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

Thanks, and good afternoon everyone. I want to start by reminding those listening that some of what we say on this call, including during the Q&A, could be considered 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. You can read about the key factors that might cause our operating results or financial condition to come out differently 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. 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 figures appears in our press release from earlier today, which you'll find under the Investor Relations tab at oxfordinc.com. Because COVID-19 had such a material effect on our business in fiscal 2020, we're also going to give comparisons to our fiscal 2019 results. Let me now introduce who's joining us on the call. Here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO. Thanks for listening, and I'll hand things over now to Tom Chubb.

Thanks, Anne. Good afternoon, everyone, and I appreciate you all being here. Before I walk through how we did in Q3, I'd like to restate Oxford's fundamental operating principles. Delivering long-term value for shareholders is what we always aim for. The way we pursue that value is by holding a collection of strong lifestyle brands capable of generating dependable, profitable expansion. And our mission, as a company and within every one of our brands, is bringing happiness to people. So it's a pleasure to share that we achieved record sales and earnings during the third quarter of fiscal 2021; these remarkable figures stem directly from the power of our brand portfolio, the quality of what we offer in terms of product, and our capacity to reach and support customers no matter which channel they use, along with the tremendous effort our teams put in to reinforce these essential pillars throughout the pandemic. Measured against the equivalent quarter a year ago, sales rose 41%. And what matters even more is that sales were also higher than they had been in pre-COVID fiscal 2019. If you set aside Lanier Apparel, whose operations were essentially wound down in the third quarter of fiscal 2021, net sales climbed 15% versus that same stretch of fiscal 2019. The strong top-line expansion we saw in Q3 came from 40% growth in our full-price direct-to-consumer operation, with every brand improving relative to fiscal 2019 — that includes a 13% rise in full-price retail and a 100% jump in full-price e-commerce. Restaurant sales likewise lifted our top line, up 14% in the third quarter of fiscal 2021 against the third quarter of fiscal 2019, powered by solid gains at locations already open plus 5 additional Marlin Bar sites. Meanwhile, adjusted gross margin climbed a striking 710 basis points, reaching 62% in the third quarter of fiscal 2021 versus fiscal 2019. Scott will go into greater depth on all of these impressive metrics shortly, though I should note that they produced record third quarter earnings of $1.19 per share on an adjusted basis, compared with an adjusted loss of $0.44 per share a year earlier and adjusted earnings per share of $0.10 in the third quarter of fiscal 2019. Our Q3 results certainly got a boost from a very robust consumer market, yet we see the main reason for our outperformance as being how well we carried out our strategy and purpose. Leaving Lanier Apparel behind in Q3 represented a key milestone for our long-term strategy, since Lanier was the final piece of our legacy private label operations. Today our portfolio is made up of 5 outstanding lifestyle brands: Tommy Bahama, Lilly Pulitzer, Southern Tide, The Beaufort Bonnet Company and Duck Head. Every one of these brands is entirely consumer-focused and devoted to making that consumer happy through strong, clear brand messaging, exceptional and distinctive product, outstanding customer experiences — our e-commerce sites, our stores and restaurants, and key wholesale partnerships included. During the past 2 years, throughout all of our brands, we've intensified our dedication to communicating our positive, upbeat brand messages via gorgeous creative content and imagery. Those brand messages connect with our shoppers and play a major role in the outstanding results we're producing. The dominant direct-to-consumer mix, which is anticipated to account for over 80% of our business, strengthens our capacity to bring happiness to our customers. the direct model grants us considerable agility and flexibility when it comes to controlling the movement of product to our customers. That flexibility has been particularly valuable this year, since supply chain difficulties throughout the industry have forced our merchants to adapt quickly regarding which product we're highlighting on the floor and on our website at any given moment. The direct business additionally supplies us with substantial margin power and accounts for a large share of the gross margin improvement we realized in the quarter. Finally, the direct-to-consumer model affords us the chance to provide an unmatched customer experience that aligns with the aspirational positioning of our brands. And our amazing people have kept delivering that elevated experience through every challenge of the past 2 years. One of our strategic priorities during the last couple of years has been boosting our digital marketing capabilities by sharpening our ability to absorb and examine data, apply that data to generate insights regarding current and prospective customers, build campaigns intended to connect with those consumers and gauge how effective those campaigns are, with the aims of growing our customer account, keeping existing customers and pushing higher spend among all customers. I'm happy to report that on a trailing 12-month basis, customer metrics at the close of the third quarter of fiscal 2021, such as customer accounts, the rate of new customer additions, retention rates and customer lifetime value, were all robust compared with pre-pandemic figures. On the product side, we keep witnessing strength in the casual, easy and cozy styles that define all of our brands. Strong illustrations of this include ongoing strength in Tommy Bahama Knits and Shorts, women's lounge and sleepwear and Lilly Pulitzer's Luxletic Athleisure collection. Simultaneously, we observed a pleasant rebound in several occasion-driven categories that faced the greatest difficulty last year, such as men's pants and woven shirts and women's dresses, as people returned to more social events. As we enter the final stretch of the year, I'm happy to report that holiday selling so far has been robust, and I firmly believe we will achieve a strong finish to a fantastic year. I'm enormously thankful to our team and share their pride in what we've delivered for our customers and our shareholders. I'll now hand the call over to Scott for additional detail on the third quarter and insights into the — our outlook for the balance of the year. Scott?

