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

Thanks, and good afternoon, everyone. Before we get started, I want to remind those listening that some of what we say during this call and in the Q&A portion could count as forward-looking statements under the federal securities laws. Such statements aren't promises, and what actually happens might end up being quite different from what those statements say or suggest. The key factors that might lead our operating results or our financial condition to come out differently are covered in the press release we put out earlier today, as well as in the materials we file with the SEC, which include the risk factors found in our Form 10-K along with our first and third quarter 10-Qs. We're not obligated to revise any forward-looking statements. On this call, we'll also be talking about some non-GAAP financial measures. A reconciliation between non-GAAP and GAAP financial measures appears in the press release we issued earlier today, and you can find it posted under the Investor Relations tab on our website, oxfordinc.com. Now let me introduce who's joining us on today's call. Here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO. We appreciate your attention and your patience. At this point, I'll hand the call over to Tom Chubb.

Good afternoon, and thanks for being with us once more. We're sorry about the technical problems we ran into, and we want to assure everyone those issues had nothing to do with COVID. Along with most people, we're glad to put 2020 in the rearview mirror and we're eager about what lies ahead in 2021 and beyond. Before I get into what we learned from 2020 and what we have planned for 2021, I want to pause for a moment and express gratitude to our amazing team. Naturally, 2020 brought huge business difficulties, with countless shutdowns, restrictions, the need to revise how we operate so we could safeguard the health and safety of our employees and shoppers, working from home, and the list goes on and on; on top of that, we know our people dealt with enormous personal struggles, some of which we knew about and some we did not. Those struggles ranged from personal worries about COVID among family and friends, to teaching children at home, to anxiety about one's own job or a spouse's job, and many more. We will never fully understand how much our people were dealing with personally, but we do know it was considerable. And we're thankful that our people stepped up and kept delivering positive, upbeat brand messaging, products and experiences to our customers. We feel tremendous gratitude for everything our people did and managed to achieve throughout the hardest year any of us can recall. Now I'd like to quickly review 2020 and a few of the important lessons we took away that are shaping our plans for 2021 and beyond. As you may remember, 2020 began wonderfully for us, with superb results in February and the first couple of weeks of March. Then the pandemic struck. And on March 17, we temporarily closed every one of our stores across the country. At that moment, we understood that the great plans we had made for 2020 simply could not be realized, so we shifted toward our 3 defensive priorities: People, brands and liquidity. When it came to people, we worked hard to comply with every applicable guideline in order to safeguard the health and safety of our employees, our shoppers and the communities where we operate. This took a major effort and was extremely hard, but we were glad to play our part in fighting the pandemic. When it came to our brands, our focus was on maintaining their integrity throughout the pandemic year. Thanks to excellent inventory management along with creative merchandising and planning, we kept inventories in good shape. With no surplus of excess inventory, we sidestepped the kind of heavy discounting that can harm brand integrity. 2020 also drove home how deeply our guests love the happy, optimistic messages, products and experiences we offer. To put it plainly, when we bring happiness to our customers, we succeed. To wrap up, regarding our liquidity, we closed fiscal 2020 from a position of strength. Cash rose to $66 million, up from $52 million when fiscal 2019 ended, and we had zero borrowings outstanding at the close of both years. This better liquidity came thanks to $84 million in cash flow from operations, which covered capital expenditure investments in data, digital marketing and omni-channel technologies, share repurchases, dividends and minority investments in smaller branded businesses. With such solid cash flow and liquidity, we are extremely well placed to put money into our business and carry out our strategy moving forward. Considering everything 2020 threw at us, Lilly Pulitzer delivered another outstanding year; during the several years before 2020, we had put money into improving and building out Lilly's digital commerce and marketing capabilities; specifically, our focus was on a beautiful, easy-to-shop website plus the ability to simulate, analyze and use customer data so we could serve existing customers better and