Oxford Industries Inc (OXM) 2019 Q1 法說會逐字稿

Good day, everyone.

Welcome to today's Oxford Industries Inc.

First Quarter Fiscal 2019 Earnings Conference Call.

Today's conference is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the floor over to Ms. Anne Shoemaker.

Please go ahead, ma'am.

Thank you, and good afternoon.

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 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.

Our disclosures about comparable sales include sales from our full-price stores and e-commerce sites and excludes sales associated with outlet stores and e-commerce/clearance sales.

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.

Thank you for joining us this afternoon.

Our first quarter results represent a very good start to the year as both sales and earnings exceeded expectations.

These solid results exemplified the successful execution of Oxford's strategy to own, develop and use powerful emotional brands like Tommy Bahama, Lilly Pulitzer and Southern Tide to deliver value to our shareholders.

While we are very pleased with our recent performance, our focus remains firmly on the future.

We are confident that the steps we've taken to build a strong foundation by judiciously adding and pruning businesses over time will allow us to achieve our long-term goals.

As the consumer's shopping behavior continues to evolve, we believe the way we have positioned our brands in the marketplace has created important competitive advantages.

In particular, we have maintained a disciplined, well-managed approach to the distribution of our products, which not only protects and strengthens our brands but also ensures our customer can experience our brands where, when and how he or she wants.

I'll start with direct-to-consumer.

This is our largest and fastest-growing channel of distribution, and we just delivered our ninth consecutive quarter of positive comparable sales.

This business has 2 components: Bricks and mortar and e-commerce.

Our selection of bricks and mortar locations has been very carefully curated, and across the enterprise, we operate only 230 stores worldwide.

The locations we select reflect the very nature of our Tommy Bahama's and Lilly Pulitzer brands.

They are generally in lifestyle centers that are -- offer beautiful open-air shopping and dining experiences on streets and boulevards that are destinations in and of themselves and in resorts, which epitomize the essence of our brands.

Less than half of our 174 domestic full-price stores are located in regional malls, all of which are better malls that attract an affluent consumer.

We enhanced the guest experience in our physical locations by providing beautiful, unique stores, superior in-store service and in 17 Tommy Bahama locations, a compelling bar and restaurant.

Importantly, we still have opportunities for prudent bricks and mortar expansion, particularly with the Tommy Bahama Marlin Bar concept, the westward geographic expansion of Lilly Pulitzer and the potential rollout of Southern Tide stores.

At the same time, our e-commerce business continues to drive our direct-to-consumer comps and grow as a percentage of Oxford's total revenue, now at 21%.

We posted strong first quarter results with comparable sales improving sequentially through the quarter and ending on a very strong note in April.

Lilly Pulitzer led the charge with e-commerce comps in the low double digits.

With our high average ticket and a high gross margin, e-commerce is a very profitable channel and we see its continued growth as a key to Oxford's continued success.

On the wholesale front, we have been equally strategic in taking measures that strengthen our brands for the long term.

We have developed meaningful partnerships with specialty retailers, signature stores and select department stores that demonstrate their ability to support our strong pricing discipline and cadences.

Excluding Lanier Apparel, our presence in department stores has purposely been reduced over time and now represents about 10% of our total revenue.

As department stores continue to adjust to changes in the marketplace, we believe our lack of dependence on this channel for our Tommy Bahama, Lilly Pulitzer and Southern Tide brands further differentiates Oxford from its peers.

As with anyone in our business, a successful end-of-season clearance strategy is essential.

We focus on ensuring the integrity of our brands with a well-controlled approach that limits the availability of our products at reduced prices.

At Tommy Bahama, we operate 130 full-price retail locations and only 37 outlet stores worldwide.

These outlets function as true clearance locations.

That overwhelming majority of the product in our outlets is prior-season liquidation merchandise that has been transferred from full-priced locations.

At Lilly Pulitzer, we leverage the brands e-commerce site by going on sale just 5 days a year.

These flash sales, which occur in the third and fourth quarters, clear the bulk of Lilly's prior-season goods at prices that generate gross margin in excess of 40% and are accretive to Lilly's operating margin.

Finally, we have good relationships with the wholesale all-price partners who can quickly clear any Tommy Bahama, Lilly Pulitzer and Southern Tide residual inventory we may have.

With well-managed inventory and low leverage, our balance sheet is enviable.

