Oxford Industries Inc (OXM) 2020 Q3 法說會逐字稿

Greetings, and welcome to Oxford Industries, Inc. Third Quarter Fiscal 2020 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Anne Shoemaker, Treasurer. Please go ahead.

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 and first quarter 10-Q. 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.

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. I am encouraged by our third quarter results as each of our branded businesses, Tommy Bahama, Lilly Pulitzer and Southern Tide exceeded our internal plans. During our historically smallest quarter of the year, our full-price e-commerce business grew 51%, helping partially offset by headwinds in other channels due to COVID-19. Our sustained digital success this year underscores the power of our brands and their strong consumer connections and is a great indication that our business is well positioned for success in the post-pandemic environment.

With the onset of COVID-19 in March, we focused on 3 priorities: the safety of our people and our customers, protecting the integrity of our brands and preserving liquidity. We have done a good job executing on all 3 of these fronts. At the same time, our business in the industry are facing significant changes that have only accelerated during the last 9 months. As we have progressed through the year, while not taking our eye off the 3 priorities I outlined, we have resumed our focus on initiatives that will help us to better capitalize on important market trends in both the near term and the long term.

In the post-pandemic world, we believe products will continue to trend towards easy to wear and easy care, traffic in malls will remain significantly below 2019 levels. Department stores will be less relevant than they were before. E-commerce will be bigger and more important than ever. Company-owned stores and restaurants will be a physical representation of the brand, seamlessly integrated into a total direct-to-consumer ecosystem, including e-commerce, and heavily digital diversified marketing channels will be essential. All of these trends should benefit our business as we emerge from this crisis.

We are building upon our already strong foundation and are well prepared for the post-pandemic environment. We continue to identify ways in which we can better build a customer-focused, digitally driven, mobile-centered and cross-channel personalized and seamless shopping experience that recognizes and serves the customer in their brand discovery and purchasing habits of the future. We are delivering innovative and differentiated products that are on brand and in sync with consumers' desires and needs from altering virtual shopping appointments curbside pickup, digital clienteling and having our store associates field customer service calls to delighting our guests with our exciting Marlin Bar concepts.

Each of our brands continues to develop and implement new ways to enhance the customer experience. We continue to invest in improved customer data and analytics that are helping and will help us assimilate, analyze and use customer data to provide a better, more personalized experience that boosts retention rates and spending levels. Importantly, these tools are also helping us identify and acquire new customers, a critical initiative for us. We continue to expand our enterprise order management capabilities to increase our ability to ship from our company-owned stores. By matching demand from anywhere with inventory located anywhere, we are able to minimize stock-outs, increase customer satisfaction and improve inventory efficiency.

This is helping us navigate through the pandemic and positions us well to grow and thrive in a new post-pandemic normal. Across Oxford, our talented teams have risen and continue to rise to the occasion by staying focused on our core purpose of making our customers happy. Our brands are all happy brands, and our customers look to us to deliver happiness through our products, communications and brand experiences. Throughout this challenging period, our people in every function from creative and design to shipping and fulfillment and every instrument in between have helped us deliver happiness to our customers. We are grateful for their efforts and proud of their achievements. We have been in the apparel business for almost 80 years and have a portfolio of businesses, which has adapted over the years to remain relevant to the marketplace and the consumer and to deliver shareholder value.

Today, we announced our most recent action, the decision to exit our legacy Lanier Apparel business, which has been a part of our portfolio for more than 50 years. Throughout that time, Lanier Apparel has been well-run by an exceptional group of people. That said, Lanier's business model, which provides license-tailored clothing to department stores and big-box retailers does not fit our long-term vision for the enterprise and the challenges presented by the pandemic have amplified this misalignment. Exiting this business will result in a portfolio that is completely in sync with our strategy. We are working closely with our licensors, customers and suppliers to ensure a smooth process.

And I want to personally thank the dedicated employees of Lanier Apparel for their contributions to Oxford over these many years. I'll now turn the call over to Scott with more details on our third quarter results and our plans for the rest of the year. Scott?

Thank you, Tom. We were quite pleased with our performance in the third quarter given the circumstances. As a reminder, our third quarter is historically our smallest quarter of the year, with Lilly Pulitzer Spring/Summer clearance events, making a meaningful contribution. This year, we made some changes to the events. We did not hold sales in our stores, Lilly's customers show up in force and for the safety of our employees and our customers, we decided to limit the sale to online. The other big change was to hold the event in 2 parts. The first in June in our second quarter and the second in September in our third quarter.

