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

Thanks, and good afternoon, everyone. I want to start by reminding those joining us that some of what we say on this call, including during the Q&A portion, could be considered forward-looking statements under the federal securities laws. Such statements aren't promises, and what actually happens may end up being quite different from what those statements express or suggest. The key factors that might lead our operating results or financial condition to come out differently are laid out in the press release we put out earlier today, as well as in the documents we file with the SEC — that includes the risk factors found in our Form 10-K and our first quarter 10-Q. We're not obligated to revise any forward-looking statements. Also, we'll be referencing certain non-GAAP financial measures during this call. A reconciliation between non-GAAP and GAAP financial measures appears in the press release we issued earlier today, which you'll find under the Investor Relations tab on our site, oxfordinc.com. At this point, let me introduce who's joining us today: here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO. I appreciate everyone's time. Now let me hand things over to Tom Chubb.

Good afternoon, and thanks for being with us. Let me begin by extending to you and your loved ones my sincere wishes for good health and safety through this challenging period. I also want to take a brief moment to express gratitude to our amazing team for everything they're doing to bring joy to our customers amid such tough conditions. At Oxford, our approach is straightforward: we aim to own brands that bring happiness to people, and to win our customers over with unforgettable experiences and products they adore. Throughout 2020, we've encountered countless fresh obstacles. Even so, we keep discovering ways each day to carry out this approach effectively. To accomplish that in today's climate, we've relied heavily on our sophisticated digital tools. The money we've put into our e-commerce channel across the last few years enabled us to take advantage of the sped-up move toward spending online. Every one of our brands — Tommy Bahama, Lilly Pulitzer and Southern Tide — made positive contributions to the 52% rise in e-commerce sales versus the prior year during the second quarter. Lilly Pulitzer stood out above the rest, climbing an remarkable 142%. This summer's Lilly product assortment was extremely robust and, in numerous respects, delivered precisely what shoppers wanted: apparel that's fun, cheerful and simple to wear. Very effective digital marketing, toward which we directed additional resources during the quarter, was a highlight of the collection. A noncomp flash sale in June contributed further to the strong second quarter performance for Lilly. Traditionally, the Lilly website has made sale items available just 5 days each year. To maintain tight control over inventory, one more flash sale lasting 2 days took place in the second quarter, bringing in $15 million of sales at a healthy 40% margin. Even without that flash sale, Lilly Pulitzer's e-commerce business rose 74% compared with the prior year. We keep putting money into our digital platforms and advancing our digital abilities, such as website upgrades and redesigns, better search engine optimization and enterprise order management systems. We think the quicker move to shopping online, prompted by the coronavirus health crisis, will probably persist. Although physical stores will remain a crucial element of how we distribute our products, we expect our e-commerce channel to emerge stronger, larger and more vital to our overall approach as we come through this crisis. Unlike our e-commerce operation, foot traffic at physical locations was, quite understandably, severely strained during the quarter, which pushed revenue down significantly at our stores and restaurants. Beyond running with reduced hours and limited capacity, key markets that depend heavily on fly-in tourists — Hawaii, Las Vegas and New York City among them — came under even greater pressure. Despite the short-term difficulties we're facing right now, we think our relatively small physical presence gives us genuine competitive edges. Among all our brands, we operate just 187 full-price stores and restaurants, the majority of them situated in premium off-mall spots like lifestyle centers, iconic resorts and resort towns, along with prestigious street fronts. The stores and restaurants we have are lovely — they draw customers in, get them fully absorbed in what our brands stand for, and serve as a key way for us to bring new guests on board. Though we can't wait for store traffic to pick back up, we're using this moment as a chance to carefully cut back locations that aren't performing and aren't helping the brand. Roughly 10 locations will have been shut by the close of 2020, 5 of which were already closed during the first half. Beyond that, we're bringing some thrilling new additions into the mix this year; a Marlin Bar has already launched at Dania Pointe close to Fort Lauderdale, and we've turned 2 existing Tommy Bahama spots — one on Las Olas Boulevard in Fort Lauderdale and one at St. Johns Town Center in Jacksonville — into Marlin Bars. Come the back half of the year, Marlin Bars are slated to debut at Fashion Valley in San Diego and in Lahaina on Maui. Throughout the pandemic, our Marlin Bars — casual in their bar and dining approach, with seating outdoors — have stood out as a bright spot. Day in and day out, we're serving the customers we already have while pulling new ones toward the brand. Our belief in the Marlin Bar strategy is firm, and we feel good about the part this concept will play in how we grow going forward. Southern Tide, having only recently made its entry into owned retail, currently operates 2 stores, both of them in Florida, and another is set to open in the Destin area come this fall. Though judging performance fully is tough given today's conditions, what we've witnessed thus far gives us reason for encouragement. Lilly Pulitzer has excelled at making the most of its bricks-and-mortar spots, layering in a concierge-style service for shoppers through private appointments and curbside pickup. Its skilled store staff are additionally helping out with customer service calls, which further erases the boundary separating our online and store channels. Our wholesale channel — which we'd been trimming strategically well before the pandemic and which accounted for about 30% of revenue in 2019 — has taken a major hit from the present state of the consumer marketplace and from how weak so many retailers were heading into the COVID crisis. Wholesale sales for the second quarter came in at under half of the figure from a year earlier. As part of our effort to work only with the strongest partners in this distribution channel, we cut our exposure to department stores in a meaningful way, and those made up just 11% of total revenue last year. We anticipate that sales declines in this channel will carry on through the back half of the year, and we're responding to that trend by keeping extremely tight control over inventory levels. Across every channel, our sourcing, planning and merchandising teams have performed remarkably, and our inventory levels are sitting in very good shape, as is the remainder of our balance sheet. Cash flow proved quite strong in the second quarter, since we achieved substantial expense cuts tied to employment throughout the enterprise along with lower occupancy costs. The quarter closed with us in a solid liquidity spot: net cash exceeding $30 million, plus more than $250 million available through our credit facility. Back in March, I laid out what we'd be prioritizing this year — first, keeping our people and our customers safe; second, safeguarding the integrity of our brands; and third, maintaining liquidity. Those were the correct areas to concentrate on through this crisis, yet we also need to keep in mind that even as we tackle the challenges right in front of us, our eyes remain on what lies ahead — and at Oxford, that future is bright. Thanks to the strength of our brands, how resilient our people are, a balance sheet others envy, and a competitive edge, as I noted earlier, we anticipate getting the company growing again and picking back up our long-term record of delivering rising shareholder value during 2021 and afterward. At this point I'll hand things over to Scott, who can walk you through the second quarter in greater detail along with what we're planning for the latter portion of 2020. Scott?