We will continue to make investing in the growth of the lifestyle brands we own a priority.

We also continue to vet acquisition opportunities and remain committed to our dividend policy as a vehicle for returning value directly to shareholders.

In recent months, our sector has been impacted by the uncertainty of proposed tariffs on goods produced in China.

Scott will discuss this in more detail, but I wanted to take a minute to remind listeners of Oxford's heritage.

Our company has been sourcing product all over the world since the early 1970s.

Our sourcing teams are experienced and nimble.

Our negotiations with producers in China have been going well, and we have confidence in our ability to find excellent alternatives outside of China as needed.

Our long-term approach and the strength of our brands and balance sheet are competitive advantages and give us the stability and means to be successful in all types of market conditions.

We have iconic brands, experienced leadership, a talented workforce and the financial resources to continue to deliver long-term growth and profitability.

I'll now turn the call over to Scott for more details on our results and plans for the rest of 2019.

Thanks, Tom.

As Tom mentioned, we had strong first quarter results, which exceeded the top end of our sales and earnings guidance.

After a weak February, both March and April came on strong and we ended the quarter with a plus-2% comp growth that included positive comps at both Tommy Bahama and Lilly Pulitzer.

As planned, an increased proportion of our sales in the first quarter were from Lanier Apparel.

This business, which is almost entirely wholesale, has significantly lower gross margins than our other businesses.

While this pulled down our consolidated gross margin, it had a positive effect on our consolidated SG&A as a percent of sales.

During the first quarter, Lilly Pulitzer's gross margin was 63%.

This is a strong margin and came in slightly above our plan.

It was, however, lower than the same period last year.

This was mainly due to increased all-price wholesale sales as we cleared goods that remained after our January clearance sale, leaving Lilly Pulitzer's inventory at quarter end in excellent shape.

Lilly Pulitzer gift with purchase events have proven to be very successful tools in driving additional sales.

Lilly Pulitzer continues to excite and engage customers by varying the cadence of the events, the reach required to obtain a gift and the gifts themselves.

During the first quarter, the team at Lilly Pulitzer increased the number of gift with purchase events and enhanced the quality and appeal of the gifts offered, both of which drove sales but put some pressure on gross margin.

Our focus on expanding Tommy Bahama's operating margin continued to generate results.

Tommy's operating margin expanded 40 basis points driven by our improvements in both gross margin and SG&A leverage.

Our balance sheet and capital structure remain very strong and support our growth initiatives and investments.

As we reported on a LIFO basis, inventories increased 19% to $157 million.

On a FIFO basis, after adding back the $62 million LIFO reserve, the increase was 13%.

We believe our increased inventory level positions us well for planned growth in our branded businesses in the second quarter, including the operation of additional stores and higher stock levels on high-performing key items.

We also have higher inventory at Lanier Apparel as we have increased the replenishment stock, which was below optimal levels for most of 2018.

This quarter, we adopted the new lease accounting guidance, which has -- which resulted in us recognizing significant operating lease assets and liabilities but had no material impact on our earnings or cash flow statement.

Turning to our outlook.

We are initiating guidance for the second quarter of fiscal '19.

We were pleased with our comps in May, which were slightly positive against a very robust double-digit comp last year.

June has been stronger, with month-to-date positive comps at both Tommy and Lilly, and we expect to have low single-digit comps for the quarter.

We expect net sales to be between $300 million and $310 million in the second quarter compared to sales of $303 million in the same period last year.

Adjusted earnings per share are expected to be between $1.80 and $1.90 compared to $1.83 in the second quarter last year.

This guidance reflects the estimated impact of a higher effective tax rate year-over-year in the second quarter of fiscal 2019.

Our third quarter remains our smallest sales and earnings quarter due to the seasonality of our Tommy Bahama and Lilly Pulitzer direct-to-consumer operations.

Therefore, we expect our third quarter earnings to be comparable to last year and expect to see meaningful direct-to-consumer growth in the fourth quarter.

We have affirmed our outlook for the full year, with sales expected to grow to between $1.135 billion and $1.155 billion in fiscal 2019 and adjusted earnings per share in a range of $4.45 to $4.65.

This compares to net sales of $1.107 billion in fiscal 2018 and adjusted earnings of $4.32 per share.

To date, enacted tariff increases have had little impact on our business.

