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, might count as forward-looking statements under federal securities laws. Such statements aren't promises, and what actually happens could be quite different from what those statements express or suggest. The key factors that might make our actual operating results or financial condition come out differently are described in the press release we put out earlier today and in the filings we make with the SEC, among them the risk factors in our Form 10-K. We have no obligation 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 measures appears in the press release we issued earlier today, and you can find it under the Investor Relations tab on our site, oxfordinc.com. Now let me introduce the people joining us on the call. Here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO and COO. I appreciate your attention, and now I'll hand things over to Tom Chubb.

Good afternoon, and thanks for being here with us. It's a pleasure to share that fiscal 2022 has gotten off to an extremely impressive beginning. Scott is going to walk through more specifics shortly, but let me offer a few of the key points. First, though, I want to take a moment to express gratitude to our amazing team for everything they contribute. You don't get five straight quarters of record earnings by accident. Every one of our joyful, optimistic lifestyle brands — Tommy Bahama and Lilly Pulitzer, plus Southern Tide, The Beaufort Bonnet Company, and Duck Head, which together make up the emerging brands group we've just established — delivered outstanding results in Q1 of 2022. All three operating groups achieved robust growth in sales and operating profit compared with 2021. Looking at adjusted figures, consolidated Q1 sales came in at $353 million, operating margin reached 22%, and EPS was $3.50 — an 85% jump from last year's record Q1 EPS of $1.89 — and every one of those numbers beat what we had expected. It was a fantastic quarter across the board, but the single largest driver of our record earnings was our biggest brand, Tommy Bahama, whose sales climbed 46% against 2021 to $228 million, while adjusted operating margin rose by almost 1,000 basis points to 23%. We stay committed to carrying out the strategic priorities I described at the start of the year, and those priorities are what fuel both the results we've delivered so far and our confidence about what's ahead. Our brands sit at the heart of this business, and we keep a sharp focus on positioning and voice so that we stay authentic to who we are. Every brand has its own distinct DNA, yet sparking optimism and a desire for happiness matters most throughout the portfolio; you can see that especially in our stronger creative and digital marketing work, which is producing fantastic results. Further proof of how well our marketing is working comes from the 2.2 million active customers we had when the quarter ended — a gain of more than 20% compared with pre-pandemic levels. Alongside our unceasing attention to brand health, providing A-plus product, A-plus distribution, and A-plus communications keeps pushing our performance higher. On the product side, we're introducing new items to take advantage of shoppers returning to social occasions, leisure travel, and even the more casual dress code of the post-pandemic physical office. Tommy Bahama is succeeding and picking up share in women's apparel. That category keeps expanding at a faster rate than even our men's business, with standout strength in dresses and swim. The St. Lucia and Diamond Clip jacquard tier dresses delivered freshness while the Two-Palm Ruffle Linen hero franchise remained strong. Beyond that, we serve the ongoing easy-to-wear preference with inventive materials such as the Aubrey performance fabric from the IslandZone franchise, which has become a platform fabric. On the men's side, we've likewise embraced performance-driven styles, with the IslandZone collection accounting for roughly 1/3 of Tommy Bahama men's business, and including the Palm Coast Polo along with the Chip Shot and the new On Par shorts. Here at Lilly Pulitzer, we're capitalizing on a key long-term edge for the brand and coming out ahead in the social dressing space now that weddings and special occasions have fully returned. Business is being pushed by these categories toward higher price points, like the Polly midi dress, which is a particularly favored event style; we're also responding to the linen trend through ongoing innovation, rolling out the lightweight, breathable, machine washable Lagoon Linen. Beyond that, our luxe athletic activewear line keeps expanding, built on fabric platforms including the Meryl Nylon and Fairway Performance Twill. When it comes to distribution, the mix across our brands keeps moving toward higher margin direct-to-consumer channels, and those now make up a bigger share of our total revenue than was the case before the pandemic. Although direct-to-consumer keeps expanding more quickly and is easily the biggest piece of our business, our wholesale operation is quite robust and set to increase at a modest pace across the years ahead. We have excellent wholesale partners, and together we agree on how to showcase and market our great brands; this lets us run a wholesale business that is profitable for us and for the retailer alike and presents our brands in an elevated manner to consumers we might not otherwise connect with. Our retail footprint keeps growing too. During April, we strengthened Lilly Pulitzer's footprint in the Southeast by opening a new spot in Alpharetta, Georgia's Avalon community; in May, we were thrilled to launch our second, The Beaufort Bonnet Company store on Kiawah Island along with a new Southern Tide store in Cary, North Carolina's recently debuted Fenton project; we keep putting money into our premium bricks and mortar presence, with leases signed for two more Southern Tide stores in Florida and an additional Lilly Pulitzer store in Charlottesville, Virginia, expected to open later this year; on top of that, we'll keep building on the Marlin Bar concept's success, with committed deals in Palm Beach Gardens and Winter Park, Florida, set for fiscal 2023 openings and more in the pipeline. To preserve our competitive edge in communications amid a fast-shifting media landscape, we keep investing in people, processes, and systems. Our focus is on sharpening our ability to spot prospective audiences, engage with our current customer base, send targeted messages, and evaluate and fine-tune these efforts so we attract new customers, keep the ones we have, and boost overall spending. We've achieved a great deal in this area over the last several years and are enthusiastic about the projects now underway to further strengthen these capabilities. From a creative perspective, we're highly focused on crafting aspirational messages that spark an "I want to be there wearing that product" moment for our customers. Reflecting on a few of the messages we've shared lately at Tommy Bahama gives us some great illustrations of how this is being done, especially when it comes to our female shoppers. More than 50% of all men's merchandise, plus essentially all of the women's merchandise we sell, gets purchased by female customers. A big driver of our recent wins is how much better we've become at connecting with these female shoppers at Tommy Bahama; we're also still putting money into our omni-channel capabilities. The ship from store capability we launched at Tommy Bahama in Q3 of 2020 has been a total success. It lets us serve more shoppers, generate more revenue with less inventory, reach higher full price sell-throughs and, in the end, better margins. Even with how well ship from store has worked for us so far, we see room to gain more from it as we keep sharpening our processes; at our growing Southern Tide retail operations, we just rolled out ship from store capabilities successfully and will keep improving and expanding them as the Southern Tide retail footprint grows; at Lilly Pulitzer, ship from store capabilities have been in place for several years, yet right now we have a very exciting project in the works that will meaningfully upgrade those capabilities and ought to launch at some point next year. On top of that, we're leveraging clienteling tools to bring together the digital and retail experiences for Lilly Pulitzer shoppers. On the operational side, our attention is on controlling inventory and fine-tuning our supply chain; we hold the right inventory levels to back the growth we've planned for this year. We're also benefiting from rolling out platform fabrics like the Tommy Bahama Aubrey and Lilly Pulitzer Meryl Nylon and Fairway Performance Twill collections mentioned earlier, which strengthen inventory management and profitability. Platforms like these accelerate product development, let us purchase in larger volumes, and push back the point of differentiation to a later stage. The momentum we built has carried into the early portion of Q2, and we have excellent plans in place to achieve double-digit top and bottom-line growth along with operating margin expansion for the year. We're eager to update you on how all these plans are progressing, along with our results, as this year moves forward. I'll hand things over now to Scott for more detail on Q1 results and our forecast for the rest of the year. Scott?