Thanks, Tom. Like Tom said a moment ago, every one of our brands turned in exceptional results during Q3, producing notable gains in sales, gross margin, operating margin, and earnings that rose above where we stood before the pandemic. Turning to the top line, product demand stayed elevated, and revenue beat 2019 across our direct-to-consumer channels and within each brand. Setting aside Lanier Apparel, whose operations were essentially wound down in the third quarter of fiscal 2021, consolidated sales rose 15% to $243 million. Every region improved, with standout strength in Florida, the Southeast, and Texas. Hawaii has been positive on the whole, with strength everywhere except the island of Oahu, which relies more heavily on foreign tours than the other islands do. Our gross margin kept running well above 2019. On an adjusted basis, gross margin grew 710 basis points versus 2019, reaching 62% in the third quarter. What fueled that gain was a bigger share of full-price selling, our broader mix shift toward higher-margin direct-to-consumer distribution channels, and better IMUs. Roughly 270 basis points of elevated freight expense, air freight included, partly offset that margin gain; on an adjusted basis, we picked up 260 basis points of SG&A leverage in the third quarter, going from 56% of sales in 2019 to 53% of sales in 2021. Adjusted SG&A dollars came down slightly from 2019 levels, with lower employment costs from headcount reductions and reduced occupancy costs, partly offset by higher marketing spend. Consequently, our consolidated operating margin grew 970 basis points, from 1% in 2019 to 11%. Tommy Bahama, Lilly Pulitzer, and Southern Tide each saw operating margin expansion. Now to the balance sheet. Our liquidity is in a strong position. We closed the third quarter holding $188 million in cash and short-term investments, with nothing drawn on our revolving credit facility. FIFO inventory fell 17% against fiscal 2020, excluding Lanier Apparel, thanks to better-than-expected sales across the first 9 months of 2021, plus continuing upgrades to enterprise order management systems and careful seasonal buying. We feel our inventory sits in a good position to satisfy forecasted demand through the rest of the holiday selling season. Looking forward, we're happy with our holiday results so far and confident we can post a solid fourth quarter. Our outlook captures what we expect to be sustained strength in the full-price direct-to-consumer business. We anticipate full-price direct-to-consumer sales growth along with consolidated gross margin expansion compared with 2019. Although we lifted our outlook for the year, gains in our full-price direct business versus last year should be partly offset by a few specific items in the fourth quarter of the fiscal year. We expect Lanier Apparel sales to come in roughly $20 million below 2019's fourth quarter, since we exited that business in Q3 of this year. Beyond that, we expect our branded wholesale business to land approximately $15 million under 2019. The move of some initial spring wholesale deliveries is having an effect here. Traditionally, those went out during the fourth quarter, but now we anticipate them going out in the first quarter of 2022, since we've cut back on using air freight for warmer weather product. On top of that, because full-price sales have been strong through the year to date, we anticipate the Lilly Pulitzer fourth quarter flash clearance sale will come in lower than 2019, which means less inventory available for that flash sale. Looking at the fourth quarter, our sales expectation falls between $285 million and $295 million, versus $298 million in the fourth quarter of fiscal 2019. Once more, Lanier Apparel brought in $20 million in net sales during the fourth quarter of 2019. For the fourth quarter of fiscal 2021, we're projecting adjusted earnings of $1.20 to $1.35 per share, against adjusted earnings of $1.09 per share in the fourth quarter of 2019. Strong quarter-to-date results, with a solid beginning to the holiday selling season, are baked into our outlook. Turning to the full year, we now anticipate sales ranging from $1.127 billion to $1.137 billion, versus $1.123 billion in 2019; for the full year, Lanier Apparel sales should come in at $25 million in 2021, compared to $95 million in 2019. Adjusted earnings per share should land between $7.52 and $7.67. That's against adjusted earnings of $4.32 per share in 2019. We expect our effective tax rate for the full fiscal year 2021 to be roughly 22%. We keep backing our business with investments aimed at future growth. Capital expenditure should fall between $35 million and $40 million in fiscal 2021, mainly reflecting investments in information technology initiatives, new Marlin Bars and retail stores. We're thrilled to be opening our first company-owned Beaufort Bonnet Company store in Grand Boulevard at Sandestin later this quarter; we keep producing strong cash flow from operations, including $157 million year-to-date. Investing in our businesses, acquisitions and returning capital to shareholders through dividends and share repurchases make up our capital allocation priorities. We're still well positioned to return cash to shareholders and proud of our long track record of delivering value through dividends, which we've paid every quarter since going public in 1960. This quarter, our Board of Directors has declared a dividend of $0.42 per share. Also, while assessing our capital allocation plan, our Board of Directors approved a new share repurchase authorization of $150 million. We appreciate your time today, and now we'll turn the call over for questions. Shamali?