The third quarter event was $12 million or 41% lower than last year due to the shift. The combined online events, however, were very successful in $2 million or 7% higher year-over-year. For our full-price e-commerce business, we saw solid growth in each of our brands. On a consolidated basis, our full-price e-commerce comps increased 51%. Each of our brands exceeded our internal plans for the third quarter with full-price e-comm at Tommy Bahama increasing 38%, Lilly Pulitzer up 93% and a 36% increase at Southern Tide. Our full-price retail sales decreased 45% as traffic was down significantly, and most of our stores continued to operate under various restrictions.

Our important Hawaiian locations were severely impacted by travel and other restrictions. Tommy Bahama operates 19 locations with a food and beverage component, excluding Hawaii and New York, we had extended closures and restrictions, we were very pleased with our restaurant comp of negative 6%. Our newest Marlin Bar in Jacksonville, Florida, which opened in the second quarter, exceeded even our prepandemic plans. Overall, our restaurants were down 30% year-over-year. Our gross margin was 55% in the quarter comparable to last year, and SG&A decreased 15% or $21 million, some of which is permanent.

Impacting both gross margin and SG&A were charges related to the exit of Lanier Apparel, which Tom just discussed. During the third quarter of fiscal 2020, we recorded a $10 million pretax charge related to the Lanier Apparel exit. About $6 million of this was inventory markdowns impacting cost of goods sold. Most of the inventory markdown was reversed and included in a LIFO accounting credit in corporate and other. Approximately $4 million were SG&A charges related to operating lease impairment, severance and retention costs and noncash fixed asset impairment.

In addition, between now and the completion of our exit in the second half of 2021, we expect to incur approximately $5 million of incremental charges. Approximately half of these charges are expected to occur in the fourth quarter of fiscal 2020. We expect to exit Lanier Apparel to be cash flow positive.

Moving to our balance sheet. We ended the quarter with inventory 4% lower than last year, which we believe is properly reserved and positions us well for future sales. As Tom mentioned, preserving a high level of liquidity has been a priority for us, and we have executed well on that front. The strength of our balance sheet entering the pandemic, as well as the actions we have taken to mitigate the COVID-19 impact, positions us well for the future. We ended the third quarter with $35 million of borrowings and $53 million of cash. This left us in a net cash position of $18 million compared to $22 million in the third quarter last year. And we had $287 million of unused availability under our revolving credit agreement. We have re-evaluated all of our capital projects. Our technology projects to support our digital initiatives retained their high priority. We also remain committed to expanding our successful Marlin Bar concept.

Year-to-date, we have converted 2 locations to Marlin Bars and opened a new location. In the fourth quarter, we expect to open 2 Marlin Bars in Lahaina, Hawaii and Fashion Valley in San Diego. And Southern Tide has opened 2 more stores in Florida this year, bringing their store count to 3. We have also taken advantage of the current situation to do some pruning. Year-to-date, we have closed 4 Tommy and 2 Lilly stores. We expect to close 2 more locations this year and have a handful slated for closure in 2021, unless the landlord provides us a compelling reason to stay.

Looking ahead, with the recent resurgence in COVID cases, we continue to see depressed traffic in our stores, with particular concerns around our 25 stores and 3 restaurants in California. Meanwhile, e-commerce has remained strong quarter-to-date. Based on current trends, combined with our view of how we think the remainder of the season plays out, we believe our fourth quarter revenue will decline on a percentage basis similar to what we experienced in the third quarter. As we think about fiscal 2021, it's too early to comment on anything specific. But with our exit from Lanier and other macro changes, we expect our top line to be smaller than 2019. However, we anticipate returning to profitability.

Lastly, our commitment to returning value to shareholders is clear. Oxford has paid a dividend every quarter since we became public in 1960, and our Board of Directors has declared a quarterly dividend of $0.25 per share. Thank you for your time today, and we will now turn the call up for questions. Laura?

(Operator Instructions)

Our first question comes from the line of Paul Likes with Citigroup.

