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 today on this call, as well as during the Q&A, might count as forward-looking statements under the federal securities laws. Such statements aren't promises, and what actually happens could end up differing materially from what those statements express or imply. The key factors that might cause our actual 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 in our Form 10-K. We're not obligated to update any forward-looking statements. On this call, we'll also be going over certain non-GAAP financial measures. A reconciliation between non-GAAP and GAAP financial measures appears in the press release we issued earlier today, which you can find posted under the investor relations tab of our website at oxfordinc.com. Because COVID-19 had a material impact on our business in fiscal 2020, we'll also be providing comparisons against our fiscal 2019 results. Now let me introduce the participants on today's call: joining me are Tom Chubb, Chairman and CEO, and Scott Grassmyer, CFO. Thanks for listening, and now I'll hand the call over to Tom Chubb.

Good afternoon, and thanks for being with us. First off, I want to express appreciation to our amazing team for producing exceptional results in the second quarter, including record sales, gross margin, operating margin, and earnings per share. We saw strong performance across every one of our brands, especially in our direct-to-consumer distribution channels. Although favorable market conditions are giving us a lift, what we delivered stems directly from our team's continued work navigating the near-term difficulties created by the pandemic, all while keeping our attention on the long-term strategic goal of bringing happiness to our customers. These outstanding results come from the power of our brand portfolio and the way we convey our aspirational, upbeat brand messages using beautiful imagery, differentiated products, and exceptional customer experiences. To provide a superior customer experience in today's market, we must remain focused on our long-term north star objective of continually enhancing our customer-centric, digitally driven, seamless, cross-channel shopping experience, with an emphasis on mobile; we keep investing heavily in further improving the customer experience through upgrades to our mobile apps, search engine optimization, customer data and insights, customer service, and much more. The lines separating our retail and e-commerce operations are getting more and more blurry; we understand that a growing number of customer journeys to purchase involve both physical and digital elements. Most consumers no longer make a distinction between their relationship with the digital side of the brand and their physical relationship with our brands. They simply think about their relationship with our brands. They want and expect to be able to mix and match digital and physical elements whenever they choose; we are committed to satisfying this desire and to continuing investment in the people, processes, and technology that let us do so. We have discussed many times our ability to ship-from-store as an illustration of how these two channels blend. We have also introduced capabilities including drive to store digital marketing, buy online, pickup in store, reserve online, pickup in store, virtual shopping appointments, and cross-channel customer service to better serve our customers' needs. The better we become at offering a truly seamless omni-channel experience, the better our customers' overall experience will be, ultimately leading to greater brand loyalty and a stronger business over the long term. Our team's unwavering focus on enhancing our customer experience shows in our numbers, which surpassed 2019 levels. In the second quarter, our combined direct-to-consumer full price store and e-commerce comp rose by an impressive 22% versus 2019, with 15% growth in our biggest brand, Tommy Bahama, and a remarkable 31% growth in Lilly Pulitzer. Growth in our direct-to-consumer channel was led by our highly profitable e-commerce business, which grew by 49% over the second quarter of 2019. Along with the impressive top-line growth, we managed to expand our e-commerce gross margin at the same time. Our e-commerce operation has gotten a boost from the ship-from-store program, letting us tap merchandise sitting in shops to fulfill online orders and requests coming from other stores too. Across the full year, we anticipate that our overall e-commerce activity will represent approximately one-third of consolidated sales, versus 23% back in fiscal 2019. E-commerce may be the channel expanding quickest for us, yet brick-and-mortar locations stay a vitally significant component of our direct-to-consumer operation; in some cases, nothing can