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 count as forward-looking statements under federal securities laws. Such statements aren't promises, and what actually happens could turn out quite differently from what those statements suggest or imply. The key factors that might make our actual operating results or financial condition come out differently are laid out in the press release we put out earlier today, as well as in the filings we make with the SEC, such as the risk factors in our Form 10-K. We're under no obligation to revise any forward-looking statements. Also, on this call we'll be going over some non-GAAP financial measures. A reconciliation between the non-GAAP and GAAP figures can be located in the press release we issued earlier today, which you'll find posted under the Investor Relations tab on our website, oxfordinc.com. At this point, let me introduce who's 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. I'll now hand things over to Tom Chubb.

Thanks, Jevon. Hello, everyone, and thanks for joining this call to learn about how Oxford did in the fourth quarter and all of fiscal 2022 — both record results; we're grateful you've taken the time and shown interest in our company. Our enterprise purpose, as it always has been, is about happiness; our enterprise strategy is holding a portfolio of lifestyle brands that generate sustained profitable growth; and our enterprise objective is maximizing long-term shareholder value. Every one of those key pieces mattered enormously to the tremendous success we had in fiscal 2022. Throughout the year we remained anchored to those fundamental presets, and we take enormous pride in the incredible results our amazing team delivered for shareholders. In fiscal 2022, we grew every brand and every distribution channel. Total sales rose 24% year-over-year, overwhelmingly powered by organic growth, led by our biggest brand, Tommy Bahama, which gained 22% for the year, with Lilly Pulitzer and our Emerging Brands Group next, rising 13% and 29%, respectively. The rest of the growth came from adding Johnny Was, which we were proud to bring into our portfolio in the third quarter of 2022; we produced that top line growth while at the same time widening both gross margin and operating margin. That combination yielded record adjusted EPS of $10.88 for fiscal 2022, versus our prior record of $7.99 in fiscal 2021 — a 36% year-over-year increase. The results we delivered in 2022 come straight out of our commitment to bringing joy to customers via our lifestyle brand lineup. Success in that mission produces durable, profitable expansion, which ultimately fuels value for shareholders over the long haul; thus, our financial outcomes always connect back to the work we do to bring joy to customers. On that measure, we performed exceptionally well during fiscal 2022, and our customer KPIs show it. Setting aside the recently acquired Johnny Was brand, we closed the year with 2.3 million active customers, compared with 2.1 million active customers when 2021 ended. Our gains in active customer count came about because we concentrated on strengthening what makes our lifestyle brands powerful. There's a distinction between a lifestyle brand and a regular one. A regular brand means you're making a product; a lifestyle brand means you're building a world — perhaps even a whole universe. Once that world strikes a chord with people, their desire is to dive in completely and eventually inhabit it. When that occurs, customers may remain fiercely devoted to you across many years. Throughout every one of our brands, we succeeded remarkably at making unmistakably plain what that brand represents, and afterward communicating its message to the audiences we target via marketing campaigns that inspire, products that are differentiated and innovative, and hospitality plus shopping experiences that lift people up. Over the course of 2022, we handled well both the makeup of what we own and the work of pushing results at the companies inside it. Regarding that makeup in 2022, it was the first time our holdings consisted solely of lifestyle brands, given that Lanier Apparel had been divested during 2021. We mentioned before how happy we were to bring in Johnny Was, which is a California-based brand in the affordable luxury modern bohemian lifestyle apparel space. When it comes to how the portfolio performed, our focus throughout 2022 remained, as it always is, on fostering excellence in every core functional area that a lifestyle brand needs in order to thrive. A great illustration of that was setting up a marketing center of excellence to serve the in-house agency for our Emerging Brands, while also drawing on resources and expertise throughout the whole company. Further examples would be forming a corporate responsibility department that spans the entire enterprise, improving our long-term IT strategy so that we get the most out of what we spend on IT, launching an effort to make fulfillment more efficient across the company, and making better use of human capital everywhere in the organization. Proper capital allocation is a vital component of creating shareholder value. We began the year with $210 million in cash and short-term investments, produced considerable cash flow, and that let us put $47 million toward future growth of the business, purchase the Johnny Was brand along with everything it could become for $270 million, repurchase $92 million of our stock, finishing a $100 million buyback program, and give back another $35 million to shareholders through dividends; we take pride in having both delivered meaningful capital returns to shareholders and made major investments in growing our business going forward, and we did all of this while keeping a very strong balance sheet. Our 2023 plans excite us just as much. Again, we expect solid growth across all 6 of our brands. Gross margin ought to rise modestly over the course of the year. Our 2023 plan features a top line roughly 50% bigger than it was in 2019, an operating margin nearly twice what it was in 2019, and operating income exceeding 2.5x the 2019 figure. Those are remarkable growth figures. To state it directly, our platform's size has fallen behind the size of our collection of businesses and the opportunity for growth ahead. So, staying within the operating margin target I just described, we are eager to invest heavily in 2023 in people, systems, stores, Marlin Bars and fulfillment infrastructure to back our expanding business. The fact that we're willing to put money in shows the depth of our conviction in the plan we're executing and in what lies ahead for growth. We've never had more faith in our ability to combine creativity with rigor to deliver fantastic brand experiences to customers through A+ product, A+ distribution and A+ communication. Where that faith comes from, today and forever, is the people on our team. To each and every one of them, we owe enormous thanks for all that they bring. With that, I'll pass things over to Scott, who can walk us through 2022 in greater depth and share what's on tap for 2023. Scott?

