Oxford Industries, Inc. (OXM) Earnings Call Transcript & Summary

Thanks, and good afternoon, everyone. I want to start by reminding those on the line that some of what we say during this call, including in the Q&A portion, could be considered forward-looking statements under federal securities laws. Such statements aren't promises, and what actually happens may end up differing significantly from what those statements express or suggest. The key factors that might lead our operating results or financial condition to come out differently are covered in the press release we put out earlier today, as well as in the documents we file with the SEC, among them the risk factors found in our Form 10-K. We're under no obligation to revise any forward-looking statements. Also, on this call we'll be going over certain non-GAAP financial measures. A reconciliation between non-GAAP and GAAP figures appears in the press release we issued earlier today, and you can locate it under the investor relations tab at oxfordinc.com. At this point, let me bring in the people joining us on today's call; here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO. I appreciate your time, and I'll now hand things over to Tom Chubb.

Good afternoon, and thanks for being with us. Before I update you on how we're handling COVID-19 and on our results for the first quarter, both financial and operational, I want to take a few minutes to talk about what's been happening lately. The events of recent weeks throughout the nation have made it painfully clear that our country still comes up far short of the national ideal of racial equality and equal economic opportunity for everyone. The moment has come for all of us to listen, to learn, and to act. Feeling heartbroken, afraid, or uneasy is understandable, yet we have to get to work and do something so the future is different. With that in mind, Oxford is committing $1 million in additional support spread across the next four years, aimed at helping our local communities tackle economic and racial inequality through education. Every single child, no matter their race or their economic situation, ought to have the opportunity to learn and to succeed. When a child can obtain a quality education, the odds of success rise exponentially. Far too often, especially in communities that are economically disadvantaged and in communities of color, that access simply isn't there. What we're committing to continues Oxford's lengthy record of backing education programs that widen access to quality education for youth who are economically disadvantaged in communities that are predominantly African American. Now let's turn to what's happening in our business. Obviously, this year is highly unusual. In any normal year, our central aim is always to deliver sustained profitable growth that creates long-term shareholder value. Given the economic shutdown in response to the COVID-19 pandemic, and given the character of our business, this is a year in which reaching that aim is nearly impossible; we see this situation as temporary, and we believe that by concentrating on our people, our brands, and our liquidity, we will come out of this year well positioned to prosper in the new, very different post-COVID marketplace. On those three fronts — people, brands, and liquidity — I'm extremely pleased with what we've achieved since March and with the path we're on for the remainder of the year; on the people front, the COVID pandemic and the shutdown it caused have been enormously disruptive for our people both personally and professionally. To get through this hard situation, we've had to make a number of painful yet necessary moves that have compounded the disruption in people's lives. Those moves include layoffs, furloughs, pay reductions, and other steps, such as working from home, that have intensified the difficulties people are dealing with. We never take such steps lightly, and I'm deeply grateful for the way our teams have pulled together. Their dedication, ingenuity, and focus went far beyond anything I could have imagined. As we start to come out of the shutdown, or in the earliest phase of recovery, I think our team is stronger than it has ever been and better equipped to meet the fresh challenges our industry faces. Second, since our physical stores were largely closed for multiple months and are just now gradually coming back, we've done an excellent job safeguarding and maintaining the strength of our brands and the ties we have with our shoppers, so that we stay well positioned for the consumer marketplace after COVID; we made moves to help lessen an excess inventory situation, which would certainly have forced us into aggressive markdowns and promotions that might harm our brands' strength. We cut back and called off orders already placed, we lowered the volume of forward orders we had earlier planned, and we pushed back and re-merchandised product that was already headed our way. Thanks to our digital marketing and e-commerce strengths, we've also succeeded in keeping shoppers connected to our brands in ways that make sense amid this strange period. The main point is that a number of the strongest messages were the ones in which we truly emphasized our brands and what they say about optimism and happiness. Shoppers genuinely see our brands as an escape from certain realities of life in a quarantined, work-from-home, home-schooled world. Coming out of the shutdown has also sped up our push to become genuinely omni-channel; we think every one of these steps leaves our brands well positioned for what comes next. Last, and quite significantly, we've watched our cash outflows extremely closely and because of that, have kept intact the robust liquidity we had before the shutdown began. We feel sure we'll end the year with liquidity that is more than sufficient to expand and prosper ahead. A number of the main steps we've taken include painful yet needed cuts to employment expense, among them removing cash bonuses and lowering salaries for executives and other employees, cutting forward inventory commitments, decelerating capital expenditures, working out fair rent terms with our landlords, and trimming our dividend along with the cash compensation for the board of directors. A lot of these steps continue, among them our talks with landlords as we try to settle the present circumstances. To repeat, our main priority this year is ensuring our people, brands, and liquidity sit in a superb position for the consumer marketplace after the shutdown. I take great pride in what we've achieved and think we're moving in the right direction toward meeting these essential goals across the rest of the year. I'll hand the call to Scott now for further specifics.