Thanks, Tom. Like Tom mentioned, our second-quarter sales came in much weaker than the prior year. That 36% drop reflected reduced revenue from our retail restaurant and wholesale channels, though e-commerce growth offset part of it. Gross margin for the quarter landed at 55%, compared with 60% in last year's second quarter; we ran somewhat more promotional activity across our brands, and that includes adding the Lilly Pulitzer flash sale, which performed well. We also recorded inventory markdowns in every operating group. We feel good about the cost-cutting work done throughout Oxford, with SG&A falling 19%, or $28 million. Worth noting: in the second quarter we took $10 million on an adjusted basis tied to credit losses, and that includes the Tailored Brands' bankruptcy, plus inventory markdowns and impairments on fixed assets and operating leases. Our adjusted loss for the quarter, which factored in those charges, came to $0.38 per share. Keeping inventory in line is essential to protecting the health of our brands, and our inventory levels fit what we have planned for the back half of the year. We closed the quarter with inventory down 3% versus a year ago, even with the big drop in sales. As Tom said, keeping liquidity at a high level matters greatly in these uncertain times. We have plenty of liquidity to cover our continuing cash needs, which speaks to the strength of our balance sheet going into the pandemic and the recent steps we've taken to soften the COVID-19 impact. Back in March 2020, as a proactive step to shore up cash — our cash position, we tapped our $325 million asset-based revolving credit facility; given strong cash flow, we finished the second quarter with $65 million in borrowings, $97 million of cash and $257 million of unused availability. Heading into the back half of the year, the challenges and uncertainties from the pandemic will persist. In our third quarter, normally our smallest quarter of the year, we expect the year-over-year decline in bricks-and-mortar traffic to be a bit less severe than what we saw in the second quarter. On top of that, our Lilly Pulitzer flash sale, which has been a bright spot in the third quarter, should be considerably smaller, since some inventory that would have been set aside for the September event got pulled forward into the noncomp events in June. Given reduced traffic, a smaller flash sale and ongoing softness at wholesale, we expect third-quarter revenue to decline year-over-year at a rate comparable to the second quarter. During the month of August, e-commerce kept posting strong positive comps. We still see year-over-year declines in brick-and-mortar and wholesale, with modest sequential improvement. Looking at the fourth quarter, we don't expect a meaningful rebound in bricks-and-mortar traffic or wholesale, but we think we'll get closer to breakeven and anticipate a return to profitability in fiscal 2021. Our dividend is a key part of our commitment to our shareholders. A quarterly dividend of $0.25 per share has been declared by our Board. We appreciate you spending time with us today, and now we'll open the line for questions. Laura?