take the place of the face-to-face engagement and elevated service standard that our stores deliver. During the quarter, our retail locations posted a modest top line increase against 2019 figures, even with reduced foot traffic, and we saw sequential gains throughout the second quarter in every region nationwide. Just as with e-commerce, we managed to grow gross margins in retail stores for the quarter, thanks to full-price selling along with higher IMUs. Looking at this year, we anticipate retail stores will account for slightly below 40% of our overall business; we set our omni-channel approach further apart in how we deliver happiness to customers through our food and beverage offering. Restaurant and bar sales climbed 26% for the quarter versus 2019. We achieved positive comp growth across every location compared with the second quarter of 2019, with nearly all reaching double-digit levels. In this year's second quarter, we count five more Marlin Bar sites than we had in 2019. Our food and beverage strengths provide a distinctive and potent means of forming connections with new customers, while also deepening the affection existing customers hold for our Tommy Bahama brand. Given the robust beginning to 2021 and our expanding footprint, we project our restaurant and bar operation will reach approximately $100 million in revenue this year. Lastly, although wholesale accounts for only roughly 20% of our overall sales, it continues to be a valuable distribution channel. When both our wholesale partner and we can turn a profit, wholesale serves as a meaningful way to introduce new customers to our brands and an additional method of serving our customer whenever and however she wishes to be served. The outstanding enterprise-wide performance this quarter stemmed from remarkable results within each individual brand. Beginning with Tommy Bahama, the brand produced double-digit top line growth against 2019. Increased sales, paired with gross margin gains and superb expense management, generated a 1,000 basis point lift in operating margin, reaching a very robust 22.7%. Throughout the quarter, a large share of the growth came from knit tops and shorts across both men's and women's, among them numerous IslandZone performance styles. The momentum in these categories perfectly illustrates how Tommy Bahama gains from, and is seizing, the enduring shift toward casual, low-maintenance, and comfortable-to-wear merchandise. Meanwhile, Lilly Pulitzer posted top line growth of 16% against 2019, widened their gross margin, and kept expenses well in check too. Taken together, those results produced a 230 basis point gain in operating margin, bringing it to a notable 29.5%. On the product side, woven dresses have rebounded nicely, a category where Lilly has traditionally been strong. Our Lilly Luxletic activewear has been the largest growth area, and it now represents roughly 12% of our business. At Southern Tide, strong e-commerce growth along with the opening of our new retail stores generated a 17% increase in sales, and that, paired with better gross margins, yielded a 21% operating margin. Although Southern Tide is still early in its retail journey, with only a small number of company-owned stores in Florida, the results we are seeing make us optimistic. Lastly, our early-stage brands, The Beaufort Bonnet Company and Duck Head, are small today but play a key role in our broader enterprise growth strategy. Thanks to their robust e-commerce operations and expanding wholesale operations, both The Beaufort Bonnet Company and Duck Head posted solid growth along with gains in gross and operating margin. We are also delighted to have signed our first lease for a company-owned store for The Beaufort Bonnet Company, and we expect to open it later this year. As we move into the second half of the year, we remain mindful of the continuing COVID-related difficulties in supply chain and in store and restaurant operations. We are confident that our emphasis on carrying out our long-term strategic initiatives will keep driving momentum in our business. We have established a strong, profitable, seamless, digital and mobile-first omni-channel platform that fuels growth by delivering a superior modern customer experience. On the product side, the shift toward casual, easy care, and easy to wear fits perfectly within the sweet spot of our brands, and we are capitalizing on that market opportunity very effectively. To wrap up, I want to thank our committed and dedicated team members once more, and to express my sincere gratitude to our customers for the relationship we share with them, as well as to our shareholders for their continued support. I will now hand the call over to Scott for more detail on the quarter and the outlook for the second half. Scott?