Thanks, Tom. The fourth quarter set a record and wrapped up an excellent 2022, powered by ongoing momentum throughout every selling channel in the portfolio. Throughout 2022, our operating groups performed at a very high level and produced double-digit top line growth at each brand. Tommy Bahama, our biggest brand, posted yet another outstanding year, delivering 22% top line growth along with 350 basis points of adjusted operating margin expansion, reaching 19.6%. At Lilly Pulitzer, revenue grew 13% and adjusted operating margin came in at 19.8%. Consolidated net sales for 2022 reached $1.41 billion, a figure that included $73 million of sales from Johnny Was, which represents 24% growth over last year's net sales of $1.14 billion, which had included $25 million of sales from Lanier Apparel. Growth among our existing brands was robust across every full-price distribution channel, with gains of 20% in full-price bricks and mortar, 13% in full price e-comm, 29% in wholesale and 14% in restaurants. On top of that, we saw sales rise by $22 million in Lilly Pulitzer's e-commerce flash sales and by 14% in our outlets. Beyond growing sales, adjusted gross margin expanded 50 basis points versus 2021, hitting 63.5%. We gained from reduced freight costs following the very elevated freight rates we faced during the second half of 2021. Further gross margin gains came from a better sales mix, shaped by the addition of Johnny Was, which carries a higher gross margin, and by the 2021 exit of Lanier Apparel, which had a lower gross margin. IMUs also rose since the price increases we implemented exceeded our cost increases; those items were partly offset by the impact of Lilly Pulitzer's larger flash sales and the lower gross margin on those flash sales in 2022, a result of extremely lean inventory in 2021. We additionally recorded higher inventory markdowns in our Emerging Brands Group during 2022, as we ended up with some excess inventory when inventory purchases ran ahead of demand. Adjusted SG&A expenses came to $684 million, versus $564 million last year. The rise stemmed from increases in our existing businesses for employment costs, advertising costs, variable expenses and other expenses needed to fuel and support sales growth; in addition, 2022 contained $41 million of SG&A tied to the Johnny Was business, covering the 19-week period during which we owned Johnny Was. Although SG&A dollars went up, the pace was slower than our sales growth, which produced 80 basis points of SG&A leverage. All of this resulted in $234 million of adjusted operating income, or a 16.6% operating margin, compared with $174 million, or 15.3%, in 2021, with the higher adjusted operating income powered by the strong results at Tommy Bahama and by Johnny Was's operating income for the 19 weeks since the September acquisition. That higher operating income was partly offset by a higher effective tax rate of 23% in 2022 and by increased interest expense from the borrowings tied to the Johnny Was acquisition. Even with those offsets in place, we kept EPS from growing off what was already a very strong 2021; as a result, adjusted EPS rose 36% to $10.88. Now I'll turn to the balance sheet, starting with inventory. On a FIFO basis, inventories rose 58%, or $106 million, compared with a year earlier, which puts us in a solid spot to take advantage of the sales momentum we've generated. At the start of the year, inventory levels sat below what was ideal, since demand ran ahead of inventory buying all through 2021. And we couldn't speed up inventory purchases enough to match that demand. On top of that, two additional items drove the inventory increase. $20 million in extra inventory came from buying Johnny Was, and getting roughly $20 million early — sorry, roughly $25 million of additional inventory early to reduce the danger of possible supply chain interruptions also pushed inventory balances higher. Our anticipated revenue growth, which is 45% above where we stood in 2019, exceeds our FIFO inventory increase of 37% across that same span even with that early product receipt. Also, because we've strategically concentrated on core and key products in recent years, our inventory holds a far bigger share of core and key product items instead of fashion items, which lowers inventory risk. On liquidity, we held $9 million in cash and cash equivalents against $210 million in cash and cash equivalents and short-term investments at the close of 2021; we drew on our cash and cash equivalents and short-term investments to help pay for the Johnny Was acquisition. After weighing our strong cash flow from operations, the Johnny Was acquisition, capital expenditures and other items, along with the $127 million of capital sent back to shareholders through share repurchases and dividends. We had $119 million in borrowings still outstanding under our $325 million revolving credit agreement as of the end of 2022. I'll also point out that earlier this month, we amended that $325 million revolving credit agreement to push its maturity from July of 2024 out to March of 2028. Essentially, this asset-based loan agreement matches the earlier one apart from extending the term, switching LIBOR to SOFR plus 10 basis points, raising the spreads on variable interest rate borrowings by 25 basis points, and lifting certain amounts allowed for inclusion as eligible assets in the borrowing base calculation. Across the past year, we've handed $127 million of capital straight back to shareholders through dividends and open market share repurchases. $92 million of that came from buying back 1 million shares during 2022, which marked the December 2022 completion of our 100 million share repurchase program launched in the fourth quarter of 2021; overall, we bought back more than 6% of outstanding shares from the day that program began. Turning to what lies ahead, I'm happy to share that our Board of Directors has approved a quarterly dividend of $0.65 per share for Q1 2023, with payment coming in April. That represents an 18% bump over the $0.55 per share paid out the previous quarter. Now I'd like to walk through how we see 2023 shaping up. Across the entire year, net sales should land somewhere between $1.62 billion and $1.66 billion, which works out to 15% to 18% growth versus the $1.41 billion we posted in 2022. This larger sales plan for the 53-week 2023 period reflects a full year of Johnny Was plus mid-single-digit expansion across our existing brands — that breaks down as gains in full price brick-and-mortar and e-commerce channels, roughly level wholesale and outlet store sales, and fewer e-commerce flash sales at Lilly Pulitzer, since Lilly Pulitzer won't be running an e-commerce flash sale during the first quarter of 2023; we're also expecting modest gross margin improvement in 2023, driven by a projected larger share of full-price direct-to-consumer sales, a smaller share from e-commerce flash and wholesale, and having the higher gross margin Johnny Was business included for all of 2023.