However, apparel, shoes and other products are included on the newest proposed list, to which a 25% punitive tariff would be applied if they go into effect.

While our guidance reflects the cost of tariffs at the currently enacted rates, we are actively working on mitigating the potential risk of the proposed additional tariffs.

I thought it might be helpful to walk you through an example of how additional tariffs could impact our business.

A shirt which sells for $100 at retail would have approximately $20 of dutiable cost subject to the additional 25% tariff that is currently under consideration.

So we are left with about $5 of additional cost to mitigate for goods sourced from China.

We are taking a multipronged approach to address the potential additional cost.

First, we have and continue to move production out of China to other countries, such as Vietnam, Thailand, India and Peru.

Our sourcing from China has decreased, and we expect continued reductions in the future.

For our products sourced in China, we have accelerated the delivery of all product and have also had success in negotiating price reductions from factories.

Finally, our brands have good pricing power with consumers, and we are planning selective price increases.

For fiscal 2019, our interest expense is expected to be approximately $2 million and our effective tax rate is expected to be approximately 26%.

Capital expenditures, including $8 million in the first quarter, are expected to be between $45 million and $50 million in fiscal 2019.

This will primarily consist of investments in information technology initiatives, new retail stores and Marlin Bars and investments to remodel existing retail stores and restaurants.

Kelly, we are now ready for questions.

(Operator Instructions) We'll hear first today from Rick Patel with Needham & Company.

And nice rebound following the soft February and good to see that continued into 2Q here.

I'm hoping you can walk us through some of the puts and takes as we think about the comp performance in 1Q and early 2Q.

Do you feel the environment improved or do you see it as more a function of strategic actions you took to address that softness?

And how does that inform your strategy as you think about the rest of the year?

I think it was a combination of both, to answer your question.

I think that there were some external factors that impacted the flow of the quarter.

So what happened was, as you know based on our call in March, February was very soft for us.

At the time we talked in March, we'd seen some improvement.

We were optimistic that the weather was turning and that with the later Easter and Passover holidays that we would see continued lift through March and on into April, and that's the way it played out.

So as the quarter progressed, we got progressively stronger on -- and some of that I think was the weather in the earlier part of the quarter, some of it was the calendar itself with the later holidays, and then some of it I think was the way that we played to those holidays.

So I think we certainly made a strong play towards the holidays.

We may have left ourselves a little bit of a gap in February, and that's something that in future years when we have the holidays following late, I think we'll be more cognizant of how to build a stronger February business.

And then in May, as Scott mentioned, we did have a positive comp.

That was against a very strong double-digit comp last May.

On top of that, this May, we had -- it was a small comp, very small comp, but it was positive and against -- again, against a strong double-digit comp last year.

So we think it's a pretty good May.

It was -- when you've got that type of comparison to have a positive comp, we were pretty pleased with.

And then in June, business has gotten a bit stronger and sort of looking out as to what we've got for the rest of the quarter, we're anticipating a low single-digit comp for the quarter.

Great.

And also a question on digital.

So very nice to see continued outperformance there.

I know you weren't thrilled with your e-commerce execution late last year, so do you feel like you've rebounded from that at this point?

Or does that remain a work in progress?

Yes.

Look, we're really happy with the way that Lilly Pulitzer e-commerce business is performing right now.

We're comping as we said.

First quarter, we had a double-digit comp at Lilly Pulitzer e-com.

We think that's a great place to be.

That's not to say that we're not trying to continue to improve the customer experience on our website, both at Lilly and elsewhere, and that's something that we will always be striving to do.

But yes, I would say we're -- whereas in fourth quarter of last year, we were modestly disappointed with what we were able to achieve there.

I think we're very happy with what we've seen so far this year.

We'll hear next from Ross Licero with Telsey Advisory Group.

And congratulations on a good quarter.

Just a question on the third and fourth quarter.

You said that 3Q should be about flat year-over-year for earnings and 4Q, you should see some acceleration in the DTC business.

I guess what's driving the growth in fourth quarter versus third quarter?

Yes.

Look, as we get more and more direct-to-consumer, and I'll let Scott walk you through this in a second, but as we get more and more direct-to-consumer, you have more and more fixed cost.

Third quarter is a naturally small quarter for us because of our -- the sort of spring-summer orientation of our brands.

So you have a deleveraging effect during that quarter against the fixed-expense structure, and that means that earnings tend to be weak.