Thanks, Tom. Like Tom said a moment ago, standout results across every one of our brands during the second quarter delivered all-time highs in revenue, gross margin, operating margin, and earnings. Looking at the top line, appetite for what we sell stayed elevated, and sales came in above 2019 amounts across all of our direct-to-consumer channels and all of our brands. Consolidated sales for the second quarter reached $329 million, up against $302 million during the same period in 2019. Our gross margin kept running well above where it stood in 2019. Adjusted for certain items, gross margin grew 450 basis points versus 2019, reaching 64% in the second quarter. Fueling that gain were a larger share of sales at full price, our broader mix shift toward the higher-margin direct-to-consumer distribution channels, and better IMUs. Costlier freight created a bit of drag on margin during the quarter, cancelling out part of those gains. We picked up SG&A leverage in the second quarter, going from 47% of sales in 2019 down to 44% of sales. SG&A dollars rose slightly versus 2019, driven by greater performance-based incentive compensation and marketing spending, partly balanced out by reduced other employment costs stemming from lower headcount and decreased occupancy expenses. During the second quarter, our consolidated adjusted operating margin grew 820 basis points versus 2019, hitting 22%, as operating margin widened across every operating group. A healthy balance sheet and robust operating cash flow give our business solid backing. Our liquidity stands in good shape, with $180 million of cash and nothing drawn on our revolving credit facility as of the close of the second quarter. Cash flow continues to be very robust. During the first half of 2021, operating activities generated $149 million of cash, versus $24 million across the first half of 2020. Measured on a FIFO basis, inventory fell 34% from where it was at the close of the second quarter of 2020. Leaving out Lanier Apparel, which we are winding down, FIFO inventory dropped 26% relative to the close of the second quarter of 2020. Tommy Bahama, Lilly Pulitzer, and Southern Tide each brought inventory down from a year earlier through cautious buying of seasonal goods and first half sales that beat expectations. Continued upgrades to enterprise order management systems are helping us use inventory more efficiently as well. On a LIFO basis, inventory dropped 48%, and once Lanier Apparel is excluded, it fell 39% against the close of the second quarter of 2020. Our view for the back half of the year mirrors our belief that our full price direct-to-consumer business will be strong. We anticipate full price direct-to-consumer sales growth along with consolidated gross margin expansion versus 2019. Although we lifted our outlook for the second half, expected year-over-year gains in our full price direct business should be partly cancelled out by a handful of particular headwinds over the back half of the fiscal year. Robust full-price sales during the first half mean we have less inventory on hand for our second-half clearance events. That includes an anticipated $15 million drop in Lilly Pulitzer's third quarter flash clearance sale versus 2019. On top of that, initial spring wholesale shipments, which historically have gone out in the fourth quarter, will likely go out in the first quarter of 2022 because of supply chain delays. And finally, leaving Lanier Apparel should hit revenue in both the third and fourth quarters. We expect sales from Lanier Apparel to come in roughly $25 million below 2019's third quarter, and $20 million below 2019's fourth quarter. For the full year, our sales expectation now sits in a range of $1.085 billion- $1.105 billion. That's against sales of $1.12 billion in 2019. Adjusted earnings per share should land between $6.45 and $6.70, which is a significant step up from our previous guidance. That compares to earnings of $4.32 per share on an adjusted basis in 2019. For the full year, sales from Lanier Apparel should total $25 million in 2021, versus $95 million in 2019. For the third quarter, our sales expectation is between $220 million and $230 million, versus sales of $241 million in the third quarter of fiscal 2019. In the third quarter of fiscal 2021, we expect earnings of $0.20 to $0.30 per share on an adjusted basis, versus earnings of $0.10 per share on an adjusted basis in the third quarter of 2019. Our outlook factors in strong quarter to date sales results, with August being the most impactful month of the quarter in 2021. The company's effective tax rate for the full year should come in at approximately 23%. We continue to back our business in fiscal 2021 with investments for future growth. Capital expenditures should total approximately $40 million in fiscal 2021, as we focus on technology related to digital marketing, customer service, mobile enhancements, and improved distribution; beyond that, we will invest in additional brick-and-mortar locations with our newest Marlin Bar at Town Square in Las Vegas slated to open tomorrow. This Marlin Bar is taking the place of the recently closed full service restaurant in the same center. Lastly, we take pride in our long history of returning value to our shareholders through dividends, which we have paid every quarter since going public in 1960; this quarter, our board of directors has declared a dividend of $0.42 per share; we appreciate your time today and will now turn the call over for questions. Hillary?