We anticipate that these stronger revenues and better gross margins will be partly counterbalanced by greater SG&A, which is projected to rise faster than sales during 2023 as we put money into the business—things like IT spending and SG&A, greater employment costs, more brick-and-mortar sites launching in 2023, and larger depreciation charges stemming from both the IT spend and those brick-and-mortar locations. Taking all of that together, we foresee operating margin declining slightly relative to 2022 levels. We also expect interest expense to be higher, in the range of $5 million to $6 million, with roughly half of that falling in the first quarter, then smaller step-ups during the second and third quarters, followed by a decline in the fourth quarter; that's against $3 million of interest expense for the whole of 2022. On top of that, we project a materially higher effective tax rate, somewhere between 25% and 26%, versus 23% in 2022, which had the benefit of certain favorable items, for instance prior year operating loss utilizations along with the reversal of some valuation allowances. Once all these pieces are factored in, adjusted EPS for 2023 should land between $11.50 and $11.90, compared with adjusted EPS of $10.88 a year earlier, as including a full year of Johnny Was operating income plus greater operating income from our existing businesses gets partly offset by the higher income tax expense and interest expense; for the first quarter of 2023, we're looking at sales of $405 million to $425 million, versus $353 million in the first quarter of 2022. During the first quarter of 2023, we anticipate that many of the same forces shaping our results for the year will be at work—higher sales, a modest improvement in gross margin, some SG&A deleveraging, greater interest expense, and a higher effective tax rate; we expect that to produce first quarter adjusted EPS between $3.60 and $3.80, compared with $3.50 in the first quarter of 2022. Building on the idea that 2023 is a year of investment, I want to touch briefly on what we expect for CapEx in 2023. Capital expenditures for fiscal 2023 should come in at roughly $90 million, against $47 million in fiscal 2022. That planned step-up is mostly attributable to more investment across our various direct-to-consumer technology systems initiatives, the start of a major multiyear project at the Alliance torch distribution center aimed at boosting its direct-to-consumer throughput capabilities, and working through our pipeline of Marlin Bars, among them 3 that should open in 2023. Add to that the Johnny Was acquisition, which is growing its store count by 10 or more stores this year, plus more store openings across our other brands; we expect this elevated level of capital expenditure to carry into 2024 before it starts to moderate in 2025. Turning away from the income statement. Our view on cash and liquidity is positive as well. Cash flow from operations should be very strong, leaving us plenty of capacity to make the investments I mentioned earlier, fund an 18% increase to a quarterly dividend, and still reduce leverage over the course of the year. We appreciate you joining us. At this point, we'll open the line for Q&A. Stacy?