target new ones. Thanks to those investments and the efforts the Lilly team made to take advantage of them, we entered 2020 with a direct-to-consumer business whose revenue was balanced between e-commerce and bricks-and-mortar retail. On top of that, we were bringing in new customers digitally at roughly two times the rate we were bringing them in via our bricks-and-mortar retail stores; this positioned Lilly very well once the world moved to digital commerce amid the pandemic. Our digital strength, together with our happy brand message and our comfortable casual cheerful products, produced terrific results. Lilly ended the year with 63% growth in full price e-commerce, which helped generate a 12% operating margin. As 2021 went on, and more and more customers increasingly feel safe returning to stores, we are thrilled to be able to offer the outstanding Lilly Pulitzer experience; many of the innovations we introduced during 2020, which more tightly integrate the in-store and digital experiences, will make that experience even better. Beyond that, we keep investing in projects that will strengthen our capacity to integrate first, second and third-party data, giving us insights that help us build segments to better understand and target customers and track engagement so we can inform future enhancements; we are also proceeding with projects that will improve our customer service by supplying more complete information on an automated basis; these are merely a few of the many projects now underway that will help us serve our customers better. Tommy Bahama likewise has an upbeat positive brand message and easy-to-wear, easy care products that customers love. That being said, entering 2020, Tommy Bahama relied far more on bricks-and-mortar for revenue and for gaining new customers. Before the pandemic, Tommy's direct-to-consumer business was divided approximately 75% stores, outlets and restaurants and 25% e-commerce. Furthermore, it was gaining customers in bricks-and-mortar at over two times the rate it was gaining them through digital. Tommy Bahama saw its online sales expand considerably in 2020, and while we think there's a big chance for further expansion, the company's pre-pandemic dependence on physical stores for income and bringing in new customers meant the hurdles created by closures and other limitations proved harder to get past in the near term. As 2021 gets underway, Tommy is putting money into the staff, workflows, and technology it requires to compete more effectively and succeed with today's digital consumer. Such spending will strengthen our capacity to identify and more fully cultivate customer groups and design shopping experiences suited to those groups and to specific usage moments. In 2020, our Tommy Bahama dining operation faced difficulties from closures and numerous operational limits put in place by state and local authorities. Despite those obstacles, we felt quite good about what we managed to deliver, especially at our Marlin Bars, the fast casual idea we launched at Coconut Point, Florida a number of years back. Because they focus on eating outdoors, drinks, and smaller, lighter menu offerings, the Marlin Bar has connected powerfully with patrons throughout the pandemic. Even more significantly, drawing on its 25 years of knowledge in food and drink, we think this idea presents our great brand in a manner that feels extremely pertinent to guests today. Along those lines, we launched 4 Marlin Bars in fiscal 2020, and following our just-opened site at Fashion Valley in San Diego, we now operate 7 altogether. We think this idea offers a superb path for expansion and investment going forward. We can not only conduct business on the food and beverage side, but the Marlin Bars also produced remarkable outcomes for the company and retail store. Specifically, the hospitality our Marlin Bars provide fosters a setting that is genuinely assisting in expanding our women's business. Of our 3 smaller brands, Southern Tide, The Beaufort Bonnet Company and Duck Head, The Beaufort Bonnet Company stood out, generating growth on both the top and bottom lines in fiscal 2020 along with operating margin expansion, closing out the year at nearly $21 million in sales, with 2/3 of that from e-commerce. All 3 brands, much like their bigger counterparts, are concentrating on sharpening their digital e-commerce and marketing capabilities in 2021, through projects comparable to those at Tommy Bahama and Lilly Pulitzer yet sized suitably for the smaller operations. Additionally, Southern Tide keeps gaining insights from its 3 recently launched stores and has honed its retail approach, while The Beaufort Bonnet Company's third signature store just opened its doors. We're really enthusiastic about what 2021 holds. Since late February, we've observed a clear uptick in business at our physical locations, especially in warm weather, off-mall spots, and meanwhile, our e-commerce operation continues to be quite robust. I appreciate your time, and now I'll hand things over to Scott for more specifics on 2020 results along with our 2021 plans. Scott?

