basis, FY16 sales were $1.023 billion, and adjusted earnings per share from continuing operations was $3.30.

For the first quarter of FY17, we currently expect net sales to grow between $270 million to $280 million.

Adjusted earnings per share per share from continuing operations are expected to be between $1 and $1.10.

On a comparable basis, sales were $256 million in the first quarter of FY16, and adjusted earnings per share from continuing operations was $1.26.

The first-quarter effective tax rate is expected to be approximately 41.5%, compared to 35.7% in the first quarter of FY16, reflecting the unfavorable impact of items described above.

Capital expenditures are expected to be approximately $55 million in FY17, to include expenditures associated with information technology initiatives, new retail stores, our retail restaurant location at Legacy West in Plano, Texas, and remodeling and relocating existing retail stores.

FY17, we expect cash flow from operations to significantly exceed our capital expenditures and dividend requirements.

Now I'll move to our FY17 plans by operating group.

Here is some additional details of our plans for Tommy in 2017: Overall, we expect Tommy Bahama's top line to grow in the low single digits, comps to increase in the low single digits, and wholesale sales to decline slightly.

We expect to open approximately six new stores, including Legacy West in 2017.

We are also likely not to renew a comparable number of leases, so we're not planning an increase in door count for the year.

We have planned modest gross margin expansion, as we make progress on reducing input costs, make selected price increases, and clear end-of-season goods more effectively.

We expect to continue to improve our results in Asia Pacific losses, reducing by approximately $2 million.

Operating margin expansion of approximately 100 basis points is planned for FY17.

Lilly Pulitzer is expected to continue to deliver strong top line growth, while maintaining a solid operating margin.

For FY17, Lilly Pulitzer is expecting a single digit sales increase compared to FY16, with comps in the mid-single digits.

We expect to open five to six new stores in 2017.

Gross margins should expand slightly, as we expect a lower percentage of sales to come from the e-commerce flash sales.

For Lanier Apparel, we're expecting a mid-single digit percentage increase in sales, with operating income flat with 2016.

Southern Tide's plan for FY17 has sales of approximately $40 million to $45 million, and an operating margin in the low teens.

Finally, the operating loss in our Corporate and Other segment is expected to increase by approximately $2 million.

Before we take questions, I also want to mention that our Board of Directors has declared a cash dividend of $0.27 per share, as we continue to believe this is an important way to return value to our shareholders.

Now Shayla, we are now ready for questions.

(Operator Instructions)

Corinna Van Der Ghinst, Citi Research.

Corinna?

We will go to Jeff Van Sinderen, B. Riley.

I wonder if you can speak a little bit about the e-com growth trend at Tommy and Lilly, and also, can you give us a little more on the difference in traffic you're seeing between the stores with and without restaurants?

And then also, maybe what you're seeing at Marlin Bar.

I know you mentioned that a little bit, and what we should expect for Marlin Bar this year?

Do you think you'll start to open another or two of those?

Maybe we can start there.

We'll start with the Marlin Bar.

And what we have seen with the Marlin Bar is all good news.

It has simply been terrific.

We opened it up back in November, and it's as we have been told by other tenants in the mall, it has literally moved the center of gravity in the mall to another part -- it's not really a mall -- it is an outdoor lifestyle center, but has moved it to Tommy Bahama.

That's become the heartbeat in it.

On the restaurant/bar side, it's performed way beyond our expectations, and we're very thrilled with that side of it.

And then what we really love is what it's doing on the retail side of the business, where it's driving a very, very strong comp store sales performance on that side.

So we really like the Marlin Bar.

We're, as we said in the prepared remarks, we're evaluating additional locations.

I'm not sure that we'll get any open during 2017, just because of the lead time on these things.

And we're also trying to take what we're learning at the Marlin Bar and evaluate ways that we can apply those learnings in our other existing restaurants.

And by that I don't mean to suggest that we're going to convert them to Marlin Bars, but I think that there are things that we're seeing in the Marlin Bar, that will probably be beneficial in some of our other operations.

I think you had a traffic question about restaurants versus -- ?

Yes, right.

Our restaurants are in a location, restaurants, the traffic has certainly held better than the ones without.

Traffic is still down but the restaurant sales have held quite well, and the comps stores, at retail stores with restaurants has held better than they have with the ones without.

Okay.

And then the other thing I was asking about was your e-com growth trend at both Tommy and Lilly.

Just wondering if there's anything to talk about there?

It has certainly been strong in both of them.

At this point in the quarter we hate to get too specific on comp trends, but I think we did comment that Tommy's overall comps are modestly positive, that's stronger in e-com than it is in stores.