Thanks, Tom. We got off to a solid start in the first quarter of 2020. Back in February, we were thrilled to launch two new Tommy Bahama Marlin Bar and Grills, both located in the Fort Lauderdale area. Positive comps were being reported by our retail and e-commerce operations, and we were poised to extend a multiyear streak of positive comps. When mid-March drew near, COVID-19's spread started picking up speed and began to affect the retail marketplace; on March 17th, we temporarily shut every one of our North American stores and restaurants to safeguard the health of our employees and customers. Work-from-home strategies were successfully put in place at our corporate offices, and by applying proper safety measures, we have kept every one of our distribution centers operating. The seasonality of our business makes Oxford's COVID-19 impact even worse. Spring/summer is the primary focus for our Tommy Bahama, Lilly Pulitzer, and Southern Tide brands, and four of our strongest months of the year fall between March and June. Our stores and restaurants, which accounted for 47% of our overall sales in 2019, only started reopening in early May, and we anticipate that nearly all of our locations will be open by the end of June. That said, as our stores reopen, they are running under numerous restrictions and with consumer traffic that is recovering gradually. On average, the locations that have reopened are running at roughly half of prior year levels, with notable differences across regions. Although we do not anticipate store revenue reaching prior year levels at any point in 2020, we do expect consistent gains as restrictions loosen and consumers grow more at ease with travel and shopping. Now looking at our wholesale channel, the pandemic seems likely to speed up the shuttering of a number of department and specialty stores. Over the past several years, we have handled our exposure to these accounts with great care, since finding partners with whom we can sustain a mutually beneficial business has grown increasingly hard; in 2019, wholesale sales at Tommy Bahama fell to 20% of revenue, and at Lilly Pulitzer, 21% of revenue. Excess inventory is sitting with most of our wholesale partners, and we think working through what they currently hold will take them some time; we believe demand for new product will be weak in 2020, and as a result, we expect wholesale revenue to come in significantly below 2019. During this difficult stretch, we successfully leveraged our digital platforms to remain connected with our customers. E-commerce, which represented 23% of our revenue in 2019, increased by 12% in the first quarter, and that positive momentum has carried into the second quarter as we enjoy the payoff from the long-term investments we have made in digital and e-commerce, including website upgrades and redesigns, improved search engine optimization, and new enterprise order management systems. Adjusted gross margins for the first quarter fell 220 basis points, driven by higher inventory markdowns and a slight rise in promotional activities. We anticipate that gross margin will keep facing strain, since we plan to run somewhat more promotions for the remainder of the year. During the first quarter we achieved major progress on cutting costs, trimming across the majority of expense lines, which brought SG&A down by $17 million versus a year ago. In the first quarter, employment costs fell by $11 million as we took the hard steps that impacted our team members. We furloughed nearly all retail and restaurant staff, cut roles across the company, lowered pay for some employees, and paused both our bonus program and our 401(k) match; we anticipate SG&A will decline year-over-year, with the biggest percentage drop coming in the second quarter. Because we expect every location to be open through the entirety of the third and fourth quarters, those year-over-year percentage declines in SG&A should get smaller. Keeping inventory in check matters greatly to the health of our brands, so we have acted decisively to cut back and push out inventory orders, with forward orders down roughly 25%. By finding new uses for part of Tommy Bahama's spring/summer collection, we shifted approximately $25 million of inventory into Tommy Bahama's resort line in December, and we have also been negotiating longer payment terms with our vendors. We feel good about these efforts, since inventory at quarter end rose just 8% even with the sharp drop in sales. Though projecting results in such an uncertain setting is extremely hard, I'd like to offer some detail on how we see the rest of the year right now. The COVID-19 pandemic's timing dealt our top line major headwinds, and much like the first quarter, we foresee a sizable year-over-year sales decline in the second quarter. For the second quarter, we anticipate a bigger percentage year-over-year drop in SG&A, which produces a smaller loss than we had in the first quarter. Seasonality always makes the third quarter tough, and we think this year it will be tougher still. At present, we forecast the fourth quarter to be slightly profitable, with a partial rebound in our direct consumer channel, though sales will remain under last year's level. As Tom said, keeping liquidity high is vital in these uncertain times. We hold sufficient liquidity for our continuing cash needs, which shows both the strength of our balance sheet coming into the pandemic and the recent steps we've taken to soften the COVID-19 blow. In March 2020, as a precaution to strengthen cash, we drew $200 million against our $325 million asset-based revolving credit facility. When the first quarter closed, we had $208 million in borrowings outstanding, another $114 million in unused availability, and $182 million in cash and cash equivalents. Cash flow from operations consumed $46 million in the first quarter, against a $6 million use during the same period a year earlier. Looking ahead to the second quarter, the rate at which we're burning cash has come down, and we anticipate it staying at reduced levels for the rest of fiscal 2020. During the first quarter of fiscal 2020, net sales fell at every one of our operating groups compared with earlier periods, which produced much weaker operating results, among them operating losses at each group except Lilly Pulitzer. That in turn led us to perform first quarter assessments for impairment of goodwill and indefinite-lived intangible assets, consistent with our accounting policies. From those assessments we determined that, as of May 2nd, 2020, the fair values of the Southern Tide goodwill indefinite-lived intangible assets were not above their respective carrying values, and that produced a $60 million non-cash impairment charge. In the prior quarter, our board of directors cut the quarterly dividend from $0.37 per share down to $0.25 per share. The board has concluded it makes sense to hold the dividend payable on July 31st at $0.25 per share. The board has also chosen to lower its cash compensation by 50% for the balance of the fiscal year. Thank you all for joining us today; we're grateful for your support. Please stay safe during these challenging times. Devin, we're now ready to take questions.