Hello, and thanks. This is Tracy Kogan, sitting in for Paul. There are a couple of things I wanted to ask. To start, could you expand on what you said regarding August being the month with the biggest impact, and that things have begun well? What I'm curious about is what you observed at Tommy and Lilly in August compared with August 2019, regarding both sales and margins? Once you've answered, I have another question. Thanks.

All right. Tracy, we appreciate you joining the call, and I'll have Scott address August and why it matters. Yes. During August, Tommy holds its friends and family event, an occasion of real significance, and theirs was very strong. Lilly, meanwhile, runs some gift with purchase events. It comes near summer's close, when we still enjoy considerable summer momentum. For us, August always matters, and this year, given the powerful events at Tommy as well as Lilly, the month was outstanding. Since we haven't completely closed it out, I won't provide actual gross margin comparisons in figures. Once August is fully closed, we will show strong gross margins against 2019 once more, and we anticipate that continuing through the quarter and across the entire year.

When it comes to the sales line, I understand you may not want to put too fine a point on it, but could you give us a rough feel for whether things have sped up or slowed down relative to the quarter we just finished and relative to 2019? On the sales line, are we seeing sequential gains or a pullback?

Through August, the pace has more or less held. My sense is that in September and October, there simply isn't as much room to run. For one thing, those aren't large months for us. The Lilly flash sale is going to be considerably smaller. September used to be the month when the Lilly flash sale stood out as easily the largest event. Beyond that, we're genuinely entering the fall stretch when neither of our brands performs especially well. We have no back to school business. It's hurricane season in Florida. Apart from the Lilly flash clearance, those months have historically been fairly weak, and as we mentioned in the prepared remarks, that clearance will come in roughly $15 million below the prior year.

Understood. Thanks. For my next question: you all brought up several of the omni-channel offerings that are available right now, like ship-from-store and buy online, pick up in store. What I'd like to know is which major initiatives are underway this year in the omni-channel space across both of your brands, or within your key brands? Thank you.

Honestly, Tracy, there's a very large set of projects, and every one of them centers on making the customer experience better — letting her shop in whatever way she prefers with greater ease and simplicity. As I said in the prepared remarks, it's about blending physical aspects of the experience with digital aspects. The more effectively we bring those two channels together so they operate in harmony, the stronger the experience. The consumer gets. A few that I named are among the major initiatives we've either finished or have underway, and the items going forward will be comparable ones that further enhance how seamless the experience feels. Making it simpler for her, and for store associates, to process an in-store return of something she may have purchased online, or to order it from the store, and when it isn't in stock, ship it from a different store or the DC — something we can already do, though we're upgrading those capabilities. Boosting her ability to sample products. We discussed reserve online, pickup in store. The concept being that a customer goes online, selects five or six styles she believes she might like, reserves them online, and then store staff can actually set up a fitting room for her containing those styles. She can dash in and try each one on. She's essentially pre-screened them online; everything is sitting there ready for her to try, that sort of thing — and it's practically an endless list, but the more we accomplish, the stronger the experience we'll deliver for her.

Understood. Thanks so much, everyone.

Hello, good evening. Great work on the quarter. What I'm wondering is, when we look at the back half, it seems you anticipate somewhat reduced profitability compared with the first half. Is that primarily on the gross margin side, and would it stem from supply chain problems, or do you also anticipate elevated SG&A costs?

It's far more about the top line; we highlighted the effect of Lanier as well as the effect of the Lilly flash sale; during the fourth quarter, our initial spring delivery takes place. Typically, it's sort of ready for a late January delivery, and certain people decide to take it in January, while others decide to take it in February. Given some of the supply chain problems, we believe that delivery will most likely be almost entirely 2022. We'll remain within the wholesalers' windows, but that will be more of an early 2022. That's creating a bit of a headwind as well.

Understood. Sorry, please continue.

When it comes to gross margin, we still anticipate solid improvement in each quarter compared with 2019 throughout this year.

All right, great. Regarding that late delivery, does it apply to the resort line this year?

It's actually Spring 1; we're shipping some goods by air; a few items might arrive slightly late for resort, and the bottom line is we still believe we can recover the bulk of that demand within the quarter; the real issue is the effect of that first spring delivery on our wholesale business, which is where the supply chain could shift certain sales from the tail end of the fourth quarter into the beginning of the first quarter.

Okay. From a regional standpoint, are the patterns still the same as what you observed during the prior quarter, with the South performing better? I'd like to know whether Hawaii has returned to where it stood in 2019, and then what you anticipate for the latter half there, since my understanding is that additional restrictions may have been put in place.