And Lilly's e-com would be stronger than their stores as well.

And that's really, Jeff, that has been the case for seven or eight years now.

E-commerce growth continues to outpace store growth.

Right.

Right.

And then if I could just--

We would expect that to continue.

Okay.

Good.

And then if I could just squeeze in one more on Tommy womens, just wondering, I mean it sounds like -- you feel like you've picked some categories, it sounds like, where you're having success.

Maybe the mix wasn't quite right last year, but how shall we think about the women's business at Tommy for this year?

Well, it's very, very early in the year, so, you can't read too much into it, but, again, we were pleased -- we had been very pleased with what we've seen so far.

And, when I look at it and look at what's selling really well there, what I would call quintessentially Tommy Bahama products, so it is things like there is a linen dress called the Two Palms linen dress that has done very, very well.

There is a Two Palms jacket, also linen, that's done very well.

The swim and cover-ups, and those types of items have been extremely good.

And in my mind, there's a theme to all of these is that they're -- they are things that people think of, when they think of Tommy Bahama.

They're the types of products that they think of, and they're working well.

And then I think another piece of it that we talked about is the catalog that we sent out several weeks ago, and hopefully you've seen this.

If you don't have a physical copy of it, you can see a digital copy on the website.

And I would encourage you to look at it, because it's absolutely gorgeous, and the consumer clearly liked it, and clearly responded to it, because we've seen them come into the store with the catalog in hand asking for products, and we've seen a lot of the terminology that we used in the catalog show up as frequently-searched search terms on our website.

So we know it's having an impact.

It's very positive.

And that has a lot to do with having a great brand, a great products, but then also communicating the full aspirational dream that is Tommy Bahama, because this catalog includes beautiful lifestyle shots, product lay downs, food and beverage shots.

We've even got, from our license partner, we have got several pages of the furniture in there.

We've got pictures of cocktails.

All of these things that drive home that this is not just about a few printed camp shirts, but it truly is a lifestyle, and we think these are the types of things that in the industry and in the marketplace that is evolving, this is how we stand out, how we get noticed, and how we succeed.

And it's working.

Okay.

Good to hear.

Thanks for taking my questions, and best of luck through the rest of the quarter.

Corinna Van Der Ghinst, Citi.

I was hoping to start with your distribution plans for this year.

Hopefully it wasn't asked earlier when I was dialing back in, but how many wholesale doors are you planning to exit this year, in terms of what is currently included in your guidance?

And also, what do you see as the long term retail store potential for both the Tommy and Lilly concepts?

So, you're talking about wholesale doors and how many we're planning on exiting?

Yes.

We've got some minor number of doors reduction, a minor door reduction in the plan.

And there are places where we're adding doors, as well.

Overall, I don't think we're looking to see a large drop in our wholesale business, at all.

It's just that we want to be very mindful of what's going on there.

If you take Tommy, for example, our fall bookings, which are not completely done, but they're looking pretty good right now, relative to last year, our Southern Tide bookings are looking pretty good.

So we're -- it's not that we're looking for a wholesale to drop off a cliff, or anything like that, we're just being mindful of what's going on there.

And how do you reconcile that with the guidance you talked about earlier, with the planned wholesale modest decline for Tommy for this year, if the bookings sound like they are positive?

Those are the fall.

Spring will be down a little bit.

And some of that is just pushing less into certain doors.

I mean, we've monitored, with our majors, we look at their maintained gross margins and there is some, hey, that we need to cut back on what we're allowing to ship into those stores.

We do that on a regular basis.

So spring, first half of the year, we have wholesale down a little bit, but fall bookings, look like they'll hopefully be up a little bit year over year.

Okay.

And then just a question on the retail stores for Tommy and Lilly longer term?

So in Lilly, if you look at them, with their 40 that they've got now, and we have been adding, averaging I think 5 a year, really since for the last several years, and with them, with their small footprint, as we said in the prepared remarks, and their extremely high productivity, I think that we've got an opportunity to continue to add stores at our same pace for several years.

The way we're selecting stores may change a little, obviously, we're going to be -- we've always been very careful, but we'll be even more careful about where we decide to put a store.

We're doing a couple of these jewel box locations that we talked about in the prepared remarks.

We mentioned the one that will be part of the Ocean House property that are in Watch Hill, Rhode Island.

And that one will be similar in a lot of ways to the one that we've had for several years down at Ocean Reef in Key Largo.

And so we'll do some of those.

Some of those stores will be more like the others that we have been opening, but we think that we can continue to open at the same pace that we have been opening in Lilly.

And Tommy Bahama for this year, as Scott mentioned, I think, in his remarks, we have got, what, six opening.

