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

Thanks, and good afternoon, everyone. I want to start by noting, before we get going, that some of what gets said on this call, as well as in the Q&A portion, might count as forward-looking statements. Under federal securities laws, such statements aren't promises, and what actually happens could end up differing significantly from what those statements say or suggest. The key things that might make our operations' actual results, or our financial condition, come out differently are covered in the press release we put out earlier today, along with 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, on this call we'll be going over some non-GAAP financial measures. A reconciliation between non-GAAP and GAAP financial measures appears in the press release we issued earlier today, and you'll find it posted under the Investor Relations tab at oxfordinc.com. Now let me bring in the people joining today's call. Here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO and COO. I appreciate your time, and I'll now hand the call over to Tom Chubb.

Good afternoon, and thanks for being here with us. We’re grateful that you’re interested in our Company. It’s a pleasure to share that we had a strong first quarter of fiscal 2023, and that makes it our eighth record quarter in a row. Sales came in at $420 million, which was 19% higher than the prior year. Of that growth, 14% came from adding Johnny Was, a company we acquired last year, while 5% was organic growth across our other five brands. Adjusted EPS for the quarter was $3.78, versus $3.50 in last year’s first quarter. When the quarter wrapped up, we had $2.6 million active customers on a trailing 12-month basis. That's up 9% compared with the close of the first quarter a year earlier. On that same trailing 12-month basis, the rate at which we add new customers came in 6% higher than it was when the first quarter of fiscal 2022 ended. And what our consumers spend with us annually, on average, is more than $400. In our view, these outcomes flow straight from our North Star pillars, from our objective, our strategy, our purpose, and our focus, from our formula for delivering on those pillars, and from the way we execute that formula. Our objective remains what it has always been: to maximize long-term shareholder value. We aim to build up a collection of lifestyle brands capable of producing dependable, profitable expansion. Our mission centers on bringing happiness to people. What we concentrate on is creating cash that can pay for growing our brands organically, pursuing chances to buy other companies, and giving capital back to those who own shares with us — and we do all of this while keeping our balance sheet extremely strong. Across all of our aspirational happy lifestyle brands, achieving the kind of lasting, profitable expansion that creates value for shareholders over the long haul follows a specific playbook. First, we zero in on — and get absolutely precise about — what each brand represents. Then we make good on that promise to customers by way of outstanding products, plus a well-proportioned combination of retail, e-commerce, and wholesale, all structured so the customer is served wherever and however she prefers. Finally, we must be capable and cost-effective when it comes to acquiring customers, keeping them, and helping them grow, which we do across a range of communication channels. When it comes to putting that formula into action, no brand of ours did it more effectively than Tommy Bahama. Every distribution channel contributed to a 5% increase in topline revenue — something we had anticipated — and both the men's and women's sides posted gains. Our women's business, along with direct-to-consumer, expanded more quickly than men's, and during the quarter it accounted for 42% of the total, up from 40% in the first quarter of fiscal 2022. Growing the women's side of Tommy Bahama continues to be both a priority and an enormous opportunity, since the women's market is about twice the size of the men's. One clear sign of how strong Tommy Bahama is as a brand: our gross margin for the quarter rose to 66.1%, up from 64.6% in the same period last year. We're still putting money into the business — people, marketing, IT, stores, and restaurants — which meant modest SG&A deleveraging. Even with that, strong gross margin performance plus growing sales allowed us to bring operating margin for the quarter to 23.2%, compared with 23.1% the year before. Taking everything into account, Tommy Bahama delivered a really solid quarter, particularly considering the unusually chilly, rainy conditions along the West Coast — home to several of the brand's biggest markets — plus the many broad economic pressures weighing on what consumers are willing to spend. Our confidence in this brand's long-term potential could hardly be higher, and we keep putting money behind its future, such as the three Marlin Bars we plan to launch, one of them in Palm Beach Gardens and set to debut before this month ends; plus our inaugural Tommy Bahama resort, coming in late 2023; and at Lilly Pulitzer, our number two brand by size, we likewise posted a solid quarter, with sales up 6%, climbing from $92 million a year ago to $97 million now. Growth came entirely from our direct-to-consumer channels, while wholesale slipped modestly, which we attribute to how wary so many retailers have become in this marketplace. At Lilly Pulitzer we saw some SG&A deleveraging as we keep funding the brand's development, yet gross margin still rose for the quarter, reaching 70.1% against 69% a year ago. Rising sales plus that higher gross margin let us produce an exceptionally strong 25.2% operating margin in the quarter. A major factor behind Lilly Pulitzer's success this quarter was a shift in how we approached our customer-called action strategy relative to last year's first quarter. Back in April 2022, we ran one of our famous Lilly Pulitzer flash sales featuring resort 2021 merchandise, discounted in the 60% to 70% off range. On this occasion, we didn't run a flash event. What we did instead was offer 30% off on current merchandise — both online and in stores — throughout April. The results were excellent: about $25 million in sales over a three-day period, and we did that at a gross margin that was very attractive. As we move through the rest of the year, we'll continue to evaluate the best ways to reach our customer tags and drive sustained top-line growth in a manner that fits the brand, while still delivering very healthy margins at both the gross margin and operating margin levels. Our newest brand is Johnny Was, which joined the portfolio in the third quarter of 2022, and we're delighted to have it with us. Our priority this year — the first full year with Johnny Was inside the Oxford portfolio — centers on finishing its integration onto our powerful platform and strengthening the groundwork for lasting profitable growth at the brand. Most of the earlier-stage portions of this effort are done, and our main focus now is applying our best-in-class existing Lilly Pulitzer e-commerce platform to strengthen the already robust Johnny Was e-commerce business, which accounts for roughly 40% of the brand's sales. Just so we're clear, Johnny Was is going to keep running its own site, preserving that unique aesthetic, but it will also tap into the tech capabilities and functionality that we built out for the Lilly Pulitzer e-commerce platform. When it comes to our three smaller labels — Southern Tide, The Beaufort Bonnet Company, and Duck Head — they make up what we call our Emerging Brands Group, and we were happy to report a 7% increase in sales year-over-year for that group. Our profitability this quarter took a hit because we kept putting money into people, marketing, IT, and stores, plus the financial hit from that excess inventory situation we brought up during last quarter's conference call. We've got a full handle on the inventory issue and we're steadily working our way through it, though it's going to weigh on the Emerging Brands Group's margin throughout this year. Fiscal 2023's first quarter was quite strong. That said, it's important to point out that February got off to a better start than how April wrapped up. Beginning in late March, shoppers clearly grew more hesitant with their spending. Our traffic patterns are still favorable, which shows growing attachment to and curiosity about our brands, yet conversion rates have come in below last year's levels; we think that's because consumers are being more careful about spending their discretionary money, and that has created a far more discount-driven market than we've seen in recent years at this point on the calendar. Even though it's encouraging that May's sales trend improved sequentially over April and early June looks incrementally stronger, our second quarter so far is coming in under what we anticipated when we gave our initial full-year guidance back in March. Given that, plus what we now anticipate will be a heavily promotional climate over the next few quarters, we feel it makes sense to dial back our outlook for the year, which Scott will walk through shortly. Even as we dial back our outlook for the year, we stay very bullish about our six powerful aspirational happy brands, and about our capacity to leverage our brands' strength to produce the consistent profitable growth that fuels long-term shareholder value. Even though our year-over-year increase is going to land a bit under our earlier forecast, in absolute dollar terms this will still be a solid year, and as Scott will walk through, our cash flow should be exceptionally strong. That means we'll continue investing in our people, our marketing, our IT, our fulfillment capabilities, our stores, and our food and beverage locations, so that we're set up for continued expansion in 2024 and the years that follow. We have every confidence that our North Star pillars, the approach we use to deliver against them, the way we carry out that approach, and our brand leaders — an outstanding group of people — will allow us, over the coming years, to expand total portfolio sales annually at a rate in the mid to upper single digits while keeping operating margin at 15% or above. At this point I'll hand things over to Scott, who can walk us through the quarter in greater depth along with our outlook for the rest of the year. Scott?