Thanks, Tom. Our operating groups performed at an extremely high level in the first quarter of 2022 and turned in record results, as Tom noted earlier. Growth across every brand and channel powered our strong beginning to the year, helped by excellent trends in the number of customers, traffic at retail, and the average value of each transaction. For the first quarter of fiscal 2022, consolidated net sales came to $353 million, representing a 33% rise from last year's first-quarter net sales of $266 million, which had included $12 million in sales from Lanier Apparel. Our full-price e-commerce business expanded considerably, climbing 20%. Turning to bricks-and-mortar, full price retail grew 51%, powered by increases in comp stores. Results at our food and beverage locations were solid too, posting 23% growth compared with last year. Adjusted gross margin for the first quarter was 64.5%, versus 64% in fiscal 2021. That 50 basis points of improvement came from a sales mix shift toward full price direct-to-consumer channels along with higher IMU, especially in innovative new performance offerings. Higher freight cost of almost 100 basis points, air freight included, partly offset a portion of that margin gain. On an adjusted basis, operating margins rose 700 basis points to 22% of net sales, lifted by gross margin gains and leverage in SG&A, which fell to 45% of sales from 51% a year ago. Each of our three operating groups posted year-over-year operating margin expansion. Tommy Bahama stood out with particularly strong profitability, delivering a 990 basis points operating margin expansion versus last year. A very strong balance sheet stands behind our business. Here are a few highlights. We closed the quarter with inventory in excellent shape to back planned growth; on an as-reported LIFO basis, inventory rose 13% to $123 million at the close of the first quarter, compared with $109 million a year earlier. Measured on a FIFO basis, inventory was up by 18%. We feel our inventory levels line up well with the revenue growth we project. Our liquidity position is strong, with no debt and $166 million of cash equivalents, and short-term investments at the close of the first quarter of fiscal 2022. Trailing twelve-month operating cash flow reached $179 million, with capital expenditures of $36 million, producing $143 million of free cash flow. That strong cash flow let us return $80 million to shareholders through share repurchases and dividends over the last 12 months. Since the December announcement of our board's new share repurchase authorization, we have bought back roughly 800,000 shares for $70 million, which works out to nearly 5% of our shares outstanding. We're happy with how our repurchasing program has performed so far. I'm also glad to report that our board of directors declared a dividend of $0.55 per share. Now I'd like to take you through our projections for the rest of 2022. Our significant beat in the first quarter and the momentum we've seen so far in the second quarter give us confidence to raise our sales and EPS guidance for the year. Even though the COVID rebound from last year is going to make same-store comparisons at brick-and-mortar tougher as we move through 2022, we're looking to keep extending the momentum we've built during the year so far. On the e-commerce side, we anticipate further growth, fueled by stronger digital tools aimed at bringing in new customers, keeping the ones we have, and getting them to spend more. Traffic at our physical stores is solid, and we're expecting sales to rise year over year across every region. By positioning ourselves strategically around direct-to-consumer channels, which account for 80% of what we do, we've strengthened our ongoing capacity to perform well even with supply chain disruption, since our skilled merchandising teams keep putting together attractive assortments on our websites and store floors whenever product is on hand. Navigating those supply chain hurdles, combined with the new products we're bringing to market, is likewise fueling a strong forward order book in wholesale for 2022. Looking at the full year, we anticipate a moderate uptick in gross margin as the gains from higher IMU continue to be partly offset by what we foresee as a somewhat more promotional climate. Across the year, we anticipate modest SG&A leverage, thanks to the considerable leverage in Q1, even with inflationary cost pressure, including a tough labor market. When we add all of this up, we're expecting to achieve double-digit growth on both the top and bottom lines, along with operating margin expansion, for the year. Q2 sales should rise from $329 million, a figure that included $8 million of Lanier Apparel, to somewhere in the range of $350-$370 million, which reflects robust quarter-to-date performance in both direct and wholesale channels. For the full year, sales are now projected to climb to a range of $1.285 billion-$1.325 billion, an increase over our earlier range of $1.245 billion-$1.285 billion, and measured against $1.142 billion in fiscal 2021, a figure that included $25 million of Lanier Apparel. This higher sales guidance for the year mirrors double-digit gains in our direct-to-consumer business and a solid wholesale order book. The especially large sales increase in Q1 should moderate into high single-digit to low double-digit gains during the remaining quarters. We expect our effective tax rate for fiscal 2022 to land between 24%-25%. On an adjusted basis, we're anticipating EPS of $3.30-$3.50 for the Q2 of fiscal 2022, versus $3.24 a year ago. For the full FY, we now anticipate adjusted EPS in the range of $9.60-$10.00, which is up from the initial guidance range of $8.75-$9.15 we gave previously, and compared with $7.99 in fiscal 2021. I appreciate everyone taking the time today, and now we'll open the call up for questions. Shamali?