Six leases that are going to expire, that we probably won't renew, that's our thinking at this point.

And then in future years, we're going to probably open a few less than we have been opening, and we'll continue to look at the lease expirations very carefully, and what we're doing there, Corey, is just if they're in a place where traffic is declining, we're evaluating where we think that's heading, and making sure that we think they can make a good contribution going forward.

Okay.

Great.

And then my second question was, can you just walk us through some of the puts and takes of your growth in operating margin expectations for the year, and just how much flexibility do you have around your SG&A expenses, if you need to cut costs?

As far as the gross margins, we're expecting some gross margin expansion at both Tommy and Lilly.

Tommy, we've got several actions that we mentioned, both we're going after trying to get lower input costs, working with our factories there.

We have taken some selective price increases.

Some of that will benefit the second half more than the first half.

We also on the clearance strategy, we think just by, in the categories like women's, buying very conservatively and taking that first mark in our full-price stores, we'll be able to have less to clear and net out at a better gross margin.

SG&A, Tommy, we've made some SG&A reductions right at the end of 2016, and we'll continue to monitor it.

Things like incentive comp, obviously, are very variable as far as how, if things got worse, that expense would get lower.

But there is, we're always watching it, and things like Tom mentioned on some of these store renewals, just having a marginal store that we have to put capital into, we're going to look very, very hard on whether that's an expense load we want to continue to carry, or whether we close those stores.

Okay.

Thanks.

And if I could just sneak in one last question.

Aside from the new direct mailer that you put out, is there anything that you can point to that is really driving the positive quarter to date traffic for Tommy Bahama?

Has there been a noticeable change in your international tourist traffic trends, or is there anything else you're seeing to help drive that positive momentum right now?

Yes, I think that we do think that the international tourist situation has gotten a little bit better in most of our locations, and we've seen evidence of that.

We, the other big thing I would point you to is that we did have our friends and family event, which just wrapped up this past week, and that's an annual event.

But we completed that, and that in and of itself was very successful.

It drove really good traffic on-line, and in stores.

And it's nothing that we haven't done before, but it worked very well this year.

Did you mention how the Lilly comps are trending quarter to date, as well?

Those are, it's early in the quarter for them, and the reason being that Easter is so important to them, Corey, and Easter is three weeks later this year than last year.

So for them, it's a little hard to call it a comp at this point.

But what we have seen to date is that stores are a bit negative.

E-com is strongly positive.

We are still optimistic about what we can do in the quarter, but the Easter shift makes it hard to really get a comp at this point.

From a calendar date perspective, it's a comp, but from the way that the Lilly shopper shops, we're not really at comp until we get past Easter.

Right.

That sounds fair.

Okay.

I'll jump off.

Thank you so much.

Ed Yruma, KeyBanc Capital Markets.

Just a couple quick ones.

First, if I heard you correctly, you said there was a $0.27 bucket of charges really related to the Tommy Bahama repositioning.

Could you give us a little bit more color on how much of that was the inventory markdown/impairment in the women's versus what was the outlet store closures?

Yes.

About $4.7 million was the inventory write down, and that was for older season, mainly women's goods in our outlets, and some in the DC that hadn't flowed to the outlets yet.

We had about $1.6 million related to the three outlet stores, and then we had another about $800,000 related to severance charges.

Was any of the comp acceleration that you saw at Tommy Bahama quarter to date related to closing out of the women's product, or is that women's product marked down or written off, and sold through in the fourth quarter?

We don't include outlets in our comp.

So -- in our outlets, we're doing more markdowns of women's, but that does not go on our comp.

So our stores, we're, I think pretty much all through.

Yes, and the big drivers, Ed, again, were the friends and family event that was fueled with the catalog, and post-friends and family, we think the catalog is still having an influence on the customer, which is certainly what we hoped to have happen, and it seems to be the case.

Great.

And two other quick ones.

I think you indicated that the Lilly Pulitzer flash sale in January was maybe larger than it had been, or maybe you hadn't one there before.

What drove that, if I heard that correctly?

And the final question, I think you said that Asia losses should improve $2 million in this coming fiscal year.

Just remind us again what the base was last year?

Thanks a lot.

So on the Lilly clearance sale, we had more inventory and we cleared more through the flash sale than we cleared in the brick and mortar stores.

So just had more inventory to clear, and cleared more through the flash sale.

So and on Tommy, we're at $7.3 million this year, and that includes, some of that outlet store closure cost.

Some of that -- a little bit of that is in that number, also.

So we expect to, take the $7.3 million hopefully down to $5.3 million or less in 2017.

Great.

Thanks so much.