Curious if you can maybe talk a little bit more about what you're seeing quarter-to-date, both in terms of sales trends and how that ties into what you expect for the rest of the quarter. Also curious about promotional environment, what you're seeing currently and how you're thinking about the gross margin line for -- through 4Q. And I think part of the gross margin improvement that you saw this quarter was probably some change in really promos. But maybe can you also talk about the other moving pieces within the gross margin line in 3Q?

Okay. I'll talk about the sales trends a little bit. Paul, this is Tom Chubb, and then I'll let Scott comment on anything else he would mention on the sales trends as well as walk you through the gross margin issues.

So sales quarter-to-date, we've actually been really pleased with. Our business has been strong. With the election, November, as expected, started out a little bit slow, but we have really planned that. And then since then have picked up momentum and I think absent the California situation, we would probably keep thinking that the sales decline in the fourth quarter would be a bit less than the third quarter. But because of what's happening there, with the new restrictions and having 27 stores and 3 restaurants there, we backed off our expectations a little bit for the fourth quarter. But what we've seen, it's been good. It's been -- stores quarter-to-date have actually been better. They have continued to pick up a little bit of steam and e-commerce has continued to be strong.

I will point out the obvious that e-commerce with FedEx and UPS, having the issues they're having, that will probably start to wind down earlier this year than it has in years past. But of course, we build all that into the plan as well. So really happy with what we're seeing so far. But obviously, still a challenging environment out there.

As far as the gross margins in Q3, on a consolidated basis, we're a little bit up, slightly up year-over-year, and that did benefit from the shift in the Lilly clearance event where some of it was moved back to the second quarter. But Tommy was just a little bit lower year-over-year. And Lilly was meaningfully higher, but again, that mix influenced that. Then Southern Tide and Lanier were both meaningfully lower due to mainly some inventory markdowns. So -- but it all blended together to be up slightly.

Got it. And then how should we be thinking about gross margin for report case?

For the fourth quarter, we'll probably be down slightly year-over-year, but it will be pretty comparable in Q4, down just kind of a little bit, it's the way it's looking right now.

Our next question comes from the line of Edward Yruma with KeyBanc Capital Markets.

I guess first, and this is a follow-up to Paul's question. I know that your promo at Tommy was restructured this year and wasn't the classic kind of bounce back. I guess kind of how do we think about, if any, modeling applications to the lack of a bounce back?

And then two, I know Lanier has historically been really managed for cash flow. Obviously, the world has changed. But how should we think about kind of what the normalized cash flow was from Lanier as we think about kind of modeling your business post-Lanier?

I'd actually go ahead to you, Anne, once -- okay. Okay. On the bounce back at Tommy, we did the same event, the timing was just a little bit later. Where last year, the cards went out and laid October and this year, they didn't go out until, I guess, second week of November. So it's just really a little bit of a timing shift at Tommy, but they still have the cards and the flip side of that where you spend a certain amount and we will expect a little bit less transactions just because of the traffic in the stores, but we are still doing it online also.

And what was the next question?

Cash flow.

Yes, Lanier's cash flow, I mean, it was very volatile over the last couple of years. I mean, yes, it would have some ebbs and flows. But normally on a normal year when they weren't having a significant inventory build or contraction, Lanier would had very little capital expenditures, very little DNA. So it's really the tax-affected operating profit. It was really usually translated to their cash flow. But they did over the last couple of years, have a lot more volatility with inventory levels at times running up and then at times, running back down.

And then this year, obviously, they've had a very challenging year. So they've been using cash in their normal operations this year. And so it was becoming the -- we didn't have confidence that we could maintain that cash flow.

I think, Ed, if you look back at that and sort of normalize the inventory peaks and valleys through the years, the sales were really sort of flatlining. And so you really shouldn't -- if you averaged it out over time, you're talking a pretty small amount of cash flow that was actually coming out of Lanier.

Our next question comes from the line of Susan Anderson with B. Riley FBR.

I guess I'm curious, just looking at fourth quarter, are you doing anything different with the product or the business? I think, typically, you would be rolling out your resort line. But with limited people, I guess, traveling to resorts, I guess, how are you marketing the product to consumers? And then also, I'm just curious if you could talk a little bit about the home product at Tommy and how that's doing?