Thanks, Tom. We're happy to share that we delivered yet another strong quarter when it comes to both sales and earnings growth. During the first quarter of 2023, our operating groups performed well despite a macroeconomic backdrop that was uncertain. At both of our two biggest brands, Tommy Bahama and Lilly Pulitzer, sales rose by a mid-single-digit percentage, and each posted robust operating margins above 20%. Consolidated net sales came in at $420 million for the first quarter of fiscal 2023, a figure that includes $49 million in sales from Johnny Was along with gains in every operating group, which was 19% higher than the $353 million in net sales we recorded in last year's first quarter; taken together across Tommy Bahama, Lilly Pulitzer, and Emerging Brands, we achieved growth in every one of our full-price distribution channels, with a 2% gain in full-price bricks and mortar, a 20% gain in full-price e-commerce, a 4% gain in wholesale sales, and a 4% gain in food and beverage sales; there was, however, a $7 million decline in Lilly Pulitzer e-commerce flash sales, since we did not anniversary last year's Q1 flash event. What's important is that beyond the sales increase, adjusted gross margin rose 130 basis points versus last year, reaching 65.8%, propelled by stronger gross margins at both Tommy Bahama and Lilly Pulitzer. We got a lift from reduced freight costs, with inbound freight having come back to roughly where it stood before the pandemic, and we realized further gross margin gains from an improved sales mix, which reflected the addition of Johnny Was and its higher gross margin along with the absence of e-commerce flash sales in the first quarter of 2023, plus greater item use. Adjusted SG&A expenses totaled $200 million, up from $157 million a year ago. Included in this quarter was $28 million of SG&A tied to the Johnny Was business, which we did not own during the prior year period. On top of that, SG&A rose in our other businesses owing to employment costs, advertising costs, variable expenses, and other expenses aimed at fueling and supporting the sales growth we expect ahead. Notably, we took on $1 million in SG&A costs stemming from the continuing effort to re-platform the Johnny Was e-commerce website onto sales force by leveraging the e-commerce tech stack already used at Lilly Pulitzer, a project we expect to wrap up this summer. All of this together produced $83 million in adjusted operating income, equal to a 20% operating margin, versus $77 million in 2022. That higher operating income was partly offset by greater interest expense from the borrowings tied to the Johnny Was acquisition, as well as higher tax expense stemming from a tax rate that rose relative to the prior year period. Even with the larger interest and tax burdens, we delivered EPS growth of 8% year-over-year, landing at $3.78. Now I'll turn to our balance sheet, starting with inventory. We're positioned well to meet our forecast for the rest of the year, with inventories on a FIFO basis up 32%, or $60 million, year-over-year, a total that includes $17 million of Johnny Was inventory. Beyond just backing the sales growth we have planned, our inventory levels rose because product costs went up and because we added larger amounts of core styles—items that stay relevant across many seasons, or even years. As we look ahead, we anticipate that inventory balances at year-end will land at or under the prior year's levels. To finance our purchase of Johnny Was, we drew on the cash, cash equivalents, and short-term investments held on our balance sheet last year, along with certain borrowings made under our revolving credit agreement. At the close of the quarter, borrowings under our revolving credit facility stood at $94 million, down from $119 million of borrowings at the start of the year. Cash flow from operations came in at $53 million, versus $22 million in the first quarter a year earlier, which let us cut outstanding debt by a meaningful $25 million in the first quarter, while simultaneously covering $17 million in capital expenditures and $10 million in dividends. For the remainder of the year, we anticipate strong cash flows and expect to pay back substantially all of our outstanding borrowings before the year ends. Now I'll take some time to discuss our 2023 outlook; across the full year, net sales should land somewhere between $1.59 billion and $1.63 billion, which represents growth of 13% to 16% against sales of $1.41 billion in 2022. The sales increase we've planned for the 53-week 2023 period reflects the full-year benefit of Johnny Was, plus growth in the low to mid-single-digit range across our existing brands—made up of gains in full-price brick-and-mortar and e-commerce channels, with wholesale roughly flat. For the full year of 2023, we anticipate gross margin expansion that is far more modest than what we delivered in the first quarter, which benefited more favorably from the year-over-year drop in freight costs as freight rates kept falling through 2022. That modest gross margin expansion also reflects our expectation of a bigger share of full-price direct-to-consumer sales, a smaller share of wholesale sales, and the full-year inclusion of Johnny Was, which carries a higher gross margin, in 2023. These stronger sales and slightly better gross margins should be partly offset by higher SG&A, which we expect to rise at a faster rate than sales in 2023 as we keep investing in the business—including information technology spend and SG&A across both IT personnel and IT infrastructure, greater employment costs, larger advertising expenses including more awareness-driving spend, additional brick-and-mortar locations opening during 2023, and greater depreciation expense stemming from both IT spend and brick-and-mortar locations. Taking all of this into account, we expect the operating margin to fall from 2022 levels to somewhere between 14.5% and 15% of sales. On top of that, we're looking at interest expense coming in higher, at $5 million, and roughly 50% of that hits in Q1, then $1 million or less in each of Q2, Q3, and Q4 as we keep paying down our debt through 2023. For comparison, interest expense totaled $3 million across all of 2022, a year in which we carried no debt until Q3. We're also forecasting an effective tax rate of about 25%, up from 23% in 2022, which got a boost from certain favorable items, including prior year operating loss utilizations and the reversal of some valuation allowances. Taking all of this into account, 2023 adjusted EPS should land between $10.80 and $11.20, against adjusted EPS of $10.88 a year ago, as a full year of Johnny Was operating income gets offset by weaker operating income in our existing businesses — a result of investing in them during 2023 — plus the added income tax expense and interest expense. For Q2 2023, our sales guidance is $415 million to $435 million, versus $363 million in Q2 2022. In Q2 2023, we're expecting sales to be higher, gross margin slightly down, SG&A deleveraging, interest expense up, but a lower effective tax rate of roughly 24%, since we anticipate the quarter's tax rate getting a favorable boost from the tax benefit tied to divesting certain restricted share awards late in the quarter.

