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 today, both in our prepared remarks and during the Q&A, could be considered forward-looking statements under federal securities laws. Such statements aren't promises, and what actually happens might end up looking quite different from what those statements suggest or imply. If you want to understand the key things that might make our actual operating results or financial condition come out differently, we cover them in the press release we put out earlier today, as well as in the filings we make with the SEC — that includes the risk factors you'll find in our Form 10-K. We're not taking on any obligation to revise these forward-looking statements later. Also, some of what we discuss today involves non-GAAP financial measures. A reconciliation between non-GAAP and GAAP figures appears in the press release we released earlier today, and you can locate it under the Investor Relations tab on our site, oxfordinc.com. Now let me bring in the people joining us on this call. Here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO and COO. I appreciate everyone listening, and at this point I'll hand things over to Tom Chubb.

Thanks, Jevon. Good afternoon, everyone, and we appreciate you being with us on this call covering the third quarter of fiscal 2022 for OXM. Most of you are aware that the mission we pursue as an organization is bringing happiness to our customers through the goods, services, and experiences provided by our family of brands. Once we succeed at creating that happiness, our operations generate profitable growth — and sustained profitable growth, naturally, is the thing that enables us to reach our goal of creating long-term value for shareholders. That is exactly what happened in the third quarter, as we posted our sixth straight quarter of record adjusted earnings. Robust revenue expansion throughout every one of our brands, together with the September purchase of Johnny Was, drove a 26% bump in sales. The combined group of Tommy Bahama, Lilly Pulitzer and Emerging Brands saw sales climb 19%, while Johnny Was added another $23 million in sales during the quarter. Simultaneously, adjusted gross margin rose by an impressive 120 basis points. Each of these elements, plus our buyback activity, contributed to a 23%, or $0.27, lift in adjusted earnings per share, moving from $1.19 a year ago to $1.46 now. Our largest brand, Tommy Bahama, was the single biggest driver of the earnings increase, posting 20% top line growth and a $9 million rise in adjusted operating income for the quarter, with outstanding performance across every distribution channel. Lilly Pulitzer enjoyed a solid quarter too, with sales up 16% and positive comps in retail as well as e-commerce. And lastly, our newly formed Emerging Brands Group recorded a 22% revenue gain in the third quarter. We've also made progress lately on several strategic initiatives. Out of many, I'll mention just 3. To begin, in September we brought the Johnny Was brand into our lifestyle brand portfolio. This brand possesses clearly defined positioning that creates emotional connection and deep engagement with its extremely loyal customer base. Johnny Was carries somewhat higher price points than our other brands and occupies the highly appealing affordable luxury segment of the market. Its distribution model is nicely balanced, with 40% of sales generated via e-commerce, supported by a fleet of 60-plus strategically placed stores featuring attractive unit economics, along with a wholesale operation that enhances the brand and is profitable for both sides. Today it produces annualized sales above $200 million, with operating margins in the mid- to high-teen range, and a profitable growth path lies ahead. An outstanding management team, in place for many years and well aligned with OXM both culturally and strategically, leads the brand. The Johnny Was and OXM corporate teams have worked diligently on integration and on building the groundwork for the brand's future growth. I thank all of them for their remarkable efforts and the successes achieved so far. In November, we were also happy to announce our first Tommy Bahama-branded hotel, the Tommy Bahama Miramonte Resort, expected to open in late 2023. For more than 25 years, Tommy Bahama has been involved in hospitality, and its restaurant division generates over $100 million in revenue each year. A resort hotel has always struck our clientele as a logical outgrowth of the hospitality operations we run. In the Coachella Valley area of California sits one of our best-performing restaurants; since 1998 we have run a bar, a restaurant, and a store in Palm Desert, and in 2018 we added a Marlin Bar in Palm Springs. If you know the Coachella Valley and/or follow tennis, you'll recognize Indian Wells — where the BNP Paribas tournament is held — as the future site of the Tommy Bahama Miramonte Resort; the Lowe Group is a tremendous partner, and this possibility has been under discussion with them for several years. Seeing it move forward makes us happy; we can't wait for the hotel to open and hope each of you gets the chance to stop by. Third, our capacity to draw in and keep customers and to deepen their engagement keeps improving impressively. At quarter's end, our customer count, leaving out Johnny Was buyers, was up 16% compared with the third quarter a year earlier. Counting Johnny Was, at quarter's end we had 2.5 million identifiable unique customers who had made a purchase within the last 12 months. More customers came to us, and they also spent more, with average yearly spending rising throughout every one of our brands. We credit the bulk of these improvements to our digital marketing work, a strategic priority companywide during this year. Among those efforts was creating a marketing center of excellence, tasked mainly with serving the brands in our Emerging Brands group. Assembled over the course of this fiscal year, that team started producing highly impressive results in the third quarter, especially across the Black Friday and Cyber Monday weekend; with just under 3 weeks remaining until Christmas, we are quite optimistic about the holiday selling period and about our capacity to produce a robust fourth quarter. Scott will share further detail shortly, but our inventory position is great for supporting the holidays, thanks to more normalized levels plus early receipt of goods that sidesteps supply chain tangles. Last, as I do each quarter, I want to thank our amazing team and express my gratitude. No matter what their role in the company is, their commitment and dedication to creating happiness for our customers has no equal. The period after Hurricane Ian offered a wonderful illustration of this. Even though it hit one of our single most significant markets across the whole company, and even with the toll the hurricane took on everyone's personal lives, thanks to how dedicated and resilient our team is, we barely skipped a step — we were back to normal operations in almost no time at all. That's just a single illustration, out of many, of how committed our employees are to taking care of our customers. We feel tremendous gratitude toward each of them, and we want to wish them, and all of you, a very happy holiday season. At this point I'll pass things over to Scott, who's going to walk us through more specifics about the quarter as well as what we expect for the rest of the year. Scott?