We get kind of the inverse of that in the fourth quarter, which is a big retail quarter, a big direct-to-consumer quarter.

And as we get more direct, we do even more business.

And then if we're comping positively, it just adds to that.

So fourth quarter is going to tend to get probably more profitable, and third quarter is going to tend to continue to have pressure on it.

And Scott, I don't know if you want to...

Yes.

And in addition, we'll have -- we're opening 3 Marlin Bars that should open in the fourth quarter.

So we'll have those going for us.

And remember, Lilly, in particular, we had a somewhat disappointing fourth quarter last year.

And I think we're -- certainly had a lot of learnings from that and the gift with purchase cadence, which I think we've kind of proven, we figured that out and then improved that.

And then the website, as Tom mentioned -- certainly our e-commerce business at Lilly has gotten a lot stronger, so it was not particularly strong in the fourth quarter last year.

So I think we have that going for us also.

Okay.

Great.

And on the Tommy Bahama's side, how are the flip side rewards promotions doing there?

We noticed you had another one going on right now.

And also, there's -- it looks like there's no free shipping on tommybahama.com but there is on Lilly.

Is there any plans to change that?

I think we did have a free shipping or we did up until 2 o'clock today.

Yes.

Right now, we have free expedited shipping for Father's Day because Father's Day is a big holiday.

And as far as the cart, Father's Day, we're earning up through Father's Day, so it's kind of early to conclude on this event but these are important events and so far, so good.

And from B. Riley, we'll hear from Susan Anderson.

Nice job on the quarter, especially given the pretty tough start out there.

I was thinking -- wanted to ask on Tommy also, just I guess more on the women's business, if you could talk about the performance there, are you continuing to see some strength?

And maybe just talk about the products that are working well this past quarter and into the second quarter?

And then also I think you have some mailers going out and I think that was helping to drive her into the store for herself, maybe if you could talk about that too.

Yes.

So we had a really good quarter in women's and Tommy Bahama.

In fact, a lot of our positives came out of the women's business.

And the particular products that worked well are things that have been perennial strengths of Tommy Bahama women's, and that's dresses and swimwear.

And this Spring again, those were probably 2 of the stronger product categories.

So they had a good quarter.

It was I think the -- probably the strongest Q1 we've ever had in women's in Tommy Bahama.

And the -- we think some of the things we're doing on the marketing side, not just the mailers, those are great, but also the overall marketing messages, the website, the e-mails, we're trying to do a better job of communicating to women about our women's product and I think it's working, so we're really pleased with that.

Then we had some great product successes in men's as well.

If you remembered, we told you at the beginning of the year that we wanted to emphasize certain core products like the Boracay pant, the new Newport Coast men's woven shirt.

And then we've get this great new Polo called the Palm Coast Polo that's turned into a runaway success for us, and that is a true performance Polo.

So it's styled like a very nice-looking gentlemen's Polo, but it's absolutely got the very best of all the performance, wicking features, quick dry, all that type of technology, which is so important in the marketplace today.

And it's at a very strong price point, it's at $115, and we're selling them at a very rapid rate right now.

So we've been really pleased to see that.

Great.

That's good to hear.

And then maybe if I could just follow-up on, I guess the wholesale business, particularly (inaudible) as we look at the second half.

Are you seeing -- we've seen some kind of weak results from some of the department stores, so are you seeing any of these guys pull back on orders at all?

Or how are you guys thinking about the wholesale business, especially going into the back half?

Well, I think our forecast for wholesale for the year overall is pretty much held.

I do think we see some evidence of the weakness in Lanier clothes even though we had a very good shipping quarter.

I think we've seen them slow down their receipts of replenishment programs a little bit, which I think would be indicative of some of their overall concerns about the health of the business.

But I think our wholesale forecast is holding up for the most part.

Great.

And then one last one if I could fit in there.

A lot of good information on the China sourcing so thanks for that.

I was wondering if maybe you had an updated penetration of where your sourcing is at versus last year?

And you mentioned a lot of good things to help mitigate the tariffs, if they actually go into effect.

But I guess I was curious if you had an idea of how much of the 25% you would be able to mitigate if that happened?

Yes.

So first of all, I think Scott's example was very important because that 25% on a $100 selling price item translates to about $5, typically would be the way you would think about it, so that's the kind of the bogey that we've got to mitigate.