Yes. So the theme is, of course, as we talked about in product, it's really easy to wear and easy care. You see that throughout the industry, and that's true for us as well. So what that means is a lot of lounge-type wear across all our brands, all that type of product is doing quite well as they always do this time of year in Tommy Bahama. Second-layer knits for men are doing really, really well. They're giftable items, they're comfortable items. They actually lend themselves really well to the work-from-home and Zoom environment. And then the sort of athleisure-type performance-inspired products that we have in all the brands have done really well, and that's where we've tried to tilt the product assortment.

And of course, we were reacting on very short notice, but that's what we've tried to set up for holiday, and that's really -- that's what's selling well. One of the highlights, Susan, of the selling so far in Tommy Bahama has been on the women's side, where typically, for Tommy, women's sort of takes a step back this year at this time of year, and it becomes really all about the men's business. Well, this year, it's different in that men's is doing well. But women's is really stepping up, and we've got quite a few items, women's items in our top 10 right now, for Tommy Bahama. And those are really things that are coming out of our Island Soft line, which I would describe as being cozy loungewear and then our IslandZone line, which is performance product that we described as sort of effortless function and feel.

So those are real bright spots that we're very excited about. We've got a really cool thing in Lilly Pulitzer right now, which is a couple of items that have a built-in face mask that you kind of pull up when you need it. And when you don't need it, you can drop it back down, which is a fun nod to the current environment. And that's creating some excitement and some buzz as well.

That's great. And then what about the home product at Tommy?

Yes. Well, home kind of stuff, giftable-type items, of course, very, very popular. It's not a massive part of the line at Tommy Bahama, but it is popular as always this time of year. Cookies also sell well, which is interesting extension of our food business, but we do offer packaged cookies in our stores that those are doing really well right now, awesome.

Well, that's interesting. I guess really quick, too, just on the regional performance, did you see any change from second quarter in the third quarter? And then also, I guess, it sounds like Hawaii still is a pressure point that -- has that improved at all?

Yes. I think the big theme has been that sort of throughout the year. And I'm trying to draw some generalizations, but sort of Florida and the Southeast have tended to be the strongest pretty much throughout this whole situation. And then the rest of the country has been weaker with movements in traffic really sort of corresponding to the level of COVID infections and hospitalization, some things like that.

So the Midwest has been weaker lately than some of the other regions. Obviously, California has its challenges in Hawaii with for a long time, we fundamentally couldn't travel at all there. They have created a path for you to be able to travel now, at least, so that's improved a bit in Hawaii. And Scott, anything I'm missing there on the regional flavor?

No, I think that covers it.

Okay. And then just lastly, really quick on Southern Tide. Was it the new stores, I guess, that helped to drive the growth there? Or did you guys see also, I guess, maybe growth driven by online pickup?

It was both and then a little bit of a whole -- off-price wholesale too, I believe, that had helped. But we were pleased with what we saw in direct-to-consumer, and e-comm, as we mentioned, was plus 36% for the quarter, which was great to see. And then also, we were happy to have the stores open and Southern Tide continues to do some great marketing. I think they punch above their weight in that regard. And that's been true this year too. I think they've tailored their marketing very well and continue to deliver a lighthearted, upbeat, happy message, but one that was not tone-deaf to what's going on in the world either.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

As you think about the shift with Lilly Pulitzer and the flash sales, how are you thinking about promotional cadence going forward for all of the brands? And then also, as you think about this fourth quarter and into next year, the expense structure given shipping and shipping surcharges with online, how are you planning?

Okay. I'll talk about the promotional thing. I think we -- what we learned this year is that shifting the promotional cadence around. It's not a bad thing at all. I think the customer actually enjoys the variety a little bit. It takes some of the predictability out of it, which is good for us from a business basis. So I don't know exactly what we'll do next year. It's way too early to say that. But I do think the idea of mixing things up a bit is a good idea. And it's something that sort of was inspired, if you will, by the coronavirus situation this year. But I do think it's one of those valuable lessons that we'll take away from this year because we're really pleased with the way that our promotional activities played out this year.

And we think it's been good for the guest, created some excitement and variety for her, and it's good for our business. And then on the shipping charges and the surcharges and how that will impact the quarter, I'll let Scott comment on that.