Thanks, Tom. We're really pleased to report that Q3 of 2022 marks our sixth quarter in a row with record sales, gross margin and adjusted earnings; the standout results came from revenue gains across every one of our brands and distribution channels compared with the third quarter of 2021. For Q3, consolidated net sales reached $313 million, and that figure included $23 million in sales from Johnny Was, which is a 26% increase over the $248 million we posted in last year's third quarter, a number that included $4 million in sales from Lanier Apparel; growth was robust across every distribution channel, with gains of 22% in full-price bricks-and-mortar, 26% in full-price e-commerce, 32% in wholesale, 17% in restaurants and 15% in outlets; on top of that, we saw an additional $9 million in sales from the Lilly Pulitzer e-commerce flash sale. At the same time, adjusted gross margin rose to 63.4%, an improvement of 120 basis points over the third quarter a year ago. We got a lift from reduced freight costs, which reflected both less air freight thanks to inventory arriving early and lower freight rates; we also raised IMUs. Those gains were partly offset by the effect of a bigger Lilly Pulitzer flash sale this year, since inventories were extremely lean a year ago. Adjusted SG&A expenses came to $171 million in Q3 of 2022, versus $131 million in the same period last year. The rise came from adding Johnny Was operating expenses plus higher employment costs, advertising costs, variable expenses and other expenses across our remaining businesses to support sales growth. All of that produced $33 million in adjusted operating income, up from $27 million a year earlier, with the improvement in operating income powered by strong results at Tommy Bahama and by having Johnny Was in the mix for half the quarter. That level of operating profit, together with a $0.07 benefit from our share repurchase program, drove EPS up $0.27 to $1.46. Now I'll turn to our balance sheet, starting with inventory. With employees up 61% year-over-year on a FIFO basis, we're well positioned to capture the sales momentum we built over the course of the year. Two strategic moves drove the inventory increase: $25 million in additional inventory from our Johnny Was acquisition and the early receipt of $20 million in incremental inventory to mitigate supply chain disruptions. Higher product cost also pushed inventory balances up. If we look back at 2019, our 25% revenue growth for the first 9 months of the year far exceeds our FIFO inventory growth of 14% for that same period, even with product arriving earlier. On liquidity, we held $15 million in cash and cash equivalents, compared with $188 million in cash, cash equivalents and short-term investments at the close of the third quarter of fiscal 2021; we also had $130 million of borrowings outstanding under our revolving credit agreement at the end of the third quarter of fiscal 2022, up from no borrowings at the close of the prior year period. What caused the shift in our liquidity situation was, without question, the money we put toward buying Johnny Was, a deal we think will bring sizable advantages to our shareholders over the long haul. In the past 12 months, we've given back $134 million in capital straight to shareholders through dividends along with open market share repurchases. Out of that total, $100 million resulted from buying back 1.1 million shares, which amounts to more than 6% of all shares outstanding when the program began in Q4 of 2021. During the fourth quarter of 2022, $5 million of those repurchases took place. This marks the finish of the $100 million share repurchase program. Turning ahead, I'm happy to share that a dividend of $0.55 per share for the fourth quarter has been declared by our Board of Directors, with payment set for January. Now I'll take some time to discuss what we expect for the rest of the year. On a full-year basis, we are lifting our sales guidance to a range of $1.395 billion to $1.41 billion, an increase over our earlier range of $1.375 billion to $1.405 billion, and set against sales of $1.142 billion in fiscal 2021. Following from that, adjusted EPS for fiscal 2022 should land between $10.60 to $10.75, which is up from the $10.25 to $10.60 we previously guided, and compared with $7.99 in 2021. For the fourth quarter of 2022, we anticipate sales landing between $366 million and $381 million, versus sales of $300 million in the fourth quarter of 2021. Over 60% of that sales growth should come from Johnny Was sales. These revised guidance numbers also take into account robust holiday sales so far while weighing the uncertainty, since we think shoppers are going back to pre-COVID holiday shopping patterns after having shopped earlier in 2021. We also expect a modest improvement in gross margin during the fourth quarter. Those stronger sales and better gross margins should be partly offset by higher SG&A, greater interest expense and a higher effective tax rate. The fourth quarter of 2022 will contain a full quarter of interest expense, given that the third quarter included only about a half quarter of interest expense, since we carried no debt until the Johnny Was acquisition in mid-September; we expect the effective tax rate to come in higher this year because Q4 of last year contained certain nonrecurring favorable items. Once these items are factored in, fourth quarter adjusted EPS should fall between $2.01 and $2.16, against adjusted EPS of $1.68 last year. For Johnny Was, the fourth quarter will be the first full quarter of operations within the Oxford family. We're thrilled to have brought in a business with annual net sales above $200 million, the chance for double-digit top line growth down the road, the expectation of roughly 65% gross margins and mid- to high-teen operating margins, excluding any inventory step-up charges and amortization of intangible assets. I appreciate your time today, and now we'll open the call for questions. Diego?