And then I would say that our teams have responded extremely well.

They've been very active and aggressive in, sort of, hitting those problem head-on.

Of course, it is not a live problem yet, but it certainly could be within the next month or 6 weeks.

And so we've taken aggressive action and been very proactive about it.

And the really 4 things that we've done, we've moved product out of China.

We've made substantial progress on that.

Last year, in '18, we were at about 54%.

I can't tell you the exact number for '19, but it will be materially less than it was last year.

Secondly, we've accelerated the delivery of a lot of fall '19 product to get ahead of the tariffs and avoid them altogether.

Thirdly, as both Scott and I mentioned during the prepared remarks, we've been very proactive and aggressive in our negotiations with vendors about getting them to share in the cost of any tariffs that end up being assessed, if they are assessed, and have had good success with that.

And finally, we've identified places where we can do some price increases to further mitigate the tariffs.

The last thing I would mention to you, Susan, and this is I think obvious to you, but timing makes a difference.

Every day that goes by, we're getting further in our mitigation efforts.

So while we'd love to see the tariffs never imposed, a delay is also a good thing for us because if it gets stretched out weeks or months, that just gives us more time to mitigate.

But all in all, there's no doubt that if tariffs get imposed, it will be -- it will have some impact on our earnings for this year.

We would expect that impact to be significantly smaller in the first half of next year.

And then beyond the first half of next year, we'd expect to be operating really as normal again to have basically fully mitigated the impact of the tariffs.

We'll hear next from Paul Lejuez with Citigroup.

It's Tracy Kogan filling in for Paul.

I had 2 questions.

The first is on your store counts.

You mentioned having a potential for some additional bricks and mortar stores, and I was wondering, what is your ultimate store potential that you think you can have for each of your brands?

And also, how that breaks out between outlet and full price?

And then secondly, I wondered, in the first quarter, how at Tommy, your outlet stores performed versus your full-price stores?

Yes.

For the Tommy, our focus now is mainly on Marlin Bars.

We really like the food and beverage component mix with the retail while we've had good success in the couple of those we have and in full-service bars and restaurants stores we have.

But we really like the Marlin Bar concept just because of the -- it's not as capital-intensive, it's not as labor-intensive, and it's not as rent-intensive and it pushes traffic to the retail store, which is critical.

So at Tommy, our cadence of opening is -- stores is much less than it was in the past but the locations we're opening will be much more meaningful.

And so at Tommy, we'll -- I think we'll get 4 stores opened this year and 3 of them will be Marlin Bars.

We -- as we mentioned, we only have 37 outlets worldwide.

We really don't see that number moving materially.

We'll probably have some closures, and we at times might open an outlet but we really don't see that number moving up much.

But Tommy still has -- I think there's some good opportunities for Marlin Bars.

There's a lot of locations where one would work, it takes getting the right location within the center.

So we have room for a patio space, which usually lends itself to corner locations.

So we're -- in that pipeline, it's filling up, and we'll get 3 this year.

We've got at least 2 on the books for next year and we still have a couple other possible opportunities.

So that will be the emphasis there.

At Lilly, we started our westward expansion with -- we have a store in Maui and we have a store in Newport Beach, California.

And we're very happy with the way it's going now.

And I think there will be additional opportunities in the West Coast and Hawaii and some more in the East Coast also.

We were opening 4 to 6 a year.

This year, we'll probably only get the 1 open, which is in Newport Beach.

But I think, next year, we will probably be back to a more normal cadence in that 4-ish, 5-ish range at Lilly, and I think that can go on for quite a while.

Southern Tide, we are heavily exploring the store rollouts and we believe it's likely -- it'll probably be next year, but we think it's very likely we are looking at certain locations.

And I think Southern Tide, it's hard to put a number on Southern Tide right now since we don't have any company-owned yet, but the signature stores, I believe we had 18 signature stores -- or excuse me, 14 signature stores.

And we're pleased with those.

I think it's lending itself to tell us that Southern Tide is ready for retail, so I think we will start opening some Southern Tide stores, and we'll probably start on coastal areas and then move from there.

So I think that's a big growth opportunity for us also.

Great.

And then the full price versus outlet performance at Tommy this quarter?

Full-price was stronger.

At outlets, we're a little bit weaker.