The result of that spending was adjusted EPS for the second quarter landing somewhere between $3.30 and $3.50, which compares with $3.61 during the same quarter in 2022. What's driving the softer expected EPS figure versus a year ago, mainly, is that our SG&A investments have grown and interest expense now exceeds the gross profit those higher sales brought in. Picking up on the idea that 2023 is a year of investment, let me take a moment on what we expect for CapEx in 2023. We're looking at roughly $90 million of capital expenditures in fiscal 2023, up against $47 million in fiscal 2022. During last quarter's call we noted that this planned CapEx bump covers costs tied to physical store locations, among them the buildout of around 35 sites spanning every brand — three new Marlin Bars plus roughly 10 new Johnny Was stores. Several of those are relocations and remodels, and together with a handful of store closures, that ought to leave us with a net gain of about 25 full-price stores by year-end, with those openings weighted more toward the back half. The money going toward these physical locations accounts for roughly half of what we've planned to spend on capital expenditures in 2023. On top of that, we'll keep investing in our many technology system efforts, covering e-commerce and omnichannel capabilities, data management and analytics, customer data and insights, cyber security, automation including artificial intelligence, and infrastructure. And lastly, we expect spending tied to a multiyear project at our Lyons, Georgia distribution channel center aimed at boosting direct-to-consumer throughput capabilities for our brands. Our view on cash and liquidity is quite favorable too, following cash flow from operations of $126 million in 2022 — that figure includes an $85 million working capital increase — and we anticipate growing cash flow from operations considerably, past the $200 million mark in 2023. With positive cash flow from operations at that level, we have plenty to cover every planned 2023 capital expenditure, dividend payments at the current rate, and paying down substantially all of our outstanding debt before the year is out. These investments will squeeze 2023 margins, yet they position us nicely for mid to upper single-digit topline growth and operating margins at or above 15% in 2024 and beyond. Thanks for your time today; we'll now open the call for questions. Shamali?