So, Tom, to start with shared services — from what I understand, your company has traditionally operated in a highly decentralized way, so I'd like to dig into some of the investments you're currently making. Will that shift how the business is oriented? And then, thinking about the medium term, when do you think SG&A leverage will come back?

All right. Thanks, Ed. So regarding the utilized portion of the business here at headquarters, what we're aiming to do is examine every critical function that a company must excel at in order to successfully operate a lifestyle brand; our method for that is to push for excellence across each of those critical functions, ensuring every brand performs at a really strong level in each one. After that, as we put it, we bundle when it's appropriate. What that means: we'll handle things through shared services wherever doing so is sensible; we won't simply fall back on that approach, though — we'll use it wherever doing so is sensible. The illustration I offered during the prepared remarks, which I believe we might have gone over with you before, involved the Emerging Brands group — the 3 smaller brands — where we concluded that to reach the excellence they require in digital marketing to thrive as lifestyle brands, we had to bundle that digital marketing work. So that's precisely what we did. We set up and constructed a digital marketing center of excellence in 2022. We kicked it off roughly 1/3 of the way into the year. And by the final 1/3 of the year, that function was running at full speed, and we're quite happy that it has produced very strong results inside the Emerging Brands Group — that contributed to why they could deliver that 29% year-over-year growth. We also mentioned during the prepared remarks that we'd set up a corporate responsibility department spanning the whole enterprise, centered primarily on what I'd describe as ESG-type efforts. As you're well aware, we've always been a company focused on doing the right thing. And today there's both market and regulatory momentum pushing for more on the ESG side. Tommy Bahama, our biggest brand, had been leading on this and had created its own corporate responsibility function, staffed with highly professional and excellent people. What we concluded was that this was a function every brand must excel at — once again — but we also felt we'd gain from the scale of handling it across the entire enterprise. So we centralized that too. In fact, we shifted the Tommy Bahama team over and turned them into a corporate enterprise-wide function. That gives you a sense of how we're thinking it through. Centralizing everything isn't the plan. Take product design — that's something we will never centralize, in my view. Anything that sits right in front of the customer and has direct contact with them, I don't see us centralizing either. What we'll do in those spots is simply concentrate on being excellent. Then, wherever we believe bundling brings an economic advantage, that's where we'll go ahead with it. Does that answer it?

