Oxford Industries Inc (OXM) 2019 Q3 法說會逐字稿

Greetings.

Welcome to the Oxford Industries Incorporated Third Quarter Fiscal 2019 Earnings Conference Call.

(Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Anne Shoemaker, Treasurer.

Ms. Shoemaker, you may begin.

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 nonfinancial GAAP measures -- 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 per share amounts discussed on this call 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.

I want to start today's call by reminding our listeners what Oxford represents.

We are a portfolio of powerful lifestyle brands, Tommy Bahama, Lilly Pulitzer, Southern Tide and a collection of smaller brands like the Beaufort Bonnet Company, Duck Head and Oxford Golf.

Our amazing people develop fantastic, differentiated product, create compelling and innovative brand messages and deliver incredible shopping experiences to our customers in our stores, bars, restaurants and online.

And I couldn't be prouder of our people and the work they do to bring happiness to our customers.

As we reported, our third quarter generated solid results, highlighted by a 6% positive comp on top of a 7% gain a year ago and earnings at the high end of our guidance range.

While the third quarter remains our smallest quarter because of the seasonality of our largest lifestyle brands, there are a few items of note during the quarter that merit emphasis.

In September, Lilly Pulitzer held one of its semiannual clearance events.

With very limited opportunities to purchase Lilly on sale, this event continues to generate excitement for veteran Lilly lovers and those just aspiring to the brand.

In just 3 days, we profitably cleared almost all of our end-of-season inventory.

This year's after-party sale generated just over $30 million online with higher gross margin compared to the prior year.

In addition to the successful sale, Lilly Pulitzer opened a couple of stores during the quarter that represent potential new market opportunities for the brand.

First, Lilly opened a store in Palm Desert, California, as we continue to build Lilly's presence out west, where the brand is still significantly underrepresented.

We also believe there is an opportunity with the right store concept for Lilly Pulitzer to fill in some of the merchant opportunity in premium coastal communities with assortments that are curated precisely for the needs of a customer on vacation.

To test this potential opportunity, at the end of the third quarter, Lilly opened its first beach shop in Siesta Key, a quaint 8-mile long island near Sarasota, Florida.

This shop is smaller than our typical store and merchandised slightly differently with more casual and relaxed selections from the line.

We are looking forward to seeing its performance as this region moves into its high season.

Both of these stores have relatively short lease terms that allow us to test the market opportunity before committing to a long-term lease.

In the fourth quarter, we are continuing our investments in carefully selected retail locations.

In November, we opened our first company-owned Southern Tide store in St.

Johns Town Center in Jacksonville, Florida.

And we have 2 other Southern Tide stores planned for the first half of 2020, Las Olas, Fort Lauderdale and Sandestin, Florida.

Tommy Bahama will continue its Marlin Bar rollout with locations in Dania Pointe, Florida, and the relocation and conversion of our Las Olas, Fort Lauderdale store into a Marlin Bar.

Both projects are slated for completion in January.

And we have 4 more Marlin Bars planned for fiscal 2020.

St.

Johns Town Center in Jacksonville, Fashion Valley in San Diego, Lahaina in Maui and Las Vegas Town Center.

As we noted in our press release earlier today, fourth quarter-to-date sales are tracking a bit behind our previous forecast, which Scott will comment on in more detail in a moment.

With a lot of holiday selling still ahead of us and the all-important resort season beginning in a few days, we are confident that we can deliver a solid fourth quarter.

That said, we believe it was prudent to modestly trim the top end of our earnings outlook.

We remain confident that our strategy of operating a powerful portfolio of lifestyle brands like Tommy Bahama, Lilly Pulitzer and Southern Tide and emphasizing full-priced direct-to-consumer channels, will drive increased shareholder value over the near and long term.

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

Thanks, Tom.

As Tom mentioned, our full-price direct business continues to grow at a healthy pace.

Tommy Bahama and Lilly Pulitzer each posted a 6% comp gain in the quarter, with positive comps in both stores and e-commerce.

On a consolidated basis, this was the 11th consecutive quarter of positive comps speaking to the strength of our brand portfolio and the great execution by our teams.

Our gross margin held well in the third quarter.

Gross margin at Lilly Pulitzer expanded at both direct-to-consumer and wholesale.

