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

Thanks, and good afternoon, everyone. Before we get started, I want to remind those on the line that some of what we say today on this call and in the Q&A portion may count as forward-looking statements under the federal securities laws. Such statements aren't guarantees, and what actually happens could wind up differing materially from what those forward-looking statements express or imply. The key factors that might lead actual operating results or our financial condition to come out differently are addressed in the press release we put out earlier today and in the documents we file with the SEC, among them the risk factors found in our Form 10-K. We're not obligated to revise any forward-looking statements. On this call, we'll also be talking about certain non-GAAP financial measures. A reconciliation between non-GAAP and GAAP financial measures appears in the press release we issued earlier today, which you'll find posted under the Investor Relations tab of our website at oxfordinc.com. Now let me introduce the people joining us on today's call; here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO and COO. I appreciate your attention. At this point, I'll hand the call over to Tom Chubb.

Good afternoon, and thanks for being with us. Before I get into the results for Q2 and what we expect for the rest of the year, I'd like to begin by recognizing Hawaii, and Maui especially, since that island has played a significant and cherished role in our company for a long time. More than 200 of our members call Maui home, and we have over 450 throughout Hawaii. We deeply appreciate these terrific individuals, and our thoughts go out to each of them as they rebuild following the destruction caused by the recent wildfires. I also feel pride in, and appreciation for, how generously our associates throughout the entire organization have stepped up in countless ways to support Maui's residents in recovering from this catastrophe; that kindness, along with the strength shown by our team members on Maui and across Hawaii, is part of what makes Oxford the outstanding company it is. Turning to the numbers; we're happy to share that sales and adjusted earnings per share came in inside the guidance range we had projected, despite the uneven conditions we're operating in. In the quarter, total revenue rose 16% compared with the prior year, lifted by our purchase of Johnny Was during last year's third quarter, plus a 1% gain on an organic basis, which follows 11% organic growth during the same period a year earlier; beyond that difficult comparison, the smaller organic increase this year reflects what's been broadly noted throughout the market — a customer who has grown somewhat more careful about discretionary spending. As you're aware, our company's purpose is to bring happiness to our customers through our brands. The metrics on our customers show we're accomplishing just that. Enthusiasm for and interest in our brands continues to be very strong. We're seeing growth in both the number of active customers and how quickly we bring new ones on board. Our average order value hasn't moved, and traffic across our brand portfolio is up this year. But conversion rates are lower than they were a year ago. And on top of that, a bigger portion of buying is now happening during our promotional events. Those two factors together suggest consumers are more hesitant about discretionary spending than they were 12 months ago, and the heavier purchasing during promotional periods is putting a bit of modest pressure on gross margins. Further down the income statement, we experienced some operating deleverage in the quarter because of added investment in a couple of important expense areas. The first of these is employment expense. Our people are our greatest asset and the foundation of everything we achieve. To make sure we keep succeeding in the future, we must have enough staff on hand and make certain they receive fair pay. During the prior year, expansion of our operations got ahead of how many employees we had, so we needed to do some work to get fully staffed. On top of that, within an inflationary climate, we keep putting money into our workforce through higher wage rates and salaries, which ensures we remain competitive and able to draw in and keep the finest talent. Advertising and promotion makes up the next big category where costs have risen. With the post-pandemic recovery increasingly distant in the past and with both the market and the consumer still normalizing, we want to confirm we are taking the steps required to sustain strong enthusiasm for and recognition of our brands. So we have raised our advertising spending levels during this year, in both absolute dollars and as a percentage of sales, particularly in awareness advertising and in testing new media channels. Finally, we're seeing impacts from depreciation, software subscription fees, and other expenses related to technology and the other investments we've made to ensure our omnichannel selling platform is modern. Even though these expenses are creating some