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 and in the Q&A portion could be considered forward-looking statements under federal securities laws. Such statements aren't promises, and what actually happens could be quite different from what those statements suggest or imply. The key factors that might lead our operating results or financial condition to come out differently are described in the press release we put out earlier today, as well as in the documents we file with the SEC, such as the risk factors 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 talking about some non-GAAP financial measures today. A reconciliation between non-GAAP and GAAP financial measures appears in the press release we issued earlier today, which you can find under the investor relations tab at oxfordinc.com. At this point, let me introduce who's joining us: Tom Chubb, our Chairman and Chief Executive Officer, and Scott Grassmyer, our Chief Financial Officer, are both here with me. Appreciate your attention. I'll now hand things over to Tom Chubb.

Good afternoon, and thanks for being here with us. Our third quarter results give me reason for optimism, since all three of our branded businesses — Tommy Bahama, Lilly Pulitzer, and Southern Tide — came in ahead of the plans we had set internally. This is traditionally the smallest quarter we have, and during it our full-price e-commerce operation posted 51% growth, which helped partially counter the challenges other channels faced because of COVID-19. The digital gains we have sustained throughout this year highlight how strong our brands are and how well they connect with consumers, and they are a strong signal that we are positioned well to succeed once the pandemic passes; when COVID-19 first appeared in March, we zeroed in on three priorities: keeping our people and our customers safe, safeguarding the integrity of our brands, and maintaining liquidity. On all three of those fronts, our execution has been solid. That said, our company and our sector confront major shifts that have only sped up over the past nine months. As the year has moved along, without losing sight of those three priorities I just described, we have gone back to concentrating on efforts that will let us take fuller advantage of key market trends both now and further out. Looking ahead to the world after the pandemic, we expect products to keep moving in the direction of easy to wear and easy care. Mall traffic will stay well under what it was in 2019. Department stores will matter less than they did previously. E-commerce will be larger and more significant than it has ever been. Stores and restaurants that we own will serve as a physical embodiment of the brand, fully woven into a total direct-to-consumer ecosystem that includes e-commerce, and diversified marketing channels that lean heavily on digital will be indispensable. Every one of these trends ought to work in our favor as we come out of this crisis. We are constructing on top of a foundation that is already strong and are thoroughly ready for the post-pandemic environment. We keep finding ways to more effectively create a shopping experience that is customer-focused, digitally driven, mobile centered, and cross-channel personalized and seamless — one that understands and serves the customer in whatever brand discovery and purchasing habits emerge going forward; we are bringing to market innovative, differentiated products that stay on brand and align with what consumers want and need. From virtual shopping appointments, curbside pickup, digital clienteling, and having our store associates take customer service calls to pleasing our guests with our exciting Marlin Bar concepts, every one of our brands keeps developing and rolling out fresh methods to improve the customer experience. We keep putting money into better customer data and analytics, which are assisting us — and will keep assisting us — in absorbing, examining, and applying customer data to deliver a superior, more tailored experience that lifts retention rates and spending levels. Just as importantly, these tools are helping us spot and bring in new customers, which is a crucial effort for us. We keep broadening our enterprise order management capabilities so we can ship more from the stores we own. When we align demand from any location with inventory sitting anywhere, we can cut down on stockouts, boost how happy customers are, and get better at managing inventory. That's what's getting us through the pandemic and puts us in a strong spot to expand and prosper in a new normal after the pandemic. All over Oxford, our gifted teams have stepped up, and they keep stepping up, by remaining devoted to our central mission of bringing happiness to our customers. Every one of our brands is a happy brand, and customers count on us to provide happiness via our goods, our messaging, and the experiences our brands create. During this tough stretch, our employees in each area, from creative and design through shipping and fulfillment and all the areas in between, have assisted us in bringing happiness to the people who buy from us. We appreciate what they've done and take pride in what they've accomplished. We've operated in the apparel sector for nearly 80 years and hold a collection of businesses that has shifted across the years to stay pertinent to the marketplace and to the consumer and to produce shareholder value. Today, we shared our latest move, the choice to leave our legacy Lanier Apparel business, which has formed part of our portfolio for over 50 years. During that entire span, Lanier Apparel has been skillfully managed by a remarkable group of individuals. Even so, Lanier's business model, which supplies licensed tailored clothing to department stores and big box retailers, doesn't match our long-term vision for the enterprise, and the difficulties brought on by the pandemic have made this mismatch even worse. Leaving this business behind will give us a portfolio fully aligned with our strategy. We're collaborating closely with our licensors, customers, and suppliers to make sure things go smoothly. I want to thank, on a personal level, the committed staff at Lanier Apparel for everything they've given to Oxford throughout these many years. I'll hand the call over now to Scott, who has more specifics on our third quarter results and our plans for the remainder of the year. Scott?