Thanks, Tom. The teams running our operations handled the pandemic well and dealt effectively with the major shifts that hit our business during 2020. For fiscal 2020, sales fell 33% to $749 million, and the mix of our revenue changed considerably. Our e-commerce operation expanded substantially, posting double-digit gains across every one of our brands. Part of that increase is clearly due to stores being closed, yet we also think it reflects a lasting change in the way our guest shops. During fiscal 2020, e-commerce sales reached $324 million, up 24%, and accounted for 43% of total sales, versus 23% in fiscal 2019. Turning to bricks-and-mortar, temporary closures hurt our retail stores and restaurant businesses, which keep operating under restrictions; California and Hawaii have been especially tough for us, since we have a substantial footprint there with 34 stores and 7 restaurants. The encouraging part is that traffic and sales have been improving as restrictions get lifted. In fiscal 2020, our adjusted gross margin came in at 55.1%, down from 57.6% in fiscal 2019; during 2020, we ran deeper discounts in our off-price channels, recorded inventory markdown charges, and a larger share of revenue came from promotional and clearance events. At the same time, an increase in IMUs gave gross margin a boost, since we shifted manufacturing away from China and created items with higher price tags at retail, such as our performance apparel. Throughout fiscal 2020, we took steps to reduce SG&A; in total, adjusted SG&A finished $93 million under fiscal 2019, through savings efforts that involved a $63 million decrease in employment costs, a $10 million drop in occupancy costs, and cuts to variable and other expenses. Turning to 2021, our business has continued to gain momentum. E-commerce is still expanding, while traffic and conversion rates are climbing at our stores, restaurants and Marlin Bars. We've also noticed a recent increase in our wholesale operations and feel positive about our forward order book. Thanks to stronger initial markups and our decision to leave the lower-margin Lanier Apparel business behind, we're looking for gross margin to expand in fiscal 2021. On the SG&A side, we anticipate a figure about 5% below where it stood in fiscal 2019, since cuts to staffing and variable costs were partially canceled out by heavier spending on marketing. When we put all of that together, we believe fiscal 2021 will bring a healthy improvement on both the top and bottom lines. For the first quarter, sales should climb from $160 million in fiscal 2020 to somewhere between $220 million and $240 million in fiscal 2021, and for the full year, we see sales rising from $749 million in fiscal 2020 to a range of $940 million to $980 million in fiscal 2021. For the first quarter of fiscal 2021, we're anticipating an effective tax rate of about 15%, and around 20% for the whole year. Certain discrete items should provide a benefit to the tax rate in both the quarter and the year. On an adjusted basis, profitability returned in the fourth quarter of fiscal 2020, and for the first quarter of fiscal 2021 we expect adjusted EPS in the range of $0.95 to $1.15, with $2.80 to $3.20 anticipated for the full fiscal year. Our business is underpinned by a strong balance sheet. Let me walk through a few highlights. As fiscal 2020 came to a close, our inventory was in great shape. At the finish of the fourth quarter, inventory was down 19% to $124 million, versus $152 million a year earlier, and every operating group posted a double-digit percentage decline. We got there by carrying out several onetime actions during 2020, among them cutting and canceling orders and moving products into other selling seasons. Even more significant is that our enterprise order management systems will let us conduct more business while holding less inventory. With zero debt and $66 million in cash as fiscal 2020 ended, our liquidity is in a strong position. Capital expenditures came to $29 million in 2020, and for fiscal 2021 we anticipate capital expenditures of roughly $35 million. Our Board of Directors raised the quarterly dividend payout, moving it from $0.25 per share up to $0.37 per share, which brings us back to where we stood before COVID. I appreciate you all taking the time today, and now we'll open the call up for questions. Anastasia?

Paul, what we're asking is how you view the potential for every one of your brands to return to the sales volumes seen in fiscal 2019. Would you anticipate that happening at some stage during this year? If that's the case, which quarter do you think that could happen for each brand, assuming it happens at all? Another thing I'm wondering about is how you view the gross margin rate for fiscal 2021 across each of the main brands; and even looking past this year, how do you think about the possible upside from that point?

Of course, Paul, and thank you for asking. What I'd say is that for each of our brands, over the full year, we probably won't quite make it back to where we were in 2019. We'll fall a bit shy of that. With a bit of good fortune, we could come fairly near those figures, though likely not entirely return. During the call, we noted that in the first quarter, the opening couple of weeks amounted to a continuation of what we'd seen in Q3 and Q4. Yet starting in mid-February, momentum has truly accelerated at our bricks-and-mortar stores and hasn't really eased off in e-commerce. That's quite heartening for us and shows there's substantial pent-up demand among consumers, and that they're genuinely eager to get out and beginning to consider traveling, taking a vacation, and all those activities that benefit us greatly. So we feel optimistic. I doubt we'll fully return to 2019 levels during this year. Still, I'd certainly expect that as we head into 2022, we'd aim to achieve that; and Scott, I'm not sure whether you'd like to add anything there.

Regarding the question about gross margin, across fiscal 2020 we definitely anticipate improvement in each of our operating groups — ideally no less than 250 to 300 basis points apiece.

Scott, what about compared with fiscal year 2019? Sorry.