short-term operating deleverage while demand is weaker, we think each of these 3 areas represents a sound investment in what lies ahead for us. In line with our purpose and goal of evoking happiness in our customers and delivering long-term value to our shareholders, we have several strategic initiatives in motion, all intended to drive excellence throughout our portfolio of lifestyle brands and help spark sustained profitable growth. One of our biggest projects is a multiyear effort to upgrade a fulfillment center in the Southeastern United States. The goal is to make sure our brands have top-tier direct-to-consumer throughput capabilities. When it's done, this fulfillment center will help support our e-commerce business, which is very large and highly profitable, across all our brands. It will also help support our retail business in the eastern half of the country — especially Florida, which is our largest revenue state by a wide margin. Another initiative we're very excited about is the upcoming relaunch of the Johnny Was website. The new Johnny Was site will keep the same beautiful, aspirational look and feel as the current one, but it will run on the excellent best-in-class technology platform that powers our Lilly Pulitzer website. What we'll end up with is a site that's entirely Johnny Was, far simpler to search, simpler to buy from, simpler to complete checkout on, and all around a superior experience for the customer. Once it goes live at some point later in this year, we anticipate the redesigned site will generate added growth for our Johnny Was e-commerce operation. Past the site and the fulfillment center initiatives, we're pursuing excellence throughout the portfolio by putting our skilled staff to work across the brands. To be specific, we've been moving functional know-how between brands to strengthen the areas that will do more to support operational excellence company-wide. Matching talent with chances to make the biggest difference to the business helps both the company and its employees. Our solid business keeps producing robust cash flow, and our attention stays on deploying that money sensibly — funding organic expansion, pursuing acquisitions, and giving capital back to shareholders, all while keeping our balance sheet in very good shape. The quarter just ended is a great illustration of that approach being put to work. We added 5 net new locations in the quarter, which brings us to 8 net new locations for the year. We anticipate having opened 25 net new locations by year-end, taking our total to roughly 320 stores along with retail bar restaurant locations. Also, the gorgeous Tommy Bahama Miramonte Resort in Indian Wells, California, remains on schedule to debut in the third quarter. One of the locations we debuted during the quarter was a gorgeous new Marlin Bar at our Tommy Bahama shop in Palm Beach Gardens. Results there have been excellent from the very beginning, and true to form, it has given a major boost to our retail performance at that location, particularly in women's. The feature that makes this Marlin Bar unique compared with the 8 we have opened so far is that it combines indoor and outdoor space right at the entryway of an enclosed mall. Hospitality functions as the foundation of our Tommy Bahama approach, and given that 2 more Marlin Bars are set to open before this year ends, along with 3 planned for fiscal '24, our excitement about the expansion it will fuel over many years to come could not be greater. Cash generation in the quarter also got a boost from our purchase of Johnny Was last year, with Johnny Was adding $7.3 million of adjusted operating profit, or about $0.34 a share, to our quarterly results. Having Johnny Was in the portfolio makes us very happy, and we think there's ample runway to grow topline and widen operating margin going forward. Thanks to that powerful cash flow, we were able to reduce debt by $46 million, leaving $48 million outstanding, while buying back $19 million of stock — roughly 196,000 shares, or 1% of our outstanding stock — paying $10 million in dividends and putting $15 million into capital expenditures during the quarter. Our inventories look very healthy, and we're in a superb position to keep delivering strong cash flow for the rest of the year and for many years ahead. Scott will walk through more specifics on the quarter and the remainder of the year shortly. Looking ahead, though, with the Maui wildfires' impact and somewhat more cautious consumer purchasing behavior as the third quarter began, we feel it's wise to factor a bit of caution into our guidance for the rest of the year. Yet we recognize that our efforts to spark joy, chase top-tier quality across all our brands, and put money back into the company will yield earnings growth and lasting returns for investors over the coming decade — as our revised forecast demonstrates, with an anticipated ten-year compound annual growth rate in adjusted earnings per share of 14%. With that said, I'll now pass the discussion to Scott, who is ready to give us a more thorough look at the quarter as well as the remainder of the year. Scott?