Thanks, Tom. We felt really good about how we did in Q3, all things considered. Just to remind everyone, the third quarter tends to be our smallest one each year, and Lilly Pulitzer's Spring/Summer clearance event usually adds a meaningful amount. This time around, we altered a few things about that event. We didn't run any sales in our physical stores. Lilly's shoppers turn out in large numbers, so to keep our team and our customers safe, we chose to restrict the sale to the internet. The second major adjustment involved splitting the event into two phases — one in June, which fell in our second quarter, and the other in September, which landed in our third quarter. Because of that timing shift, the third quarter event came in at $12 million, which is 41% below the prior year. That said, the two online events combined performed really well, coming in $2 million, or 7%, above the same period a year ago. Turning to our full price e-commerce operation, we posted strong gains across all of our brands. Taken together, our full price e-commerce comps rose 51%. Every brand beat our internal targets for the third quarter — full price e-com at Tommy Bahama grew 38%, Lilly Pulitzer climbed 93%, and Southern Tide was up 36%. Our full price retail sales fell 45%, since traffic dropped sharply and the majority of our stores kept running under a range of restrictions. Our key Hawaiian doors took a hard hit from travel and other limitations. Tommy Bahama runs 19 spots that include a food and beverage element. Setting aside Hawaii and N.Y., where closures and restrictions were prolonged, we were quite happy with a restaurant comp of negative 6%. Our newest Marlin Bar, located in Jacksonville, Florida, which launched in the second quarter, actually beat the plans we had made even before the pandemic. On the whole, restaurants declined 30% versus a year earlier. Gross margin for the quarter came in at 55%, in line with last year, while SG&A dropped 15%, or $21 million, and a portion of that reduction is permanent. Both gross margin and SG&A were affected by charges tied to the Lanier Apparel exit that Tom just covered. In the third quarter of fiscal 2020, we booked a $10 million pre-tax charge connected to leaving Lanier Apparel. Roughly $6 million of that came from inventory markdowns that hit cost of goods sold. The bulk of those markdowns was reversed and sits within a LIFO accounting credit in corporate and other. Around $4 million consisted of SG&A charges for operating lease impairment, severance and retention costs, and non-cash fixed asset impairment; beyond that, from now until we finish the exit in the second half of 2021, we anticipate roughly $5 million in additional charges. About half of those charges should land in the fourth quarter of fiscal 2020. We anticipate the Lanier Apparel exit will generate positive cash flow. Now on to our balance sheet. We closed the quarter with inventory 4% below the prior year, which we feel is appropriately reserved and leaves us well positioned for sales ahead. Like Tom said, keeping a large amount of liquidity available has been something we've focused on, and we've done a solid job there. Coming into the pandemic with a strong balance sheet, plus the steps we've taken to soften the blow from COVID-19, puts us in a good spot going forward; when the third quarter closed, we had $35 million in borrowings and $53 million in cash. That put us at a net cash position of $18 million, versus $22 million in last year's third quarter. Under a revolving credit agreement, we had $287 million of unused availability; we've gone back through every one of our capital projects. The technology projects backing our digital initiatives keep their top priority; we're also still dedicated to growing the successful Marlin Bar concept. So far this year, we've turned two locations into Marlin Bars and launched one new site. During the fourth quarter, we're planning to launch two Marlin Bars, one in Lahaina, Hawaii and one at Fashion Valley in San Diego. Southern Tide has launched two additional stores in Florida this year, which brings its store count up to three. We've also seized the chance the present circumstances offer to do a bit of trimming. So far this year, we've shut four Tommy stores and two Lilly stores; we're looking to shut two additional sites this year and have a small number marked for closure in 2021, unless the landlord gives us a strong enough reason to remain. Going forward, given the recent spike in COVID cases, traffic at our stores is still weak, and we're especially worried about our 25 stores and three restaurants in California. At the same time, e-commerce has stayed robust so far this quarter. Given where trends stand now, along with our sense of how the rest of the season will unfold, we think fourth quarter revenue will fall by a percentage similar to the one we saw in the third quarter. When we consider fiscal 2021, it's premature to say anything concrete, but because we've exited Lanier and other macro shifts have occurred, we expect our top line to come in below 2019. We expect to get back to profitability. Finally, we're clearly dedicated to giving value back to shareholders. Oxford has issued a dividend each quarter since going public in 1960, and our board of directors has declared a quarterly dividend of $0.25 per share. Thanks for your time today, and now we'll hand the call over for questions. Lauren?