Thanks. Good afternoon. I hope all of you are doing well.

Thanks, Rick.

You mentioned that during 2020, some stores weren't hitting the same productivity they had the year before. Could you give us a bit more detail broken out by channel? My guess is you still anticipate e-commerce sales being up, but I'd appreciate whatever insight you can share on store-level sales compared with wholesale as we look ahead to the coming quarters.

Sure. As far as e-comm goes, it's performed well; the first quarter was solid. The second quarter is in fact going extremely well up to now; honestly, we anticipate it staying robust for the whole year. I really don't foresee any kind of downturn there. Regarding stores, what we observe is that when we reopen, the emotional bond our guests have with our brands has never been stronger. You're still operating under serious limitations. There are a few things at play. Above all, we need to be certain we're doing everything necessary to safeguard the health and safety of both our employees and our customers. Next, there are government restrictions and guidelines you're attempting to follow, and you are following them. Then there's simply consumer sentiment regarding going out and around. What we observe mirrors what you see reported in the news, and in locations more open to reopening such as Florida, Texas, and perhaps Arizona, spots like those. In many instances, we're genuinely getting near the level we reached a year ago. On certain days, in some locations we're even posting positive comps. Not daily, but on some days; elsewhere, things are considerably slower. Our typical pattern when we've been reopening stores is that they come back, and for the first few days you're running at 10% or 15% of the prior year's volume, after which it usually climbs from that point; when it comes to wholesale, they're dealing with many of the same difficulties. Many of them are in genuinely difficult inventory situations, holding far more inventory than they currently require, and they have to sell through it. We anticipate demand in that area will stay depressed for the rest of the year. I simply don't believe they'll be bringing in product at the same rate as last year, or anywhere near it, honestly. E-comm is doing very well. Retail, meaning our own direct channels, I believe will strengthen progressively over the course of the year. Wholesale, I believe, will likely remain under pressure for the majority of the year.