So, I suppose I have two things to ask. The first one is really about modeling. What's the right way to consider Johnny Was when it comes to seasonality? Do certain quarters stand out where either sales or profit gets a disproportionately big lift? Then, I suppose, something shorter-term. You folks appear to have done really well across the Black Friday shopping period while actually running a strategy with fewer promotions than in prior years, which stands out as quite unlike what we're otherwise hearing about retail. So I suppose, how are you looking at the rest of the holiday stretch? And does the guidance you've given factor in possibly needing to respond more nimbly given what appears to be an increasingly promotional holiday environment?

Thank you, Ed. It's always nice to hear from you. I'll take the one regarding BFCM and what's left of the season, and after that Scott and Jevon can add their perspectives on that plus the seasonality question about Johnny Was, which is an excellent one. But I believe what's taking place this holiday period overall is largely what we anticipated. We figured the season would more or less return to normal; and you'll remember clearly that for us, as well as for a lot of others in the market a year ago, customers began shopping extremely early and extremely aggressively; so they did their shopping in October, which still falls in the third quarter; they did a great deal of shopping in the early portion of November. And then they continued shopping throughout the holiday period, but it leaned far more heavily toward the early part of the season than would be typical in an ordinary year. The other highly unusual thing about last year is that, for the first time in a long stretch, the market simply wasn't promotional to any meaningful degree, mainly since everyone was lacking inventory. This year, we anticipated a return to normal, and that's what has occurred. We made our plans with that in mind. So the 5-day stretch covering Black Friday and Cyber Monday turned out to be the true start of the holiday period, which matches how it has traditionally gone. And the amount of discounting out there is far bigger than a year ago. I'm not certain it's actually much bigger than what existed before the pandemic. There's — there's plenty of it. We saw that coming, and that's essentially how things are unfolding, and we think it will stay that way through the rest of the holiday selling period, and our guidance was constructed around that premise.

And Ed, when it comes to seasonality, Johnny Was doesn't really follow seasonal patterns that much. Things stay pretty even from one quarter to the next, whereas other businesses tend to see a spring spike during the lower third quarter. Across the whole year, Johnny Was holds fairly steady each quarter.