Hello there, good afternoon. Appreciate you fielding our questions. I believe I have a couple. To start, I'd like to connect this to the general inventory positions and how the remainder of the year will take shape. You mentioned planning to finish the year with stock levels lower compared to the prior year, but how ought we to think about the timing for when those might align better with sales growth? Then, regarding the Emerging Brands Group specifically, was there one particular brand where the surplus inventory stood out the most? And following up on that, concerning the revision to the earnings estimate for the rest of the year, you clearly made an adjustment to the second quarter, so what should we expect regarding the types of cuts you've implemented for the latter half? Thanks.

Alright. Thanks for your — for joining the call today, and actually I think, I mean, let Scott handle both of those. Aside from that, I'll mention that the inventory position and the EBT Group — Scott will go into more detail on this; the largest portion was at the Beaufort Bonnet Company, though it was somewhat spread out as well. But like we stated in our prepared remarks, we're addressing it in a methodical way; we have a handle on it, it's just — it will keep weighing on profitability likely throughout the year.

Ed, every quarter our inventory position is going to narrow the difference versus the prior year, and once we reach the end of the year, we anticipate being lower. Part of this, as I believe we've talked about previously, is that we had built a great deal of buffer into our supply chain because of certain supply chain problems. We can begin taking some of those weeks out, and beyond that we're simply attempting to operate with less inventory thanks to some of our systems. So it will be a good — inventory is going to be a good story this year, and our cash flow is going to be a good story, since as I said during the prepared remarks, we had a fairly significant working capital build last year, while this year working capital is likely neutral or perhaps even generating a bit of cash, or something along those lines, which is going to reflect really well on our cash flow. But we think that once the year ends, we ought to be lower, and we can sort of remove some of that buffer from the supply chain that we were forced to put in; and as Tom said, a portion of the inventory increase came from Beaufort Bonnet and a small amount from Southern Tide, and we have — we've completed the markdowns, and we took slightly more markdown during Q1, though the majority of the markdowns were taken in the prior year. But as we sell those goods off, they carry a zero to little margin. So they do create a bit of pressure on both gross and operating margins as we actually send those goods out the door.