Hello, everyone. Thanks. I'm wondering whether you could share a bit more detail on what you've been observing so far this quarter, covering both the direction of sales and how that connects to your outlook for the remaining part of the quarter. I'd also like to hear about the promo landscape, what it looks like right now, and how you're approaching the gross margin figure for 4Q. My sense is that a portion of the gross margin gain you posted in this quarter likely came from the shift in Lilly promos. Could you perhaps also walk through the remaining factors affecting the gross margin figure in 3Q? Thanks.

All right, I'll cover the sales trends for a moment, Paul. This is Tom Chubb speaking, and after that I'll let Scott weigh in on whatever else he wants to add regarding sales trends, plus take you through the gross margin problems. Where sales stand quarter to date, we've honestly been quite happy. Our business has performed well; with the November election, as we anticipated, things got off to a somewhat slow start, though we had prepared for that. From that point on, momentum has built. I believe if not for the situation in California, we would likely be anticipating that the fourth quarter sales decline would come in somewhat smaller than what we saw in the third quarter. Given what's going on there with the new restrictions and the fact that we have 27 stores and three restaurants in that state, we lowered our fourth quarter expectation slightly. What we've observed so far has been positive. Stores quarter to date have in fact done better. They've kept gaining a bit of steam, and e-commerce has remained strong. I'll state the obvious point that with FedEx and UPS dealing with the problems they're dealing with, e-commerce will probably begin tapering off sooner this year than was the case in prior years. Naturally, we factor all of that into the plan too. Really pleased with what we're seeing up to now. Clearly, the environment out there remains challenging.

When you look at gross margins for Q3 on a consolidated basis, they came in a little higher, up somewhat compared with the same period last year, and that got a boost from the timing change in the Lilly clearance event, since part of it shifted back into the second quarter. Tommy was down just slightly versus the prior year, while Lilly was up substantially. Once again, that mix played a role. Southern Tide and Lanier each saw substantial declines, driven mostly by certain inventory markdowns. Everything combined to land slightly higher.

Got it. How should we be thinking about gross margin for < >?

For Q4, we're likely to see a modest decline compared with the same period a year ago, though it should end up fairly similar to four. At this point, what we're expecting is just a small decrease.

Got it. Thank you. Good luck, guys.

Thanks, Paul.