Kelly Crago here, filling in for Paul. I'd like to explore the inventory situation a bit further; it declined 3%, yet that figure is far smaller than the sales decline you anticipate during the latter half of this year. So I'm curious whether you could address how healthy that inventory is, what portion might be exposed to markdown risk, how you intend to finish inventory once the third quarter wraps up, and any details you can give by brand. Then, second, could you discuss the order books for the latter half of this year, meaning this fall, and then how spring is taking shape?

Alright. Regarding inventory, Tommy Bahama's is up somewhat compared with a year ago, and they skipped their usual end-of-season clearance event, which in fact got pushed to this weekend; so it has sort of slid later; therefore I believe that will assist Tommy's inventory in returning under the prior year's levels. And Lanier's closed inventory sits somewhat above what we would prefer. We've applied suitable markdowns, and that is largely replenishment-style inventory. So the pipeline has been shut off, our levels are somewhat elevated, but they will be brought down. This is inventory with a long life, and it replenishes as our accounts — our wholesale accounts — sell through the merchandise. So we feel confident about our inventory, and we have applied suitable markdowns; thus inventory levels, yes, perhaps somewhat above the ideal, but correctly marked down. Then Lilly will run another September flash, which they invariably do. But it will be somewhat smaller than a year ago since we ran the June flash, yet that will once more bring inventory down. So — but given the sales decline, I think our steps to minimize how much inventory comes in have let us remain somewhat below a year ago rather than considerably above it. And although we have applied some markdowns, I think they've been fairly modest relative to certain others in the industry. So I think we're in good shape on that front.

What about that order book, then?

Turning to how the order book looks ahead, the guidance we gave on sales for Q3 and Q4, I think, captures what we're currently seeing. Past that point, once 2021 arrives, it's probably too soon to predict how things will land. We'll definitely share more on that in December.

A question about e-commerce. Do you think the speed-up we're seeing in that segment amounts to a lasting shift in how your customers shop? And if so, what's your thinking on store count from here? I realize the Marlin Bar plan is already underway, but I'm wondering whether we should anticipate additional shutdowns at your remaining sites past this year?