Then, regarding the cut to the back half guide—or whatever is baked into the total guidance?

Yeah. Yeah, on the whole, what we've done is bring comps down from closer to mid-single digits to the low single digits; and honestly, it's just what we've observed, as Tom said—April was a hard month, May improved somewhat, June is improving somewhat, but we sort of examined that May, June rate so far and are projecting forward, with hope that the June pattern keeps up, and I believe there's some upside, though the consumer is wary. We've certainly witnessed them acting more cautiously, we do see them visiting our stores, they simply aren't converting at the same rate. And I think they purchased a tremendous amount over the last two years, plus we've gained many customers, which is great, and they remain interested in our brands, but I think they went—very aggressively last year in particular, and I think they're simply being somewhat more careful about their spending this year.

Thanks so much.

Thank you, Ed.

Hello, and thanks for taking my question. I was just curious whether you might give us some additional detail about the patterns across brands that are reflected in the second quarter guidance, and also any brand-level insight regarding the momentum as we came out of the first quarter? Then, on a separate note, I was hoping you might share some perspective on Johnny Was and how it did versus what you had expected, plus any initial learnings from it? Thank you.

Yes. I'll address part of that, and then hand things over to Scott, who perhaps can fill in the specifics regarding the second quarter guide. What I'd say is that, looking back at our prepared remarks, Tommy Bahama truly delivered a strong first quarter. Every metric rose for the quarter, year-over-year growth occurred in each channel, gross margin grew, operating margin was quite strong; they did take a bit of a hit, as we mentioned, from the harsh weather on the West Coast, yet they managed to more than offset that across other parts of the country. Then, regarding the quarter's shape, no one really escaped that pattern of a stronger start in February than the finish. So during the latter part of March, you could clearly notice the consumer turning more cautious; and I believe that overlapped with — not that there aren't areas we'll aim to improve next year — but I think much of it related to outside factors such as the bank failures, the heavily promotional market, and all of that left the consumer somewhat more cautious. And then, as we noted, April was roughly the bottom, May improved somewhat, and June has so far been even stronger than May; so that's basically how it took shape, and I think you were asking for perhaps a bit more detail on where the second quarter guidance originated.

Yeah. Keep in mind that during Q2 of the prior year, our comp rose 14%. So we're up against quite a strong comp, and with Tommy's comp increasing only slightly and Lilly, at full price, likely declining a bit — while our remaining brands are roughly flat versus last year. So overall, we expect to squeeze out a modest amount of growth for the quarter across our current brands, though it did — the quarter did get off to a slow start, yet we're seeing June bounce back somewhat. So, hopefully, we'll — hopefully, June keeps going and we can post results slightly better than this.

Then I'll address what you asked regarding Johnny Was. During the prepared remarks we mentioned that this marks the initial complete 12 months in which we've owned Johnny Was. We view it as the reference year. We're going to establish a solid base for Johnny Was and position it for growth ahead, and all of that work is underway. As we stated, the majority of the earlier phase—the more fundamental pieces, so to speak—of bringing it together are finished, and the major emphasis right now, which has us quite enthusiastic, involves making use of the Lilly Pulitzer e-commerce platform to assist in running the Johnny Was site. They currently operate a fantastic e-commerce operation, and they have a gorgeous site that is going to stay as it is; the only change will be, in a sense, the unseen side regarding the technology employed and the capabilities and attributes it delivers, and the essence of that is boosting how shoppable the site is, so guests can browse more easily, locate items, and complete purchases with us. Thus, we believe that will deliver a lift to an e-commerce operation that is already quite strong. After that, as Scott noted, we're putting money into Johnny Was stores too, with roughly 10 additional sites opening during this year, which has us quite excited. And regarding the business overall, the first quarter came in somewhat below what we had intended, though I believe they were hit especially hard by California and the situation unfolding there, plus they serve what is likely the most affluent customer demographic within our portfolio, so I think a degree of hesitancy filtered into that segment of the market somewhat more. So conditions were a bit more difficult, yet nothing that worries us whatsoever over the long run. It's an excellent brand with an excellent, loyal customer following. The market we could reach is far bigger than what we currently serve, and we're highly committed to connecting with the wider portion of the market accessible to us in that space. We have excellent leadership and an excellent team there, whom we enjoy collaborating with, and we remain incredibly optimistic about what Johnny Was is capable of achieving both independently and within our portfolio moving forward.

Thanks.