Hello everyone, I appreciate you answering our questions today. To start, and this just continues what Paul asked about, I realize the promotion at Tommy was reorganized during this year and did not produce the usual rebound. So how should we consider any potential effects on modeling from that missing rebound? And second, I recognize Lanier has traditionally been run with a focus on cash flow. Clearly, circumstances have shifted, but what is the right way to view Lanier's typical cash flow when we model your company after the Lanier deal? Thanks.

I actually came to you. All right, regarding the bounce back at Tommy, we ran that same event, though the timing ended up being slightly delayed. Previously, the cards were distributed in late October, whereas this time around, they weren't sent out until, I believe, the second week of November. So it's truly just a minor scheduling change at Tommy, yet they continue to offer both the cards and, on the other hand, the scenario where you spend a specific amount, and we anticipate somewhat fewer transactions due to store traffic, but we're still carrying it out online as well. Next question. My apologies.

Cash flow.

Right, so Lanier’s cash flow has been quite unstable across the past 2 years, with periods of ups and downs. Typically, in an ordinary year, when there wasn’t a major inventory buildup or reduction, Lanier would. Capital expenditures were minimal, and D&A was minimal as well, so essentially the tax-affected operating profit was generally what flowed through to their cash flow. During the past 2 years, though, they experienced much greater swings as inventory levels sometimes climbed and other times decreased. This year, clearly, has been a very difficult one for them, so they’ve been drawing on cash in their usual operations this year; we lacked confidence that we could sustain that cash flow.

My take, Ed, is that when you revisit that period and smooth out the highs and lows in inventory across those years, what you actually see is sales that had essentially gone flat. Taking an average across that stretch, the cash flow genuinely being generated by Lanier was fairly modest.

Got it. Thanks so much, guys.

Hi, good evening, and thank you for taking my question. I'm curious — when you look at the fourth quarter, is there anything you're handling differently on the product side or in the business? Normally, I believe you'd be launching your resort line, but given that fewer people are, I suppose, heading to resorts, how are you going about marketing the product to consumers? And I'd also love to hear a bit about how the home product at Tommy is performing.

Yes. The overarching idea, naturally, is what we've discussed regarding product: it's genuinely easy to wear and easy to care for. You observe that across the sector, and it holds true for us too. What that translates to is plenty of lounge-style apparel throughout every one of our brands. All of that product category is performing quite nicely, as it invariably does at this point in the year at Tommy Bahama. Second layer knits for men are performing very nicely. They're items suitable for gifting; they're items that feel comfortable. They genuinely work extremely well for the work from home Zoom setting. The athleisure-style, performance-inspired goods we carry in every brand have performed very nicely, and that's where we've attempted to shift the product assortment. Naturally, we were responding with very little lead time, but that's what we've tried to put in place for holiday, and that's what's selling nicely. One bright spot, Susan, of the selling so far at Tommy Bahama has come on the women's side, where normally for Tommy, women's takes a step back at this point in the year, and everything becomes really about the men's business. Well, this year is different in that men's is performing well, but women's is genuinely stepping up, and we currently have quite a few women's items among our top 10 for Tommy Bahama. Those are genuinely pieces coming out of our Island Soft line, which I'd characterize as cozy loungewear, and then our IslandZone line, which is performance product we describe as effortless function and feel. Those are genuine bright spots we're very excited about. We've got a really cool thing at Lilly Pulitzer right now, which is a couple of items featuring a built-in face mask that you 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. That's generating some excitement and some buzz as well.

Oh, that's wonderful. What about the home product at Tommy?

Yeah, so home-related merchandise, items suitable for gifting, naturally, extremely, extremely well-liked. At Tommy Bahama, it isn't a huge portion of the assortment, yet it remains popular, as it always is during this season. Cookies move quickly too, an intriguing outgrowth of our food operation, but packaged cookies are something we carry in our locations. Currently, those are performing very strongly. Fantastic.

That's fascinating, and quite unexpected. Let me follow up quickly on how things went by region — was there any shift as we moved from Q2 to Q3? My sense is Hawaii remains a trouble spot, but has it gotten any better at all?