Thanks, Tom. Like Tom said, we're happy to share that we've delivered yet another solid quarter, and it falls inside the range we guided to. With the macro picture unclear and shoppers behaving more carefully, our operating groups performed really well, especially considering the direct-to-consumer comparisons of 14% from Q2 of 2022. For the second quarter of fiscal 2023, consolidated net sales came to $420 million, and that figure includes $52 million in sales from Johnny Was plus gains in every operating group, which is a 16% rise over the $363 million in net sales posted in last year's second quarter. Taken together, Tommy Bahama, Lilly Pulitzer and Emerging Brands saw declines of 3%, while full price brick-and-mortar fell 4%, and full price e-commerce along with wholesale sales dropped 7%. Those decreases were made up for by 8% growth in our food and beverage business, plus $16 million in sales from the Lilly Pulitzer e-commerce flash sale, which we didn't run during last year's second quarter. Adjusted gross margin came in at 64.3%, versus 64.6% a year ago. That modest drop stemmed from more e-commerce flash sales at Lilly Pulitzer and a larger share of sales coming during Tommy Bahama's loyalty award card, flipside and end of season clearance events, partly offset by Johnny Was's higher gross margin and lower freight expense. Adjusted SG&A expenses totaled $202 million, up from $163 million a year earlier. This quarter's figure includes $29 million of SG&A tied to the Johnny Was business, which we didn't own during the prior year period. We also saw additional SG&A increases across our other businesses for employment costs, advertising costs, variable expenses and other expenses, as we keep investing in our businesses to fuel and support the future growth we expect. All of that produced $73 million in adjusted operating income, or a 17% operating margin, compared with $78 million in 2022. That $73 million of operating income included $7 million of operating income from Johnny Was. The drop in operating income mirrors the SG&A deleveraging we planned, along with the $2 million hit from lower royalty income from our licensing partners, particularly in the furniture and home categories, which experienced a surge during the pandemic and the period that followed. Turning past operating income. We took on more interest expense after carrying no debt in last year's second quarter, and we gained from a lower effective tax rate thanks to the favorable tax impact of stock awards vesting during the quarter. Given all of that, we delivered $3.45 of adjusted EPS, near the top end of our guidance range. Now I'll turn to our balance sheet, starting with inventory. Our inventories rose 14%, or 28% year-over-year on a FIFO basis, and that includes $18 million of Johnny Was inventory. That 14% inventory increase lines up with the low double-digit sales increase we plan for 2023. So we feel our inventory levels are right to let us deliver on our forecast for the rest of the year. To pay for the Johnny Was purchase, we tapped the cash, cash equivalents, and short-term investments sitting on our balance sheet from last year, along with certain amounts drawn under our revolving credit agreement. At the close of the quarter, borrowings under our revolving credit facility stood at $48 million, down from $119 million at the start of the year, or $153 million of cash flow from operations in the first half of fiscal 2023 versus $91 million in the same period a year earlier. That gave us room to cut outstanding debt substantially, by $71 million, across the first half, while still covering $31 million of capital expenditures, $21 million in dividends, and $19 million of share repurchases. For the back half of the year we're looking for robust cash flows, and we expect to pay down more debt in the fourth quarter. Now I'd like to walk through our 2023 outlook. As Tom said, we're softening our full year guidance to account for the Maui wildfires and somewhat greater consumer caution showing up early in the third quarter; for the full year, net sales are now projected at $1.57 billion to $1.6 billion, which is growth of 11% to 13% against sales of $1.41 billion in 2022. The sales increase planned for the 53-week 2023 includes the full year benefit of Johnny Was plus low single-digit range growth in our existing brands, powered by our direct-to-consumer businesses, whereas wholesale sales in our existing businesses should come in comparable to 2022. For the full year of 2023, we continue to expect modest gross margin expansion, with the bulk of that gain landing in the first and fourth quarters. Those higher sales and slightly better gross margins should be offset by greater SG&A, which is projected to rise faster than sales in every quarter of 2023. We're still investing in our businesses, as Tom described earlier, and while we don't want to pull back on expense investments that build for the future, we're stepping up our efforts to scrub the income statement and carefully trim expenses where it makes sense. Royalty income for the year should also be lower, with the second half comparable to the prior year. Taking all of this into account, operating margin is expected to decline from 2022 levels, landing at a percentage of sales between 14% and 14.5%. On top of that, we expect interest expense of $5 million for the year, after almost $4 million of interest expense in the first half. That's against $3 million of interest expense for the full year of 2022, when we carried no debt outstanding until the third quarter. We also anticipate a higher effective tax rate, roughly 24%, versus 23% in 2022. Taking all of that into account, our adjusted EPS for 2023 is now projected at $10.30 to $10.60, compared with $10.88 on an adjusted basis a year ago. The full year of Johnny Was profit is being offset by reduced operating income across our existing businesses, a higher effective tax rate, and greater interest expense. On top of that, we anticipate pressure on how we perform in the back half as we work to rehabilitate our business in Maui, where nearly $30 million in sales came from our brands in 2022. Out of 6 locations on that island, only the Wailea Tommy Bahama store and restaurant plus the Johnny Was store stayed open, and even those saw traffic drop substantially. Our Lahaina Marlin Bar location was a complete loss. The path to reopening, and what results we see afterward, for our 3 stores at the Whalers Village Center is still uncertain; we estimate the net effect will be a hit of roughly $0.10 per share in each of the third and fourth quarters, or $0.20 across the second half. For the third quarter of 2023, our expectation is sales between $320 million and $335 million, against $313 million in the third quarter of 2022.