Tom, regarding that final wholesale topic—several other brands have told us they intend to reduce their fall order books by 30% or perhaps even more, purely because of the inventory problem you just mentioned. From a planning standpoint, are you taking that same route, or is your expectation that it won't be quite so extreme?

One thing we definitely won't do is push products onto partners who aren't prepared to take them.

When it came to placing orders ahead of time, our approach assumed a reduction of 25% in forward commitments, based on the expectation that wholesale would decline while our own channels had not yet fully recovered. The return of wholesale, however, has been quite sluggish, and in my view, some period will be needed before inventory levels normalize.

Understood. My question was going to be regarding gross margin. It's fallen 220 basis points. True, that's a decline, yet it's far less extreme than what many other businesses have reported, where drops exceed 1,000 basis points. I'm just wondering what you think about the capacity to keep gross margin from eroding further, and can we safely conclude that Q1 represents the worst point for gross margin contraction, with improvement expected as we move ahead?

Once we enter the seasonal clearance windows, additional merchandise will likely be moving out. My guess is those quarters might experience somewhat greater strain. With any luck, as we reach Q4, perhaps the strain will ease somewhat. Through postponing certain inventory and scrapping orders, our teams acted quickly and managed to come in with fresh purchases, scale them back, rework the product mix, and hold back items slated for summer, shifting them toward the resort period. That's relieved some of the strain. At this moment, with just 8% growth alongside a sales decline exceeding 40%, we feel quite good about what our teams have done.

That's much appreciated, and many thanks.

Thanks to you as well, Rick.

Hello there, good afternoon. I appreciate you taking my questions. To start with the store footprint — with some of the shifts that could happen, do you have any views on the footprint's present size, and are you using this chance to shut locations for good? On a bookkeeping note, I recall you said you're negotiating rent. Did you put the entire rent amount through as an expense in Q1, or will some of it be made up in subsequent quarters? Thanks.

Yes. Ed, many thanks for joining the call today. I'll take the final one first, since it's the simplest. The answer is that during Q1 we are fully expensing the rent for accounting purposes. Unless a signed arrangement with the landlord provides us some form of relief, the complete rent expense went through the income statement. Nothing unexpected on rent is coming down the road. Next, regarding the store footprint, we're giving a great deal of thought to what the store will look like going forward, and I'm not sure we've reached all the conclusions yet. Once they arrive, they'll be more dedicated to making a purchase. They'll have done their homework beforehand. They'll be seeking the expertise and service provided by our wonderful store staff. It could ultimately alter physically how we choose to arrange those stores and how big they are, but I'm not sure we've reached any firm conclusions on that. As for store count, something I believe was an advantage as we entered this shutdown is that we weren't over-stored; we didn't have many locations that were marginal. Although this situation has certainly created pressure on things, I don't anticipate shutting many stores because of it. I can't claim there won't be a small handful that don't reopen, but I don't think we'll shut many stores in the near term.

One other follow-up.

Go ahead.

If I could, just one more quick question. Your team has always been known as a highly disciplined acquirer. I realize it's likely hard to discuss this while the macro picture is under so much pressure. Lilly was purchased at a wonderful, highly opportunistic moment. Are you beginning to notice possible targets getting valued more sensibly? Would that be something you'd consider now? Thanks.