Rick, our feelings about e-commerce are extremely positive. You're aware we've been involved in that area for quite some time. Even before COVID, we saw tremendous expansion online. And for us, that expansion comes with profits. Our e-commerce channel, as you know, is highly profitable. So growth in that area pleases us. My view is that this shift will probably stick around for the long haul. The term permanent isn't one I favor, since hardly anything appears to stay permanent nowadays. Still, I firmly believe that's where things are headed. So looking ahead to '21, my expectation is that e-com will make up a far bigger share of the business compared with 2019, and for us that's positive; we still consider physical stores a crucial piece of our brand's future. We'll be extremely choosy when it comes to sites. What we're actually focused on right now is this: whenever renewals come due or other chances to get out of leases appear, we examine those closely, and I believe across the coming couple of years we'll keep shaving a few off in various places; yet we'll also open new stores, just as we're doing right now, when conditions and sites are right. And as you mentioned, I'm thinking especially of Marlin Bars or similar concepts, which interest us either as fresh sites or, quite often, as we've handled a few this year, through turning a current store into a Marlin Bar.

Then, regarding what we expect for 2021 — obviously, having strong confidence in any projection is basically not feasible at this moment, yet I'm simply interested in your mindset for that year. Are you treating it like a typical year comparable to 2019, though maybe somewhat cautious? Or instead, could there be a sharp, hockey stick-style bounce back, with the company hitting a fresh peak? What I'd like to understand is which assumptions underlie your profitability expectations for the coming year.

So, the approach we'll take for planning and committing, Rick, is to commit rather cautiously, which might leave room for some upside should a genuine hockey stick-style rebound occur in consumer demand. Still, I'd argue that playing it this smarter way instead, guarding against the downside, mirrors how we've operated throughout this year — especially during the latter half, which we had some ability to shape. Therefore, I'd anticipate that we — although it's far too soon to make many claims regarding '21, assuming it comes in below '19 seems reasonable, and that we will — yet we think we'll be back on a path of growth. Thus, our beginning point will be — we'll step back from where we start, but remain on a growth path.

So I suppose, to start, regarding Lanier and how we should view it over a longer horizon. I realize you absorbed the charge-offs tied to Tailored Brands, and it's possible that certain longer-term secular shifts away from suits are even speeding up. In the past you handled that operation with an eye on cash flow. What's the right way for us to think about this business over the medium term? Then, to follow up on Tommy Bahama, it's obviously heavily oriented toward destinations. Is there any way to shift the product mix so it fits better with what's happening right now?

Yes. Thanks so much, Ed, and I appreciate your joining us. As for Lanier, the first point I'd make is this: we have an outstanding team in place there. They put in a tremendous amount of effort, they keep putting in a tremendous amount of effort, and nobody in their space does what they do better; that being said, it's an extremely difficult part of the apparel industry among the shoppers they cater to, who are mostly department store and big box customers, and they had a few accounts — in fact 3 over the past several weeks, Tailored Brands, Stein Mart and Lord & Taylor, all of which sought bankruptcy protection; so that's one problem they face, and on top of that their main product line is tailored clothing, essentially men's suits, which clearly faces major difficulties because of the coronavirus yet, even before all this, was dealing with certain secular pressures, namely the continuing casualization taking place across the nation. So the obstacles in front of them are pretty significant right now, and we are putting in a tremendous amount of effort alongside them to figure out where this business goes from here; but once more, I'm pleased that you recalled it and brought it up. For several years now, what we've done is run that operation to generate cash flow, and that will remain the top priority for Lanier moving ahead. The real goal is getting as much cash flow as possible out of that business; and my expectation is that in December, we'll be in a position to share more details with you, but we'll stay focused on that same emphasis — truly, cash flow.

And what about Tommy?