Thank you. Congratulations, everyone. What a terrific quarter and a great outlook.

Thank you, Dana.

When you consider today's conditions—the pricing you're observing, the shifts in wholesale order direction we keep hearing about, and the move toward caution—how are you approaching AUR and the increases you'll take on price? On freight, it appears the impact reached 100 basis points during this quarter, versus 160 in the prior one. Digging deeper, what's your framework for weighing the favorable and unfavorable pieces affecting gross margin along with SG&A? I simply wanted to ask something regarding the brand. Thank you.

Okay, I'll let Scott go into more detail on that shortly, though my sense is that, broadly speaking, we're feeling fairly positive about how it'll shake out. Like we said back on the March call, we put some pricing moves in place that started hitting in Q1. There's additional pricing still to come online across the next 2 quarters. On the question of holding onto or lifting our initial markups, I'd say we've managed quite well at keeping in front of a portion of the cost pressure; chances are we'll see promotional activity of some kind work its way back into the market. As you're aware, the market last year was, on the whole, far cleaner than is typical, and we were, well, less promotional than at any point in our history. That'll likely create a bit of pressure on us. And then freight, which you pointed to, has, well, some of that headwind has begun easing in how hard it's hitting, and my view is that's another possible lift for us down the road. Scott, would you like to-

Yeah.