Looking ahead to Q3 2023, we're anticipating stronger sales, largely because this year's period will capture a complete quarter from Johnny Was, whereas the same stretch a year ago reflected just half a quarter of activity following the September 2022 deal. That gain will be partly offset by softer expected revenue elsewhere in the portfolio, given that we posted 12% comps during last year's third quarter. On the margin side, we're forecasting gross margin roughly in line with last year's Q3, along with ongoing SG&A deleveraging. Putting that together, we see adjusted EPS landing somewhere from $0.90 to $1.10 for the quarter, versus $1.46 in Q3 2022. The main reasons for that year-over-year decline: heavier SG&A investment, which weighs most heavily on operating income during our seasonally smallest revenue quarter, plus the effects of what's happening in Maui. Turning to Q4, we're looking for a sales lift, helped in part by the extra week in the period, with otherwise flat revenue versus a year ago, when we delivered 9% comps in Q4 2022. We're also calling for slightly better gross margins — last year's fourth quarter carried some inventory markdowns within the emerging brands — and mild SG&A deleveraging, since SG&A is growing faster than the top line. On top of that, interest expense should come in below last year's Q4 figure, reflecting the substantial debt paydown we achieved during 2023, and we anticipate a higher effective tax rate, since Q4 2022 benefited from certain favorable items we don't expect to recur this year. For all of 2023, CapEx should come in around $90 million, up from $47 million in 2022. As we noted on the prior call, that planned increase covers spending tied to physical stores, including build-outs for roughly 35 locations across every brand — among them 3 Marlin Bars and around 10 new Johnny Was sites. Several of these are relocations and remodels, and together with a handful of closings, that should leave us with a net gain of roughly 25 full-price stores by year-end, with about 9 net new openings in each of Q3 and Q4. Roughly half of the 2023 capital expenditure budget relates to these brick-and-mortar projects. Beyond that, we'll keep funding our many technology systems initiatives. And lastly, we expect early spending on a multiyear effort spanning our fulfillment network in the Southeastern U.S., aimed at boosting direct-to-consumer throughput for our brands. Our view on cash and liquidity remains quite favorable. Coming off $126 million of operating cash flow in 2022 — a figure that included an $85 million working capital build — we're projecting a significant step-up in operating cash flow for 2023, reaching beyond $200 million. With operating cash flow at this strength, we have more than enough to cover what we've planned: our 2023 capital spending, dividend payments at the existing rate, the $20 million in buybacks we just finished, and paying down more of our debt as the year goes on. Yes, SG&A investments are going to weigh on 2023 margins, but these moves position us nicely for mid- to upper single-digit growth in topline revenue and for reaching a long-term operating margin target of at or above 15%. I appreciate everyone spending time with us today. At this point, we'll open things up for questions. Doug?

All of our thoughts go out to everyone you work with on Maui. I suppose I have a few quick questions. To start, over the last couple of years you've brought in a substantial number of new buyers into the Tommy Bahama client list. When you consider keeping a portion of those shoppers, could you perhaps share a bit about what patterns you've noticed, and maybe connect that to what was said about the promotional backdrop? Then, as a second question, any perspective on Johnny Was's organic growth rate and how that business is doing would be welcome.

All right. Thanks, Ed, and thank you for what you said about Maui. We're aware that you understand how unique a place it is, and it's definitely a difficult circumstance; so we're grateful for the sentiment. Regarding the Tommy Bahama shoppers, what I'd tell you is that what we observe there is essentially what we observe at a fundamental level throughout the brands; and I believe this matches what is happening in the market, which is that traffic is still solid. Interest in the brand is solid. Our customer count is increasing. Our rate of adding new customers is increasing. The problem is truly with conversion, and we'd chalk that up, as we mentioned in our remarks, to a more hesitant buyer — one who, I think, is partly anxious about the direction of the economy and what the Fed is doing and interest rates and all of that. And then I also believe the other element that causes customers to be pickier when purchasing is how much promotional activity exists in the market. That does appear to be easing somewhat across the spring and the start of summer. It had been extremely high. And that aspect does appear to be adjusting somewhat, but I think there's a lingering effect from the economy that is pressing on the consumer somewhat. And then when it comes to Johnny Was, I'd say the situation is the same. They're facing their own difficulties with organic growth. They're no different from what we're observing at the other brands. And it's truly the same collection of factors at play there.