And I think the outlet traffic just -- I think there's been more traffic pressures at outlets than with -- you don't really have to go to an outlet to get a deal anymore and that's why we're so -- we so much believe in our strategy of not having outlets where we make a bunch of goods for outlets and have -- there's a lot of people who have more outlets than full-price stores.

We think our ratios are very much in line as a primary clearance channels.

The better outlets seem to perform better and we are in good outlet centers.

We're glad we're not in a bunch of B and C outlet centers.

We tend to be in the A outlet centers, which perform better.

But outlet traffic has been down.

And I would add to that, Tracy, and I don't think you were really following us a couple of years ago, but in our outlets, we got into a situation where we were overstuffed with inventory and gross margins were kind of headed in the wrong direction.

Our gross margin performance and our inventory position in outlets is right where it ought to be.

It's really just the traffic that's a little bit of an issue and suppressed the performance a little bit this quarter.

But we're otherwise pleased with the way they're running.

We'll go next to CL King & Associates, Steve Marotta.

I just want to ask about the inventory, 13% increase in FIFO.

You mentioned that this is planned investments as well as store openings.

Just want to verify that the inventory levels at the end of the quarter were within your expectations and that aged inventory hasn't increased.

If you could maybe peel the onion back one more layer.

Yes.

It's definitely within our expectations.

Lilly, we moved the goods left over from the flash sale.

The biggest thing, I think, Lanier where we were really too low last year and we're really not fulfilling replenishment at our expectation levels and we needed to build up that inventory.

So we built it up and -- but we were, most of last year, a bit below where we needed to be.

And then, Tommy, we've got some really great key items and those are items where we have taken a little bit higher inventory position last year on the Boracay pant.

We were chasing all year.

We were missing sales because we were breaking, and that -- as that program accelerated, we were having trouble staying in stock, and I think we've rectified that and we have some other good key item programs so that we were just taking a little bit higher inventory position on those.

But we feel good about our inventory levels and certainly think anything that is older is marked down appropriately.

That's great.

And regarding the CapEx investments this year, can you talk a little bit about the IT initiatives that this targets and what capabilities that will bring you?

Well, I think a good example of -- they're really all about trying to enhance the guest experience, that's the primary focus, and to integrate the retail and e-commerce channels.

And a great example of that is something that we're doing in Tommy Bahama to try to make the -- any inventory in the system fundamentally readily available to any consumer or store associate, wherever they are in the system, and we just are in the test phase with a couple of stores now where they're now able to easily, and on an automated basis, access not just the inventory that's in their particular store, but also what's in the distribution center.

We'll then extend that to being able to look to other stores.

These are all things that we could do before, but not on an automated basis.

It was very labor-intensive and clunky and difficult and time-consuming.

And so we're automating these things.

And that's just one example, but those are the types of things that we're investing in to try to have the best experience the guest can possibly have.

We've also got a huge initiative in Tommy Bahama to modernize our system in our distribution center to facilitate the modern sort of shape of our business.

It also does things like helps with labor cost management and a lot of other things that will improve the functionality of our distribution center.

We'll hear next from Michael Kawamoto with D.A. Davidson.

Congrats on a good start to the year.

Yes.

So just to start off, how should we be thinking about the comp cadence for Lilly this year?

Is it safe to say it's tougher comps in 3Q and maybe a little easier in 4Q?

And then outside of the comp, what are your expectations for the flash sale this year?

Yes.

I think, yes, fourth quarter at Lilly should be a little bit easier comp just because of some of the problems we had.

Third quarter, yes, maybe a little tougher but it's such a small quarter that it's -- the direct consumer business is just not as meaningful in that quarter.

And the big thing in that quarter is the flash sale.

And we're planning the flash sale somewhat flattish.

So not -- we're pleased with the sale we did last year, but we don't really want it to get a lot bigger.

So as long as we can continue to sell doing that positive comps, we should not have inventory that would have a need for that sale to get bigger.

So kind of flattish flash sales right now.

Got it.

And was the January flash sale a little smaller than planned, just given the extra sales to the off-price wholesale channel?

Or was that pretty much how you had it planned?

No.

It was -- yes, it was pretty much as planned, and we just -- I think there's probably a little bit more of it.

They always sell off to the off-price channels, the third-party off-site off-price channels after the sale when the majority of that went in the first quarter this year where, sometimes, some of it goes in the fourth and first.