This was offset by a decrease at Tommy Bahama, primarily due to sales mix, with off-price wholesale sales representing a greater proportion of sales in the quarter.

SG&A as a percent of sales increased 50 basis points in the third quarter primarily due to increased marketing spend.

Operating income came in slightly better than planned at $2.7 million, resulting in earnings at the high end of our range for the quarter.

Moving to our balance sheet.

Our cash flow remained strong.

And as of November 2, we had no borrowings under our $325 million credit facility and $22 million in cash compared to borrowings of $32 million and cash of $7 million as of November 3, 2018.

At the end of the third quarter, our inventory increased to $154 million from $138 million last year.

On a FIFO basis, after adding back our $62 million LIFO reserve to both years, the increase was 8%, which reflects additional inventory to support key items to Tommy Bahama, anticipated sales growth and new retail stores in Marlin Bars.

Our balance sheet and capital structure remained solid underpinnings for Oxford's future growth and investment.

Turning to our outlook.

As Tom mentioned, we are tracking a bit behind our earlier plans for the fourth quarter, and I'd like to give you some more detail on what we're seeing quarter-to-date.

The calendar shift with a later Thanksgiving and 6 fewer shopping days have made planning and forecasting more challenging.

On a consolidated basis, we went into the quarter with a plan for a mid-single-digit comp increase, which we have now moderated to a low single-digit comp increase.

In our direct-to-consumer channels quarter-to-date, we have seen strength at Lilly Pulitzer, but Tommy Bahama is lagging our earlier expectations in their existing stores and online.

We have also had delays in Marlin Bar openings.

We are still rolling out great product and marketing and are confident we will gain traction at Tommy Bahama over the remainder of the holiday and resort season.

In our wholesale channel, Lanier Apparel's replenishment business is softer-than-anticipated and Tommy Bahama's wholesale business is lower than our earlier plan.

So putting that all together for the fourth quarter, we now expect sales to range from $300 million to $310 million, slightly higher than last year, and adjusted earnings per share of $1.01 to $1.16, compared with $1.08 in the fourth quarter of 2018.

For the full year, we now expect net sales to grow between $1.125 billion and $1.135 billion compared to $1.107 billion last year.

Adjusted earnings per share are now expected to be between $4.25 to $4.40 compared to $4.32 per share last year.

Capital expenditures in fiscal 2019, including $27 million in the first 9 months are expected to be approximately $40 million, primarily reflecting investments in information technology initiatives, new retail stores in Marlin Bars and investments to remodel existing retail stores and restaurants.

Free cash flow for fiscal 2019 is expected to exceed $50 million.

Our sourcing and merchandising teams continue to make very good progress on our initiatives to mitigate the impact of punitive tariffs on our business by reducing our exposure to China, negotiating price concessions and making selective price increases.

We expect the impact of punitive tariffs to be fully mitigated by the second half of fiscal 2020.

Finally, our Board of Directors have approved a quarterly cash dividend of $0.37 per share.

Oxford has paid a dividend every quarter since becoming a public company in 1960.

Now Omar, we are now ready for questions.

(Operator Instructions) Our first question is from Susan Anderson, B. Riley FBR.

I guess just a follow-up on the lighter sales so far for fourth quarter.

It sounds like it's mainly within wholesale.

Is that correct?

And then also, maybe if you could talk a little bit about what you're seeing in your resort locations, particularly Hawaii?

And if there's been any kind of change in performance in any of those also?

Yes, the sales moderation is both the combination of Tommy Bahama direct-to-consumer and the wholesale of both Tommy and at Lanier.

And as we mentioned, we have moderated our comp assumption.

We had a mid-single-digit comp assumption before we moderated that to low single-digit in our direct businesses, and that's mostly coming from the Tommy side.

Lilly is off to a -- been off to a good start and consistently strong.

So we feel good there.

As we mentioned, this has been a really difficult holiday to plan.

The calendar shift does create some havoc as we have 6 days less.

So it's really -- you're not really on a true comp basis when you look at to date.

And so we do -- we feel good about Tommy's business.

We think we'll make up some ground, but we are moderating, and hopefully, we'll just be prudent in doing that.

And then on the Hawaii question, Susan, I think we've seen good things in Hawaii, and we're expecting more there.

This time last year, people had been kind of scared off by the volcano issues and so I think we'll see a nice rebound there.