Thanks, Ed. I believe you're correct. Lilly was acquired by us at the close of 2010, which was roughly the point when things were recovering following the financial crisis. Our view is that a similar chance may come along again. At present, what we're observing is somewhat more in the way of distressed circumstances, in which the businesses likely weren't in great shape before the crisis hit and have simply faced additional pressure. With luck, and we're keeping our eyes open to this across the months ahead as conditions begin to bounce back, some solid opportunities could emerge, and we will certainly be on the lookout for them.

Thanks.

Thank you. Here's my question. I hope everybody is doing well. Perhaps we could begin by having you describe the variations you're noticing? I believe you mentioned certain stores were reopening, or perhaps it was an average that was down 15 and then got better. First, does that represent the average across the whole base? Could you just discuss the variations you're observing among the regions that are doing better against those that might be opening up somewhat more slowly? If you could also say something about how Hawaii and California are performing. Thanks.

Susan, I appreciate you joining the call, and I appreciate the question. The locations that are performing best are truly those situated in spots that people drive to in order to escape everything, and that sit somewhere sunny with a connection to the beach. To give you an example, we have stores in Destin, in Florida's Sandestin resort area, and those are performing very well. We have a few outlet stores in Myrtle Beach, South Carolina, plus Hilton Head, and those are performing very well at the moment. Our view is that this is entirely about people driving to those destinations from many different parts of the country so they can get away from things and enjoy a short break and a brief vacation. We have one located on Kiawah, a few on Kiawah, and those are performing quite well. Those are the sorts of destinations. Our stores in Naples are performing well. Palm Beach is performing well. Those are the sorts of spots that are performing well. The tougher situation involves stores located in enclosed malls in more interior parts of the country; those are recovering a bit more slowly, and honestly, those are also the ones we're inclined to open somewhat later. Regarding Hawaii, as you're aware, Hawaii remains entirely shut down. Were you to fly there today, a 14-day quarantine would be required upon arrival. Essentially there is no tourist business right now. We're conducting a small amount of business in Hawaii, but getting back to our normal levels will be difficult for us absent the tourist business. We look forward to the point when it reopens. Our belief is that it will. The COVID case level is very low right now, and we're hoping that happens reasonably soon. Hawaii has somewhat of an echo effect on California, since a good portion of our California business comes from people based on the West Coast who are traveling to Hawaii for vacation, and they stock up before departing. Conversely, we have certain California locations that I believe will perform really well once things begin to open up out there. Take Palm Desert and Palm Springs — sure, summer there gets extremely hot, but I figure plenty of folks in Southern California will still hop in the car and head out for a weekend getaway, and that ought to work in our favor in those areas. It really varies market by market. Being warm, having sunshine, getting outside, and being within driving distance — all of those are major advantages at the moment.

Excellent; that's quite useful. I appreciate all the specifics.

Of course.

I'm not sure if I brought this up already, but maybe you could talk about how each brand's online business did in Q1? My understanding is that you said online generally sped up in Q2. Was that pattern the same for all the brands?

Across every category at Lilly, we saw a 12% increase for the quarter, which was solid. We got off to a strong start in the quarter. During the early days of the quarantine, things were much more uneven. As time went on, and even through today, it has improved significantly. I'd say Lilly has performed the best. Honestly, the results we've been seeing everywhere have made us happy, and as far as the second quarter goes up to this point, things are looking pretty strong. Once more, Lilly is out in front. One thing I'd mention regarding Tommy is that there's a significant calendar move at play, since Father's Day falls as late as possible this year, whereas last year it came as early as it possibly could. Because that occasion matters so much to us, we aren't truly in a comparable position yet. With Father's Day approaching, we expect Tommy Bahama to have a strong stretch over the coming weeks. We feel positive about the month-to-date trend at that location, and it positions us well for a solid Father's Day, which ought to deliver a strong quarter for e-commerce.