A little bit went in the fourth but I think a little bit more went in the first.

Okay.

That's helpful.

And then just lastly on the newer Lilly stores, Whaler's Village in Newport Beach, can you just talk about the product acceptance in those markets?

Are those consumers gravitating towards the bold Lilly patterns?

Or is it more solids?

And then what percentage of your sales for Lilly occur, call it, west of Mississippi, just curious?

What percent of them occur what?

West of...

Oh, west of the Mississippi.

I don't know off the top of my head but it's going to be a pretty small percentage.

California is -- comes up pretty high on our e-commerce list of top states.

But when you look at that, you always have to remember that they have a huge population out there.

So while they're only 1 of 50 states, they have an outsized share of the population.

But it's going to be a pretty small fraction that occurs west of the Mississippi.

In terms of the consumer acceptance of the product, it's been good.

In Southern California, I think we're finding a fair number of people who know the Lilly brand.

Maybe they're East Coast transplants or have spent time in the East and have been introduced to the brand before.

And yes, they are buying the traditional Lilly products there.

It's been very exciting to see.

In Hawaii, we're definitely introducing the brand to a lot of new people who have not -- who are new to it, which is great, too.

A lot of them are actually from California that we see in the Hawaiian stores.

So that, I think, is a nice -- we see that kind of rebound effect between South Florida, West Florida, in particular in the Midwest.

And I think we may see some of that too where you have the people from the West Coast or down in Hawaii on vacation, then go home and remember the Lilly brand that they saw while they were in Hawaii.

We'll hear next from Edward Yruma with KeyBanc Capital Markets.

First, on the clearance merchandising with the wholesale at Lilly, I guess, trying to dimensionalize how large that was and the impact to margin.

And then, I guess, as a kind of broader philosophy, should we expect that we will see that going forward or are you able to kind of better balance with the flash sales?

And then, second, as a follow-up, how should we think about Lilly Pulitzer margins based on kind of the annual guide that you've given us?

The wholesale offers -- at Lilly, we had a few million of wholesale off-price sales and they're at very, very low gross margins but, you've got to remember how big that flash sale is.

So it's -- we're still selling through with that flash sale over 80% of the price that we need to clear.

So these flash sales are doing their job.

We did have more inventory last year, so the January sale was I think $17 million, where it was $12 million the year before, I believe.

Yes.

And so it was just more inventory.

We sold more through the flash sale, but we just had more we had to clear.

As I mentioned earlier, a little bit more of it went -- crossed over to the first quarter, we shipped some out in the fourth quarter last year and some in the first quarter, so a little bit more split out to the first quarter this year.

But that's kind of typical.

We'll -- It was just a bigger -- more inventory and a little bit of it shifted, but we do this normal cadence to go to the third-party off-price with whatever the residual is from the flash sale.

And then the Lilly margins that are embedded in guidance?

The operating margins or gross margins?

Yes.

The op margins.

The op margin.

Kind of flattish with that last year.

We're 17.5% last year, so it's somewhere in that general ballpark, maybe down just a little bit, but -- as we did have a little bit more of that wholesale off-price.

But no, pretty close to last year.

Got it.

And maybe just a final bigger picture question.

Are you [guys excited], maybe the impacts of the holiday shifts?

And whether -- you also have a fairly affluent customer, so I guess, have you seen, do you think, any kind of impact, if it's from news flow perspective or impact on tourism?

I think we feel pretty good about the consumer overall.

I mean, it's been -- this first quarter was a little bit hard, difficult quarter to read just because of the weather was pretty bad in a lot of places for a long time and then you had the extreme holiday shift.

But at the times where we really wanted them and needed them to show up, the consumer was there.

I mean, you look at our results and they ended up being pretty strong after being in a pretty big hole in February.

And on the tourism question, Ed, I think a lot of people talk about international tourism being down.

That's never been, as you know, a huge part of our business and our customer base.

So we don't necessarily see that quite as much.

I think a lot of the people who rely on outlet stores a lot are really feeling it.

As we mentioned earlier, we're fairly limited on the number of outlets.

So we're not really feeling it there severely.

And at this time, I'd like to turn things back to Tom Chubb for closing remarks.

Okay.

Thank you very much for your interest.

We look forward to talking to you again after Labor Day.

Have a great summer.

That will conclude today's conference.

Again, thank you all for joining us.