And then in other resort locations, particularly in Florida, which is a huge state for us in Tommy and Lilly, the business has really been good -- consistently good there for quite a while now.

So good to see all that.

Great.

That sounds good.

And I guess, at Tommy then, are you seeing the lighter sales across both men's and women's?

Or are there any product categories, specifically you could point to?

Or it's kind of just really across the board?

It's really -- actually, women's has been performing very, very nicely and has been really tracking, I think, a little bit above what our expectations would have been.

Men's is lagging a little bit.

And that actually, we believe we're going to make that up in large part.

I think when we look back at the '12, '13 calendars, which is the last time we had this exact same calendar shift in the way that the business built then, it really ramps up in the week or 2 before Christmas.

And I think that's what's going to happen again this year.

We've done what we think is prudent to the guidance, but we're also very excited about the opportunity that we have in front of us.

And then as we always remind people, resorts is very important to our brands as well, and we'll be starting to do some of that resort-type business in the next couple of days, really.

We've got in Tommy a wonderful women's resort mailer that should be hitting homes, including hopefully yours, this week.

And it is beautiful, and we've got great product to support that.

Great.

I'll look for that.

And then I guess, finally, just on the gross margin, maybe if you could talk about a little bit the puts and takes for fourth quarter, but then also for Tommy, is there still opportunity, particularly the later sales to continue to grow that margin?

Yes, I think there is certainly opportunities at Tommy.

But the gross margin, we -- Tommy, we were a little bit lighter, but that was in third quarter, but that was really the wholesale mix, where our wholesale business had more off-price sales which is extremely low margins, which weighed that down.

Fourth quarter, I think we'll be a little bit closer year-over-year.

But we need direct-to-consumer to have a good holiday, and I think it will.

Our next question is from Paul Lejuez, Citigroup.

This is Tracy filling in for Paul.

I had 2 questions.

I was hoping in your DTC businesses for the third quarter, you could tell us what the drivers were of the comp between AUR, traffic, UPT, et cetera?

And then also, how that's looking fourth quarter-to-date, I guess, really at the Tommy business, what's changed there?

Is it traffic conversion, et cetera?

And then I have a follow-up.

Yes, I would say, Tracy, yes, the big driver on the comp is really conversion.

That's the story, I think, is getting better conversion out of the traffic that we're getting.

I don't think there's a big movement in AUR, ADT so much.

It's really the conversion that's driving it.

Was AUR up for the quarter at both brands -- for the major brands?

Hang on just a second.

It was down slightly at Tommy, I believe but I want to confirm that and up slightly at Lilly, but not big movements.

And some of that bounces around from year-to-year.

I don't think we saw anything too earth shattering there where we're -- again, where we're seeing bigger movements is really in conversion.

I guess is that the issue in the fourth quarter, where I think you said the Tommy comp had slowed on the retail side a little bit.

Is it -- did conversion just fall off a little bit?

Well, the problem is I don't -- you're really not comped with the calendar.

That's the difficult thing about it right now.

So -- but we're really having to compare back to our plan.

And our plan, maybe was a little front-end loaded -- more front-end loaded than it should be when we really study history, but still we are off our earlier plan by a little bit.

We want to be prudent there.

But you really -- I don't think you're going to be able to really conclude a comp until you get through the whole holiday season.

Got it.

And then my follow-up is, I was just wondering if you could update us on some of your omnichannel initiatives like buy online, pickup in store?

Yes.

Great question, Tracy.

Thank you for asking it.

We've got some really exciting things going on there.

We recently, in Tommy Bahama, went live in all stores with our enterprise order management system, which allows you to go into your local store.

And if they don't have the particular item you're looking for, your size in stock, they can in the same transaction with the other merchandise that you're purchasing, they can bring it up.

Same transaction, one receipt automatically gets routed to the best store for that to shift to and you'll have that basically the next day.

And that's something that we've always been able to do, but it required a lot of labor and a lot of work to get there and a separate transaction in a lot of cases.

This is a single transaction for the guest, single receipt, much easier and quicker for the store associate, which means that they can get you checked out quickly and then move on to helping the next guest.

And then in Lilly Pulitzer something that we've got going on that's really exciting is that we've got a curbside pickup option this time around, which is great.