Pam Quintiliano, SunTrust.

Thanks so much for taking my questions, and for your extensive commentary, Tom, regarding the changing environment, that was very helpful to hear your insights on it.

So quick point of clarification with the Tommy quarter to date commentary.

Men's and women's, you're both encouraged?

And following up on that, just how you're feeling about men's?

Obviously women's has been the bigger issue, but what is going on there, as well?

What I would tell you is that they both sold well, and we're pleased with where we are with both.

Obviously you have all kinds of issues going on in the industry, and this traffic issue is a very real issue.

I know that you're very in tune with it, because everybody's talking about it, and it is a real issue, but we think we've got the tools to win in that environment.

We've got great brands that really stand for something, and are supported with great product, and at the end of the day, that's what always prevails.

And we think that's what we've seen to date, quarter to date, and in Tommy Bahama we've got -- always had a great brand.

We've got great products there, and we communicated it very effectively through this book, which I hope you've seen.

And, again, if you haven't, would encourage you to at least look at the digital version, and we'll get you a print copy, if you don't have one.

But the combination of those things, I think even in this tough environment, is working, and has worked to date.

And then how do I -- and I do have a copy, and it is beautifully done.

And how do you think about, you were talking about the quintessential women's product, and how well that is doing now.

Can you talk about the depths of that this year versus last year, and if you have increased your emphasis on it year over year?

And are you going to continue increasing, if so, are you going to continue increasing your emphasis on it, as we progress at least through the first half of the year?

Well, yes, that's the essence of being a merchant, is delivering to the customer the products she needs and wants, and last year we had -- we had a lot of stuff that was really beautiful and the customer loved the way it looked and all that, but didn't buy quite as much of it as we would have liked to have seen.

And I think this year, we're -- based on the results we've seen to date, the products that we've got, not only is she loving them, but she's buying them, too, which is what we want.

And when you look at it, they're, to me and I'm not, I'm not a merchant, as you know but I've certainly been around the game a long time and have watched this for a long time.

And there's a theme to them.

And, the term quintessentially Tommy Bahama was mine, because to me, they're the kinds of things that when you think of Tommy Bahama, these are the things that pop into mind.

So swim, which has always been a strength of Tommy Bahama, women's is doing very well.

The cover-ups and some of the other items that go along with that, have done well.

If you look in your catalog or on-line, it actually shows up in a couple of places in the catalog, there's a linen shift dress called the Two Palms dress that is, it's very easy to wear, breezy linen.

Simple shift.

But, to me, that just looks like what you would think Tommy Bahama women's would be.

And it's working, and then there is a Two Palms linen jacket, and there's a wonderful printed knit dress that's done really well.

And all these things, again, there is this theme of breezy, easy to wear, island-inspired.

Certainly people can wear them anywhere, including New York.

We would be happy for you to wear it.

But they are, at the same time, quintessentially Tommy Bahama.

And I think we were just sort of feeling our way towards that last year, and we're -- it would appear that we're getting closer to the mark this year.

And then is there a way to think about the depths, any percentage numbers or even any -- just any way to think about how meaningful -- how much more meaningful the emphasis is this quarter versus last year?

On women's or on those products?

On those products and women's.

Certainly if you look at the catalog, I think you see a lot of that stuff in there.

I don't have specific statistics.

I don't know whether Scott does.

I don't.

But I know we did, on those key type items, we went deeper in those key type items, and maybe more fashion items a little smaller behind.

Okay.

And then switching gears, because you had discussed the shift in the way the millennials are shopping, which is something we're all seeing.

Obviously Lilly, she's very plugged in.

You have the app, she's always on-line.

How do you feel about Tommy Bahama and the mobile experience, and the opportunity there?

And is there any changes that you're trying to implement or any learnings from Lilly that you can pull over?

Well, certainly there is a lot of communication between the teams at Tommy and Lilly.

And, there's a lot that they can learn from each other.

They are different brands, with different customer bases.

So some things that are appropriate for one brand, might not be appropriate or as appropriate for the other, but certainly a lot that they can and do learn from each other.

In terms of mobile, there is no question that everywhere we look, mobile traffic is increasing, so including our friends and family sale this year, I don't have the stat with me right now, but the mobile traffic was up dramatically, and that is what we're seeing everywhere.

And what that means is that in all of our brands, we're really trying to adopt a mobile-first mentality, because we have to think that more likely than not, the place that the guest is looking is on their phone.

And so we need to build our visual assets and our website and everything else to support that, and that's going on across the company.

Okay.

And then last one, Amazon, can you remind me again your approach with Amazon?