Fill in some of the blanks there?

Right, right. Regarding freight, Q2 could present somewhat of a challenge since we had very little during Q2 of the previous year. During the third and fourth quarters, it's becoming less of an issue versus the year before. Additionally, because of how we've adjusted certain merchandising calendars, we believe we can steer clear of the amount of air freight we needed to use in the second half of last year. When it comes to SG&A, as a percentage of sales, it will likely flatten out or perhaps run slightly above the prior year as a percentage of sales across the final three quarters. We are anticipating strong growth, and we do face some inflationary pressures, especially in areas such as labor, which we're working to offset. As Tom said, on the gross margin side, we believe we've moved past the input cost increases and ought to still see higher IMU for the full year.

Understood; so then, with the flash sale shifting into this quarter, what effect does that have? My sense is it lands in either Q2 or Q3. How do you view that moving ahead? The Marlin Bar seemed to perform quite strongly. Right? I believe there's one opening this year. What are your expectations there?

Sure. About the flash sale, in terms of philosophy — and I'll have Scott address what the dollars might look like for the remainder of the year. Philosophically, the thinking behind that shift in the flash sale was truly just to change things up a bit. As you're aware, Dana, through 2020, at the peak of the pandemic, and then in the prior year, we sort of altered our approach somewhat. We experimented with a few things. We're happy with it. I believe our customer genuinely enjoys being caught off guard a little, and we prefer to be somewhat less predictable with some of that. That $7 million represented, you know, really a change in timing, more than anything else. An August flash sale and a January flash sale will both still happen. Scott, would you like to provide some of those figures?

During the first half of last year, we didn't run any, though in Q3 we had roughly $19 million. Our inventory was much lower then; now we've purchased up to a larger inventory position. We continue to anticipate that a Q3 flash sale will likely come in a bit higher than the prior year's flash sale, despite the fact that we ran an extra sale. As for the Q4 sale, there will be one in January, and at present our expectation is that it will be fairly flat versus last year; last year we did $13 million, and this year we'll land somewhere within that range for our January sale.

Scott, just a couple of final quick items. First, regarding the product categories you carry, are you expanding? It sounds like dresses, and you're also stretching into men's and swim. Is there anything worth mentioning about categories and how the athleisure trend might be performing for you? That one's for you, Tom. And for Scott, normally the Q2 operating margin, even looking back prior to 2019, comes in above the Q1. Any reasoning behind that, or how are you approaching it? Thanks.

All right, Dana, many thanks, and I'll take on the question about how categories are moving. Just as you'd anticipate, honestly throughout the entire company, we're moving toward styles that are dressier and more structured. At Lilly Pulitzer, we're likely moving fewer leggings compared to what we did a year ago, yet we're doing more occasion dresses than we did a year ago. That's genuinely favorable since it lifts the average unit retail absent any true price increase, but merely a mix change is helping push a higher AUR, which is wonderful to observe; we're noticing something comparable at Tommy Bahama, and men's may be the strongest illustration, where we've seen enormous expansion in wovens, a rather expensive category for us and an extremely important one for us. Although everything, I believe each meaningful category at Tommy Bahama expanded throughout the quarter, a substantial portion of that dollar gain was arriving via wovens, which is a plus. Regarding athleisure wear, a few of those trends you'd imagine might be decelerating—the more performance-driven product—but that isn't actually the case. Performance product keeps expanding at both Tommy and Lilly. The composition of that product has shifted somewhat. For instance, at Lilly, as I noted, the leggings may have eased somewhat, but we're performing quite strongly with certain tennis and golf type items. What I think you're observing is that, as folks, as we mentioned, go back to travel, social events and even, as you know, return to the office, which is more casual than it has ever been, and our brands suit the workplace better than they ever have. We're receiving plenty of benefit from each of those factors.

Yeah, regarding operating margins — Q1 saw really solid growth for us, and things are looking better in wholesale. Q1 is a major quarter for wholesale since that's when spring's initial shipments go out. On top of that, Tommy's women's segment has become extremely robust, and that's typically a business that performs well in Q1. As for Q2, we expect it to remain a strong quarter, though my sense is that the operating margin gap between the first and second quarters is narrowing considerably compared to how it used to be. Father's Day has always made Q2 a significant period for Tommy, and that won't change, but I believe Q1 and Q2 will end up with fairly comparable operating margins.

Got it. Thank you.