So you can get your order and for our very, very busy Lilly customer, we've got legitimate gift wrapping not just a gift box, but we wrap it for you in the store in beautiful wrapping paper with a ribbon and a bow, and then you can pick it up at curbside.

So there are lots and lots of ways that we're using technology to really enhance our relationship and interaction with guests.

And we're excited about those and think that they're going to be meaningful contributors to our fourth quarter business.

Our next question is from Edward Yruma, KeyBanc Capital Markets.

I guess, first, on promotion.

You guys have tried a little bit of a different strategy this year seems like within Tommy Bahama with some key item pricing.

And I noticed you also ran a Lilly Pulitzer promo that I think was $20 off $100, which we haven't seen in a while.

I guess how would you score the efficiency of those promos?

And did they perform as you would have expected?

Thank you, Ed.

Good question.

And the key to all of that is, as you know, during that Cyber 5 or whatever you want to call it, that Thanksgiving weekend through Monday, as you know, the market is very noisy.

There's lots going on.

Everybody's got a deal and an offer.

And so what we want to do in our brands is make it simple for our customers.

You know some of our typical marketing activities are a little bit complicated.

Our customer understands them well.

But during that very busy time of year, we wanted to offer them something that's simple, respectful of their time during that very busy time of year and it worked.

We love the results that we got, and to go to the $20 for every $100 you spend in Lilly Pulitzer, that actually, we don't think, on a net margin basis, that was any worse.

And in fact, I think there's a chance it ends up being better than what we did last year with our gift with purchase program.

So in Lilly, that was for Sunday and Monday of Thanksgiving weekend; and Thursday, Friday, Saturday, they had a stackable ornament gift with purchase offer; and that was a very simple, I believe, it was $75.

Every $75 you spend, you get another Christmas tree ornament.

And again, very simple.

Customer doesn't have to spend a lot of time thinking about it.

They can spend what they want to spend and they get a nice little treat for every $75 there.

Those worked really quite well and, I think, with very minimal margin dilution.

I'll add a promotion that approaches the same number of days.

So it wasn't additional days.

It was just mixing the promos up during those same day.

So it wasn't more days on promo.

It was just gift with purchase part of the time and then the $20 off $100 part of the time where last year was gift with purchase the full 5 days.

Great.

And one just follow-up, if I may.

On inventory, I guess, how do you feel about the quality of inventory?

And how do you plan to exit the quarter given that the comps are a little bit maybe softer than you had initially planned?

We feel good about the inventory.

Tommy, we're up 8% year-over-year.

And the lion's share of that is at Tommy and most of it is really being in stock of key items.

And that's one thing we feel good going into holiday, where last year, we were starting to break in some key items.

We are well stocked in things like the Boracay, the Newport Coast, long sleeve woven, some of those key items that become very important for holiday.

We are in stock, where last year, we were not quite stocked properly.

So I think this adjustment in inventory is appropriate.

Last quarter, we were up 16% year-over-year.

So now we're up 8% year-over-year, which I feel is about the right running rate for us.

(Operator Instructions) Our next question is from Rick Patel, Needham & Company.

Congrats on the strong third quarter performance.

I'm hoping you can help us understand what's embedded in the updated guidance.

Tom, you talked about expecting to see a bounce back into Christmas.

Is that improvement reflected in your current guidance right now?

Or are you assuming that the weakness persists?

There's -- we have some improvement baked in, and we believe there's opportunity for improvement above what we have baked in, but we do have some improvement baked in.

And just looking, studying the calendar setting.

The last time this calendar is just that, that's exactly what happened.

We are -- and again, the planning is difficult here.

I think there's a lot of shopping days and some key shopping days, which -- so we do have some improvement baked in, but we believe there's opportunity for improvement above what we baked in.

And I would add to that, Rick, that our stores have never been better prepared to do a lot of business over the next couple of weeks.

I think in both brands we've got the right items in stock.

Our staffs are better than they've ever been before.

They've always been terrific but they're better than they've ever been before.

And we've got the tools like the enterprise order management that I mentioned to you, a client telling tool that we have in Lilly Pulitzer.

So we're giving them lots of tools to enhance the relationship and the interaction with the customer.

And again, as Scott's mentioned, you look back to the '12, '13 calendar shift, we're actually tracking a little bit better than the way that one unfolded.