Nice work on the strong quarter, and it's encouraging to hear about the momentum during the holidays so far. For me, I suppose, a near-term question first, then one looking further out. You all seem to have managed inventory really well — handling the balancing act and making certain in-stocks were adequate for the holiday. I realize you aren't giving guidance for next year at this point, but beyond that wholesale move you described of bringing inventory in earlier, are there other implications we should consider, and how does that leave you positioned at least for the start of '22? Then the longer-term question. I know you've begun opening additional Southern Tide stores. It sounds like you're going to open the 1 Beaufort Bonnet store. Could you just give an overview of where you believe you stand regarding store rollout potential across your banners?

Yes. Thank you, Ed. The third quarter results made us very, very happy, along with how we've set ourselves apart; yet regarding inventory, I believe we've done a fantastic job, as you said, staying agile and nimble in handling the circumstances, ensuring we could hit our sales goals and take care of our customers. And we truly don't foresee any issue in accomplishing that. A great deal of effort is going into ensuring everything functions. But we're placing inventory orders sooner to account for the extended supply chain timelines that everyone in the industry is facing, and we keep being nimble and agile. So the takeaway there is that I don't anticipate being unable to deliver the business because of supply chain problems, if that helps you. I believe we'll be in good shape. And then on the long term... Yes. On the long-term store side, I think we're very pleased with how the 4 Southern Tide stores we have are performing; we're learning a great deal from that, and we have additional stores in the pipeline for Southern Tide. I'll let Scott elaborate shortly; and the plan is to keep opening more Southern Tide stores. Beaufort Bonnet, as Scott mentioned in his section, we'll have the first one open soon. We have a couple more in the works at Beaufort Bonnet Company; and then regarding Tommy and Lilly, as you know with Tommy Bahama, the emphasis is very much on Marlin Bars. And we like what we're seeing with the Marlin Bars and will continue to look for additional locations and potentially some stand-alone stores as well. But I think the emphasis will be much more on Marlin Bars, and then at Lilly, we're looking at new opportunities, too. Regarding Tommy and Lilly, we are likewise taking a close look at every store we currently have, and every so often, some of those could fall away from the list when renewal dates arrive or when other chances to leave come up. Still, we are certainly pursuing additional locations really throughout all 4 of the brands that currently operate them.