Yes, regarding Tommy as well. In my view, Tommy offers numerous items that perform extremely well in today's climate and are indeed doing extremely well. Several performance items have launched over the past 2 years; and Ed, I'm aware you had firsthand knowledge of these. To illustrate, consider the Chip Shot Short, a hybrid short crafted from a fast-drying performance wicking fabric that allows you to wear it in the ocean, then step onto the beach, and once you reach the poolside bar restaurant, it will have dried and appear suitable for entering that restaurant. And although individuals might not be at resorts as often at present, that kind of item truly matches what they desire at present. The Palm Coast Polo serves as another excellent illustration, which I think we launched roughly a year — slightly over a year back. And it swiftly rose to become one of our top-selling items and has remained there since, making it an outright champion. We have performance wovens on the way in both short sleeve and long sleeve that are receiving strong feedback from the wholesale markets that have viewed them, those are kind of arriving next year. We just launched a fantastic bottom that resembles others you may encounter in the market from major athleisure brands, yet it goes by the name IslandZone Pant, which is, once more, a performance fabric; and when you hear performance, you can interpret that as simple to wear and simple to maintain. And those are attributes that are extremely, extremely sought-after at present and I believe will stay that way. I doubt we will regress on that, and truly, throughout all our brands, we are pushing into those trends aggressively. And Tommy Bahama has consistently focused on simple to wear; it has not always been quite as focused on simple to maintain, yet that has gained significant traction over the past 2 years, and we will keep driving in that direction. In women's, for holiday this year, we have an entire capsule of women's performance athleisure-style items that I believe will be a major success for us. So I don't believe Tommy faces any difficulty whatsoever adapting to that climate. And we are pushing into it very aggressively at present; and it's succeeding, in places where we have those items, and we have many of them now, they're truly performing.

I'd like to hear how things are going in different regions — say Florida, Hawaii, and California. You noted, I believe, that Hawaii, New York, and Vegas were under pressure. Could you give us a sense of the varying results and the differences among those areas?

Sure. Let me start with some broad observations. Honestly, the picture is quite mixed, and pulling it all together isn't easy. Still, take Hawaii: travel restrictions have essentially closed that market down at this point — visitors aren't allowed in, and there are limits placed on the people who live there — so it is, and has been, essentially closed. That clearly creates difficulties, especially for Tommy Bahama, since Hawaii represents a significant state for that brand. It's an added weight they're dealing with at present. On the whole, we see our strong position in Hawaii as an edge over competitors. Right now, though, it's one more thing to carry. Turning to California, indoor malls there are currently prohibited from operating, and I believe roughly 8 of our locations fall into that group, so they're unable to open today. And naturally, New York City faces an extremely difficult set of circumstances on every front, and in New York City we're still shut. On the other hand, consider a few of the markets people drive to — a prime illustration for us in the Southeast being Destin, located in the Florida Panhandle, that region known as the Third Coast. It's a well-liked beach spot reachable by car, fueled largely by rental homes rather than hotels. And wow, that's exactly what folks are after these days. They want to pile the family into the SUV, head to a comfortable house somewhere, and simply stay put there for the week — and for us, that market has been outstanding. Palm Springs has also proven quite fascinating; we operate a Marlin Bar there, and customers make the drive from L.A. and elsewhere in Southern California. Ordinarily at this point on the calendar, they'd stop making that trip until around October. This time around, though, there's nothing better for them to do. They aren't boarding planes to anywhere, so results there look really solid. Jupiter, Florida stands out as yet another market performing strongly. My sense is that many snowbirds from the Northeast simply never returned home; we've got a fresh Marlin Bar that just launched in Jacksonville, Florida, at St. Johns Town Center — basically the spot you'd head to if you were staying in Ponte Vedra and felt like spending a day shopping. That Marlin Bar debuted roughly 2 or 3 months back now...

During June, that's right.

Correct, that was in June. Honestly, those folks are just performing incredibly well. Watching it has been a pleasure. So the spots really thriving for us at the moment are those vacation destinations you drive to, along with places where people escaping certain other regions of the country have kind of settled in.

Great. That is really useful. And so perhaps I was hoping to hear what you think about Q4. Normally, I believe you'd have the resort line available at this point; and clearly, shoppers would be considering a trip or heading somewhere warm, particularly in the chillier Northern states, which might not occur this year, or in particular, shoppers might avoid boarding a plane. So then, how are you approaching your assortment? Are you swapping everything out for Q4? And then, returning to something closer to typical sales levels, is domestic tourism at minimum required to return, I suppose?