So hopefully, that same curve will continue, and we think we're ready to get our share of the action for sure.

Got it.

And can you also provide some color on your new store test for Lilly.

Maybe compare and contrast that smaller format location with your legacy stores?

And if the test does go well, what's the longer-term opportunity you see for these smaller format locations?

So it's kind of a nooks and crannies strategy.

If you're familiar with Siesta Key, it's our store in Sarasota or one of them.

We've got a couple of them.

But one of them is on St.

Armands circle, which is actually on, I believe, it's called Lido Key.

And the next island below that is Siesta Key.

And it's a beautiful Florida West Coast to Florida Beach place where people have second homes and go and stay at rentals and other places.

And the idea is that a lot of people that go to Siesta and other places like that, once they get there, they really don't want to leave even to go the couple of miles up to St.

Armands Circle.

So what we're offering them is on that island, in a very small storefront, I think it's 1,100 feet or something.

It's a casual BT kind of Lilly Pulitzer store that's got a very casual and relaxed assortment.

It's all out of the line.

But we've just assorted it a little bit differently.

And there are 2 things that, that store could do for us, I think.

And one is we can do some incremental business because we're serving her right there, where she is, a walk or a bike ride from her house.

And we can get her that cover-up or pair of shorts or whatever it is she forgot to pack and do some incremental business.

And then I think the second thing it does for us is it reinforces our positioning as a true resort brand because we're right there in the place with her.

And finally, it gives us some exposures to some eyeballs that might not otherwise notice us, and whether they shop while they are there or maybe when they get back home to wherever they came from, they get online and check us out a little bit further so -- and we can make money doing this.

This is not -- it's not just a marketing exercise.

The rent on these types of locations, it's not much.

And we think we can make money.

And so if it works, we think there are a number of these places, there are probably 4 or 5 of them just on the West Coast of Florida, where you can fill in with a little store like this.

So it's not -- at the end of the day, it's not going to be the biggest thing that ever happened at Lilly Pulitzer, but we think it's a nice addition.

Our next question is from Steve Marotta, CL King & Associates.

Scott, as far as the quantitative impact of tariffs next year, I understand clear in what's the mitigating factors are, but I believe you said that it wouldn't be until mid next year that they'd be fully offset.

Can you talk a little bit about, obviously, you're not giving specific guidance for next year, what would be a normalized impact of unmitigated tariffs or partially mitigated tariffs for a half a year?

Yes.

Well, we think it's probably going to be similar to the second half of this year, which will be in kind of that $0.15 to $0.20 range.

We think right now that next year will probably be something in that ballpark.

And a lot is the way goods flow and exactly when they flow out.

But we do have some -- we're really happy with the actions our teams have taken working with vendors, moving, sourcing.

And we've made some really good progress.

So we feel good about it, and we feel very confident that the second half of the year, this is going to be a non-event.

So even if tariffs are in, we're going to have done what we've had to do.

It just takes some time to get it put in place given the long product development cycle.

But we're -- we started working on this a long time ago, and we've made some good progress.

And as far as the Marlin Bars that were opened this year, are they all tracking on plan?

And can you talk about how long those delayed -- Marlin Bars were delayed?

None have opened this year.

We opened...

I mean the ones that are opened?

Yes.

The 2 that opened have been -- Coconut Point just continues to do fantastic and Palm Springs is doing well.

That area is still being developed.

So it's not at full production, but it's in a moneymaking mode, and we feel good about it.

The ones we're going to open, those have kind of delayed a little bit, just permitting and getting possession of the space.

So there's a lot of things, but we're going to get 2 opened late this year, and those are in construction now, and we've got 4 slotted for next year.

So we really believe this pipeline is there.

And we're hoping that we were going to get 3 opened this year and that they were going to be early in the fourth quarter.

Now we're going to get 2 opened and they're going be towards the end of the fourth quarter.

So we're not going to get much impact at all this year from the 2 that opened.

But next year, we'll go into the beginning of the year with 2 up and running and another one coming relatively early in the year, and then the rest will be spread out during the year.

So we -- it always takes a little longer than we would like, but we've got them coming.

We have reached the end of the question-and-answer session.

And I will now turn the call back over to Tom Chubb for closing remarks.

Okay.

Thank you very much for your interest, and all the best to you and your families for a very happy holiday season.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.