We are obviously getting some surcharges, but we've also implemented the enterprise order management abilities to ship e-comm from the store at Tommy, and that's going to help mitigate that some. We're not shipping all orders in store, obviously, but we are able to take advantage of that. So we do have a bit of mitigation because we're shipping a lot of orders a lot closer to person's home. So not only will it be better customer service, it also will reduce some freight costs. So net-net, it will probably be a little bit higher, but we do have a little bit of mitigation with the enterprise order management system.

And one last thing of the stores that haven't reopened, are you looking to close them? Do you keep them? How do you think about that store base and in -- like Manhattan, how do you think about it?

Well, we've got, I think, a handful of stores that have already closed this year, a few more that will close during the year, and then a group next year. And altogether, I think that's about 22?

Yes, just the 2 together.

The 2 years together, those are -- and that could change depending on landlord negotiations or whatever. But what we're really doing, Dana, is looking very hard at any opportunity where we have a kick-out clause in the lease that allows us to get out at a certain point or we've got a renewal. We're just looking at them and evaluating them very carefully to see whether it makes sense to continue to operate that store or can we satisfy that demand some other way, either through targeting e-commerce more heavily to that area or through an enhanced wholesale relationship or whatever it may be.

So we're being smart about it, I think, being very analytical about it, taking a 360-degree view of those stores. And if we were to close them, how we continue to serve that guest and capture those dollars. And I think what will happen is that will lead to some closures, but we're also -- we're opening a few stores too as you know. So net-net, I think the store account will probably drift down maybe just a little bit over the next few years that we'll end up with a portfolio of stores that are better positioned and more profitable for us.

Our next question comes from the line of Steve Marotta with CL King.

Tom and Scott, and forgive me, my phone disconnected briefly, if this question was asked, my apologies. But can you talk a little bit about inventory being down 4% versus sales down being 27% and what gives you confidence that the inventory composition is good?

Yes. Our inventory on [all goods] Tommy is down and Tommy is pretty flat. And -- remember, we shifted their summer line to serve as kind of the resort spring, much of the resort spring line. So we do have that spring inventory in-house where last year, some of that would have not left factory yet.

So at the end of the quarter, I think we have that difference. But I think our inventories are in good shape. Our old inventories or aged inventories are actually lower year-over-year. And our core inventory, some of the basics is a little bit higher year-over-year, but we feel good where we -- that, that will work out an ordinary course. So we think -- we feel good about our inventory and the items that we felt we do need to liquidate, we've taken proper reserves on those. So I think overall, we are in good shape.

That's very helpful. I'd also like to review what you said about Marlin Bar that they are tracking at pre -- at your pre-COVID planned levels. That's pretty amazing considering what COVID has done to restaurant traffic in general. Can you unpeel that a little bit more?

Yes. No, not only are they tracking at pre-COVID planned levels, the new one that we opened in Jacksonville is actually exceeding the plan that we had for it before we had even heard of the coronavirus. So it's been really awesome to see, and it's also driven a big increase in our retail business there. It's not technically a comp because we moved the location of that store within the center, but whereas our Tommy stores in general are comping down about 40%. And that location this year is comping up since the opening in the Marlin Bar, I think about 30% or so. So you have a massive difference, which is attributable, I think, primarily to the existence of the Marlin Bar there.

And one of the greatest things about that is a huge amount of that comp increase is actually being driven by women's. So that's turning into one of our strongest women's stores. And as you know, Steve, we all always thought we had a bigger opportunity in women's than we've been sort of bringing into the cash register. And what we're seeing is that in these Marlin Bars, not only do they help drive the overall business, but they really help drive the women's business, which is a big opportunity for us.

And then you, Steve, heard from Scott before about all the advantages of the Marlin Bar with the lower capital commitment, the lower rent number that's typically involved in the lower labor level that you can operate on there. So they're a winning formula. I would also say that from a consumer standpoint, they're more about how people want to eat out these days with the -- more of a grazing approach than a full sit down multicourse meal that we have in our full-service restaurants. So they offer great quality of food, but it's in a sort of a small plate type and sandwich and bowls and salads format with great cocktails and wine and peer and such, and that's something that's very appealing to people in the contemporary market.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Tom Chubb for closing remarks.

Okay. Thank you, Laura, and thanks to all of you for your interest in our company. Stay safe, and I wish you and your families a very happy holiday season, and we look forward to talking to you again in March.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.