For fiscal year 2019, we anticipate a bit of expansion, and we believe Lilly in particular has a chance here. They truly put in considerable solid IMU effort toward securing improved initial gross margins, and much of that effort during 2020 simply ended up obscured by some of the additional promotional activity. And Tommy's, I'd say, will likely be roughly flat against 2019, perhaps slightly higher. And I believe Lilly holds some gross margin expansion potential in 2021 relative to 2019.

Understood. Then, finally, you said — I believe — that certain order books gave you encouragement. Can you put any figures to that? Is there anything else you might tell us about what you're observing?

Things are changing so quickly at present, since so much hinges on replenishment. That's why giving a figure makes us reluctant, though we've definitely felt encouraged.

Paul, my take is that a return to what we saw in 2019 probably won’t happen during the fall season. Once we move past that, though, when resort and spring arrive—and the beginning of that period falls inside this fiscal year—I can’t say for sure. What happens will hinge on how the double sale accounts are doing. With some of them, we’re beginning to observe a significant increase in their business. As Scott mentioned, things remain in flux.

Given that inventories have fallen 19%, how much of that reduction was intentional and how much stemmed from supply chain problems? Also, what's your outlook on inventory orders and levels throughout '21?

Disruption has been minimal for us. There's plenty happening out there in the supply chain, I'm aware, yet our delays have been quite small. Much of Lilly's product arrives on the East Coast, an area affected less severely. Tommy also shifted some products around, and we brought in far less for spring. Thus, so far that hasn't posed a significant problem for us, though we're monitoring the situation. Thanks to our enterprise order management systems and more disciplined inventory management, we think we can run this year with smaller inventories than previously while still producing solid sales. So going forward, we simply anticipate greater efficiency with inventory.

Understood, that helps. Could you give us an update on your confidence level regarding the Tommy women's segment for 2021? And perhaps share whatever you can on a year-to-date basis, or possibly some early spring color?

Year-to-date figures probably aren't something we can hand over, though we can offer a bit of year-to-date color, and honestly, it's pretty strong. What we saw in women's during the fourth quarter left us feeling good, that's when our new IslandZone performance product launched; and we had the second holiday season, both 2019 and 2020, when Island Soft was in the mix. Those are both women's items, and each has done very well for us. They genuinely opened up some new lanes of business in women's, and I believe they helped us locate a zone we're able to own around. Another thing lifting women's is the — you could call it the basic fundamental category-type business, bottoms and bits, and key item type categories like that, where across the last couple of years, really, we've established a business we'd never had previously, and that's more of an annuity-type business we can keep building on. And this spring, in fact, our fashion product in women's is moving well too. Then the final point, Matthew, I'd offer on women's is that, as we've said, in our Marlin Bar locations, those tend to rank as our very best women's locations. And we truly believe the Marlin Bars will help us grow the women's business. We've witnessed it directly there, and I think we'll begin to witness it indirectly elsewhere.

Great work this quarter. About Q1 — it's encouraging to hear that business seems to have perked up. What I'd like to know is whether every region is doing better, or whether it's places such as Hawaii, which has reopened and may now be seeing some traffic, that are fueling it. Also, does this hold — or do all the brands show similar patterns?

All of the brands, I'd say, show similar patterns. Right now everyone's experience — honestly, everyone's business looks quite strong at the moment, or at minimum is on a solid path at the moment, which is wonderful to see. What isn't consistent is the geography piece; so the top performers, as we said in our prepared remarks, tend to be warm weather and off-mall locations. So generally, an outdoor mall, a street location, or a resort location in a warm weather market seems to be faring well. The Northeast, the Midwest, parts of the Pacific Northwest — a few of those geographies are still, while they might have gotten a bit better, quite beaten down at this point. As for Hawaii, a pleasant rebound is beginning to appear there. In fact, Doug Wood, who heads up our Tommy Bahama business, has been out there this week; when we spoke with him yesterday, he was on Maui, and according to him, tourism is really starting to return there. And my sense is that what's happening in Hawaii applies to domestic travelers, so that means the big island, mainly Maui, and it's picking up quite nicely. Waikiki is still not quite as strong; that location relies far more on the international traveler, and those visitors haven't quite returned yet, but the trends we're seeing there and elsewhere have us super excited. And I believe it all comes down to people feeling safer about going out. And you've got — each day, more people get vaccinated. A lot of states now offer it to anyone over the age of 16; and I think all of that will keep fueling consumers' growing willingness and desire to get out, travel a little, and visit some stores and that kind of thing.