Right. And keep in mind, their operations are concentrated quite heavily in California. Out in California, conditions proved genuinely tough during Q1, and certainly for a portion of Q2 as well. So Johnny Was has faced a distinct set of difficulties because of that.

Even so, we're still really enthusiastic about having them in our portfolio. They posted—I believe the figure was $7.2 million in operating profit, and that works out to $0.34 per share for the quarter. I think their operating margin came in at 14.2%, which is below what we believe they're capable of reaching and will reach; we have a lot of confidence on that point. Even so, it's still a decent operating margin. And as you're aware, Ed, the emphasis during this year at Johnny Was has largely been on getting them integrated onto our platform, positioning them the way we prefer to operate our brands, which isn't a full 180 degrees apart from how they were run when private equity owned them, though it is somewhat different. So we're treating this as the baseline year. We believe very firmly and with great confidence that we can increase topline and also widen operating margin at Johnny Was moving forward; and one of those efforts, as we laid out on the call that we've been working on throughout this year, involves bringing over the Lilly Pulitzer sort of back end, so to speak, for e-commerce. Johnny Was has a solid e-commerce business; and when you arrive at the landing page, it's a gorgeous website, yet its shopability simply isn't strong. And we're certain that this is leading us to leave money on the table, which once we go live on the new Lilly website, we expect will be a major improvement to the business. And we're still very excited about Johnny Was and what it can deliver this year and beyond.

First off, I was hoping you might give us some detail on how sales trended month by month during the quarter, and then what the exit rate looked like as we came out of the second quarter. Second, I'd like to hear your thoughts on where inventory stands. Beyond that, it would help to get some detail on any changes you're planning to make to the promotional calendar for the remainder of the year.

All right. Thanks, Noah. Appreciate you joining the call today. So during the second quarter, June was what I'd describe as a wobbly month. Things got a bit better as that month went on — it was an up-and-down stretch overall — yet July ended up being a solid, quite robust period. After that, just like we said in the prepared remarks, the first part of August has come in somewhat weak. This isn't a situation where everything is collapsing or anything of that sort. Even so, it has been weak, much like what we observed in certain months of the first quarter; and when you put all of that together, it led us — as we noted on the call — to conclude that shoppers are currently in a more hesitant frame of mind when buying. So, with that in mind, we've trimmed our guidance slightly for the remaining portion of the year. On the inventory question, I'll hand it to Scott for a fuller picture, though our overall position feels strong. We believe we're sitting in a solid place.

Absolutely; indeed we are; on a FIFO basis, our inventory has risen 14% compared with a year earlier, yet we — once Johnny Was was added, given the sales growth we're seeing, and also because during last year we were still building inventory while attempting to bring it back to suitable levels; it wasn't until Q3 and Q4 that we genuinely believed inventory had returned to where it should be. So my sense is that as we reach the end of the year, we ought to be significantly nearer to flat and possibly even somewhat lower versus a year ago. Thus we're pleased with our position on that front.

Now, regarding what we intend to do differently with promotions, I'd say at Lilly Pulitzer specifically, just as we've been doing throughout the year, it isn't so much that we're adding more promotions — we're simply varying the mix somewhat. You saw with the — this year we held a couple of events that weren't part of last year, though we've removed others as well. At Tommy Bahama, my sense is it's going to look extremely, extremely close to our approach from last year.

Great. I was hoping we could dig a bit deeper into the reasons behind the reduced sales outlook. I recall that on the prior earnings call, you mentioned sensing more caution from consumers. Since sales and EPS landed within your expectations, I'm trying to figure out whether this shift really emerged after the quarter ended, or whether it's more about added conservatism given how much uncertainty remains. And then, if you could say more about the big picture so far — what you've taken away from Johnny Was and how you expect the brand to grow from here?