Yes. Yeah, building up that store pipeline does take some time. So Marlin Bars especially, but we're confident we'll have some Marlin Bars in '22 and finish the year with a solid Marlin Bars pipeline going forward; so we're — we like — we continue to like brick-and-mortar stores for our brands.

This is Tracy Kogan, covering for Paul. A few things I wanted to ask. First, you mentioned that holiday sales so far have been strong. Could you put that in context for us — versus 2019, have the trends picked up pace relative to what we saw in 3Q? Any detail you can offer would help. Then, turning to wholesale, what are you hearing from your wholesale partners? With possible delays in delivery, are any orders being canceled? Or are those partners simply accepting whatever inventory they can obtain?

Yes, of course, Tracy, and thank you for joining the call today. Regarding wholesale partners, the way our products have performed at retail for them has actually been very solid across the third quarter and into the early portion of the fourth quarter. They grasp what's happening with the supply chain; therefore, no, cancellations are not something we expect. In most instances, I believe it's fair to say they'd purchase more from us if we had it on hand. Many of them are eager for merchandise from us and keep asking whether we can supply additional units — given how strong our own sales are, we don't really have much extra to provide, yet we don't foresee any cancellation problems. Now, on the fourth quarter so far, the direct-to-consumer trend and what we expect for the remainder of the quarter — perhaps Scott can chime in.

Yeah. At this moment, our total direct-to-consumer trends look fairly close to what we saw in Q3. Timing factors are playing a big role. On e-commerce, we might see things wrap up somewhat sooner this year given certain freight worries, and stores could make up for that. We're keeping a close eye on it. There's still plenty of holiday season ahead, though we're happy with how it has started. One more thing regarding wholesale: we truly put money into holiday, including some airfreight, to get product in. Our goal was making sure wholesale partners had the right items on the floor for holiday. Not everything arrived exactly when it should have, yet we spent on airfreight to counter a portion of those supply chain delays. That created a slight margin drag, but margins would have looked even stronger otherwise.

Great work this quarter. I suppose a quick follow-up regarding wholesale orders. My assumption is that for spring they're likely greater than what we observe in fall, depending, I guess, on the amount of product you're able to supply them? Then regarding your DTC business, clearly it has performed quite strongly. What's your thinking on that penetration over the longer term?

Yeah; regarding wholesale, I believe we're happy with the booking patterns we're witnessing for next year. Right now, that's mostly spring plus a bit of summer that we're looking at. And I think wholesale is recovering well; we're moving through at the retail floor pretty effectively. I think, essentially across the board with all our wholesale customers, and that, I believe, bodes well for wholesale's future. As for the proportion, if that's what you're asking about direct-to-consumer versus wholesale, as you're aware, Susan, we've experienced a stretch during the past couple of years when the actual wholesale dollars declined somewhat as we were extremely selective regarding whom we sell to and what we sell them. I do believe we've reached a stage where wholesale likely holds some dollar growth opportunity; and then the real question becomes whether it expands as quickly as the direct businesses. And my guess is that it likely stays around that 20% figure we referenced. But should it not, I think that's probably since direct-to-consumer is expanding even quicker.

Great, that helps. Now, very quickly regarding pricing: could you recap the amount by which you increased prices during the back half, plus what you're expecting for next year?

This year, our IMUs rose roughly 1 point. As we head into next year, we are taking pricing action, yet certain cost pressures will be present, and precisely how everything will turn out remains uncertain, though our operating groups have acted quite proactively in pushing prices higher, hoping to at minimum counterbalance — perhaps somewhat more than counterbalance — the inflationary forces we foresee hitting us next year. At the factories, they're facing considerable inflation, and they are certainly intending to try passing it along, and we must act on our IMUs to assist in counterbalancing that.

Great. And then, if I may, just one final question. Clearly, you've got record cash balances sitting on the balance sheet — any thinking on capital allocation, returning cash to shareholders, and possible acquisitions?