Yeah, that answers it. Now regarding SG&A, at what point can we reasonably anticipate that line returning to leverage?

Right. Like we mentioned during the prepared remarks, some deleveraging is anticipated for this year. With any luck, once we reach '24, things will begin to shift. However, we have numerous investments tied to system projects, plus we're bringing in additional personnel across certain critical areas. On top of that, there's substantial retail activity underway, and that includes 3 Marlin Bars. As you're aware, from the moment a session is taken until a Marlin Bar opens its doors, roughly a 6-month window is involved. That means all those preopening costs flow through your P&L. So there are many items on our plate, though they're exciting ones that I believe will help drive the business's future growth. And frankly, we're doing a bit of catching up when it comes to SG&A. Our business has expanded enormously. When your business grows the way ours has, you're always — it's tough to build that infrastructure as fast as sales keep climbing. So during '23, we're doing a bit of catching up.

Great to see the Q4 numbers. When you look ahead to the coming year, and you mentioned some expense increases, thinking about each brand individually — if things went better than we anticipate, are there any new products or categories we ought to keep an eye out for as this year unfolds? And then finally, regarding the wholesale segment, where I think you described it as flat. What's your read on the wholesale business in general? And how are you assessing consumer health based on the exit rate as you closed out the quarter?

All right. Dana, let me take the wholesale one first, and I believe our plan assumes it stays flat, as you're well aware since you track so many of these companies. Nearly all the big retailers are proceeding with a great deal of caution regarding their future inventory commitments. A majority of them are in fact reducing their purchases compared to last year; so from where we sit, and we observe this in the sell-through numbers we're posting at retail. Being flat really amounts to beating expectations in wholesale during this year. So we feel quite good about that; and although growth would certainly be welcome, we also appreciate seeing the large retailers exercise discipline on inventory. Now regarding consumer health, what I'd say to you — and this is quite evident in our Q4 performance — is that for the shoppers we cater to, consumer health has remained solid, I'd say consumer health has been solid. We anticipate that staying solid. We aren't anticipating any significant macroeconomic upswing, yet we believe our customer will remain resilient throughout the year. And the main risk right now, to put it plainly, is likely the situation in the banking sector along with the Fed and the regulatory reaction to it. Our expectation is that we'll come through that — the Fed and the regulators. They'll steer us past it without letting it escalate into something far worse; but that's the single uncontrollable element I'd point to currently; and once more, we believe they'll manage it. Our customer will stay resilient. Still, this particular week, it's difficult to keep that from being foremost in your mind. And what was that third item?

What opportunities exist?

Yes, looking at it from a product or category angle, Dana, there are a few significant openings, and honestly they're mostly about expanding the categories we already have. Take Tommy Bahama, for instance — in women's dresses, there's plenty of runway for us to grow that business, which has been performing really well there. Still, I believe we keep developing it. And as you're aware, within the overall apparel market, that's a really sizable category. The same holds true, I'd say, at Johnny Was. Dresses in particular represent a massive chance for them, in my view. And once again, they're seeing great results as they build it out quite well. As a share of their overall mix, dresses have historically been somewhat underweight for them. There's a great deal of room for expansion there, I believe. Beyond those kinds of openings, where a major category can be grown at what you might call an accelerated pace, there are also some fill-in possibilities throughout the company — and one of them won't be massive right away, and likely not even over the long haul. An enormous category? I don't see it. But not long ago at Lilly Pulitzer, we introduced some enhanced home product. The idea behind it is to become the go-to destination for what you'd call an elevated, elegant hostess gift. We began with a modest assortment of items — picture frames and that sort of thing. The early results have made us happy, though, and we believe there's some business to be done in that space. Comparable openings of that kind exist across the company, I'd say.

This is Tracy Kogan, sitting in for Paul. There were 2 things I wanted to ask. The first 1 concerned your SG&A. During the fourth quarter, could you discuss whether markdown levels rose or fell compared with last year? Also, how did freight compare with last year? And for both of those items, what is assumed in your gross margin guidance for 2023? I believe you described it as moderately up, so I'm just curious what you're assuming for markdowns and promotions versus freight? Then I have a follow-up once you finish that.