Yes. Susan, what I'd say is that the regions' comparative strength looked alike, though every region actually got better over the quarter. Those that were softer during the first quarter — the Northeast and the Midwest, especially Mid-Atlantic — still haven't matched certain southern regions, yet they've narrowed the difference relative to 2019, which is wonderful to witness. Honestly, each of them wound up appearing quite solid as the quarter went on. Regarding Hawaii, extra restrictions have been introduced. My sense is that people there are putting in a lot of effort to prevent a severe, prolonged closure such as what occurred last year. They're approaching it wisely, and clearly public health matters have to be a worry for them. Without question, there will be some disruption there, but I genuinely believe they're striving hard to steer clear of the type of situation that happened last year.

All right, that's wonderful. I really appreciate it. Best of luck for the second half.

Thanks.

Hello, everyone. Appreciate you answering our questions. So, to start with, there’s obviously plenty of positive movement when it comes to gross margin. When we look ahead over a longer horizon, how would you break down the gains from greater D2C, more e-com, and less wholesale, compared with what might be temporary and simply due to fewer markdowns? Also, just a quick administrative note, I saw that you had an $11 million sale involving an unconsolidated entity. Could you share any details about that? Thanks.

Starting off, regarding gross margin, I’ll let Scott chime in on that, but my view is that much of the improvement we achieved there is something we can hold onto. As you mentioned, there’s likely to be some pressure ahead, probably from increased promotional activity in the market compared to what we saw this year. The lift in gross margin wasn’t solely due to less promotion. It also came from the shift in mix toward direct to consumer, which you pointed out. Beyond that, it’s really improved IMUs, which stems from the efforts we’ve made on pricing and factory cost of goods over the past 2 years. I believe we’re now truly reaping those rewards. Another point I’d make is that even with those favorable factors boosting our gross margin, we faced a significant amount of extra freight expense in the quarter, and likely will for the rest of the year. In time, that will diminish. I’m not suggesting it’ll disappear before this year ends. I don’t think all those freight hikes are lasting, and eventually they’ll ease, and we’ll no longer face that burden we actually dealt with on gross margin in the quarter. Now, about the mention in the press release of the $11 million gain from selling our minority stake in an unconsolidated entity—that ties into our emerging business units initiative we’ve discussed before, where over the last 4 or 5 years, we’ve made small investments, usually around 10%, in small but growing apparel brands. We’ve partnered with those teams, aiming to learn from them, and they gain from us too. We assist them somewhat in their growth. A few of those have led to acquisitions where we took full control, as we did with Beaufort Bonnet. In other instances, we anticipate this outcome, and that’s what occurred with the one we highlighted: we determined we’re not the ideal long-term owner for them. Still, they’re set to complete a larger control-type deal. As part of that, we’d sell our stake. Out of the, I think, 6 investments we’ve made so far, we’ve actually sold 2 of them, I believe that’s the tally, including the one mentioned in the press release. I think going forward, this isn’t something we’d expect every quarter and maybe not even annually. Occasionally, we’ll divest some of those interests, and others will go the opposite way, moving from minority stake to a controlled transaction. Having said all that, I’ll hand it over to Scott to address anything else on gross margin.

Yes. I can provide a bit more detail regarding the gross margin. Regarding promotional discounts, the reduced promos and discounts accounted for slightly under 300 basis points of margin. Our shift in sales mix contributed just under 200 basis points. IMU was slightly under, coming in at nearly 100 basis points. Freight ran a bit above 100 basis points in the opposite direction; that essentially reconciles the margin. I believe that with promos, when you see a decline that large, we are likely losing some sales since inventory levels are so low. I think there was some top-line opportunity we were unable to capture because our inventories were so lean. Even if that figure decreases somewhat going forward, I believe we have top-line opportunity from being better inventoried.

Looking at this broadly, Ed, I'd say our approach is genuinely delivering results. Plenty of what showed up during Q2 — sure, there were undeniably helpful market conditions, and that contributed, and we won't claim all the credit for it. Still, I believe a great deal of what happened this quarter can be traced straight back to efforts we've spent years developing, and those are now truly benefiting us. These are things where, especially through the COVID period a year ago, we simply refused to lose sight of the goal. We handled whatever was necessary to make it through that stretch, yet at the same time we stayed committed to those larger, longer-range priorities. That, I'd argue, explains much of what you're witnessing in the numbers, and a good portion of it is going to remain with us as we move ahead.

Great. Thanks so much guys.