I know that there is Lilly product that shows up on Amazon, I remember seeing that, but just across the brands, how we think about Amazon as a partner, the timing of the launches, if you're taking pricing in store, what happens on Amazon, that type of thing?

Well, yes, so Amazon of course owns Amazon and Zappos and they are a top-10 customer for the corporation.

We sell them in -- we sell them in Tommy, Lilly, and Lanier Apparels.

We are testing -- Zappos is a very good vehicle for fashion.

In the Amazon world, we've got our toe in the water, and we're trying to figure out how to build a mutually beneficial business there.

We're seeing a lot of success, but obviously, it's a very different vehicle from a lot of other places that we sell our brands, and we want to make sure we understand how it works, and make sure that we're doing it in a way that is not just volume dollars, but that's also, brand enhancing and consistent with maintaining our brand integrity.

So we're certainly spending a lot of time and effort looking at it, working with it, trying to learn how we can best interact in that world.

Great.

And they are a top 10 customer at this point.

Well, thank you so much, and thank you for giving me an excuse to go to the Ocean House this summer and grab a drink and see everything there.

Good.

Good.

(Operator Instructions)

Danielle McCoy, Telsey Advisors.

I was wondering if you can give us an idea on how many leases for Tommy Bahama are coming up for expiration over the next two years, and is there any areas where you're seeing greater pressure than others, or any areas that you are seeing some success in?

As far as the leases, roughly 10 a year.

Tommy had been opening that 7 to 10 to 12 a year, and so now we are kind of in the pace where every year we have got -- we use 10 year leases and every year we have roughly 10 coming up for renewal.

And then, Danielle, in terms of strength or weakness, malls are not going away altogether, I don't believe.

I think there's some challenges out there, but the best malls, which are the only malls we're in, they're going to figure it out.

They're all working on adding other components to their line-up like food and beverage, make-up bars.

Different things that will bring traffic into the mall, as opposed to traditionally relying really primarily on the department stores to bring that traffic in.

So, we think, it's not that we think they're going away.

And are there some that are currently stronger than others?

Absolutely.

I'm not sure we're prepared to comment on that exactly, but, there are some that are not having the same level of traffic declines as others.

And that's, certainly as we look at lease renewals, that's part of the equation.

All right.

Great.

And then can you give us any updated thoughts on Tommy International?

Again we expect to reduce the loss by a couple million dollars this year.

We are looking for a partner in Japan.

Australia is going well, and Hong Kong, we have one store, where it is probably about a year out before we can get out of that lease.

So that, that lease, we're starting to get end of sight on that one, but I think the key is to find a partner that in Japan, because Australia we're happy with.

We make some money there, and we've expanded there, and we've had success there.

And in Hong Kong we got an end in sight, so Japan is really the market.

But we made some good inroads, and made some good progress, but we really would like to find a partner to leverage the brand awareness we created there.

Great.

And then just last on Southern Tide, how many signature stores do you have, and where do you see that going ahead?

We've got three open and I think we expect to get a couple more open this year, and we think it's a good channel for us.

It's certainly been a big part of the Lilly Pulitzer brand.

It was enormously important in their growth and development, way back before we even bought them.

And to this day, remains a very important part of the Lilly Pulitzer equation.

For Lilly, I believe that would be about 15% or 16% of their business would be sales, wholesale sales, to signature stores.

And, I don't know, we don't at present have a strong view on where this settles out for Southern Tide, but we're excited about the partners we have, and excited about the businesses that we're building together through those signature stores.

Great.

Thank you so much.

Good luck.

Michael Kawamoto, D.A. Davidson.

This is Michael on for Andrew Burns.

A follow-up to a previous question.

As you look at selectively opening Tommy stores down the road, do you think the majority of your store base will be in street and lifestyle centers?

And will the stores with a restaurant or bar component ultimately be a larger piece of the mix, given your success with the Marlin Bar?

Thanks.

Yes, I would suspect that the tilt towards lifestyle and street locations will continue.

As you know, we're only 50% mall right now, or even less than that.

It's 45% or something malls.

So we already tilt a bit away from the mall, and I would guess that would continue to increase.

I'm not going to say we'll never open another mall store, but I would certainly think that would be true, and then we'll more include some type of food and beverage element.

I would guess that, yes, that's true.

Not necessarily a bigger proportion of full-blown island retail restaurants.

But as you suggested, the Marlin Bar concept may be a part of the significant number of the future stores.

Thank you.

That concludes the Q&A portion of today's call.

I will now turn the call back over to the Chairman and Chief Executive Officer, Tom Chubb.

Please go ahead.

Thank you, again, for your time this afternoon.

We very much appreciate your interest, and look forward to speaking to you again in June.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.