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

Thanks so much, and welcome everyone on this afternoon's call. Just before we get started, I want to point out to those listening that a number of remarks we may make during today's Q&A could count as forward-looking statements under the federal securities laws. Such statements aren't promises, and what actually happens could end up differing substantially from what those forward-looking statements say or suggest. The key elements that might lead actual operating results or financial condition to come out differently are covered in the press release we put out earlier today, as well as in the documents we file with the SEC, which includes the risk factors found in our Form 10-K. We have no obligation to revise any forward-looking statements. On this call, we'll also 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 on our website, oxfordinc.com. At this point, let me bring in the people joining us on today's call. Here with me are Tom Chubb, our Chairman and CEO, along with Scott Grassmyer, our CFO and COO. I appreciate everyone's attention, and now I'll hand the call over to Tom Chubb.

Good afternoon, and thanks for being with us. I'll take a few minutes to discuss Q3, then shift to what we expect and how we're planning for Q4, and last, offer a small advance look at our 2024 plans; we're happy to share strong results for the third quarter of fiscal 2023. Those results show sales growth in the low single digits, including comps that declined in the low single digits, layered on top of a positive 12% comp during Q3 of the prior year. Although consumers have plainly grown more careful with discretionary purchases, we think our performance, particularly when viewed on a two-year stack, stacks up well against our peer group. Even with a tougher environment, we produced these outcomes because our teams stayed dedicated to capitalizing on our powerful brands to communicate clear, consistent messaging that motivates and connects with shoppers, sparking strong demand for what we sell and the services we offer. One excellent illustration from Q3 is the debut of the Tommy Bahama Miramonte Resort in Indian Wells, California. This small gem of a property in the Coachella Valley draws on the credibility Tommy Bahama has established across almost 30 years in hospitality via our highly popular restaurants and bars, plus the broader strength of Tommy Bahama as one of America's leading lifestyle brands. The resort will substantially help reinforce and even enhance the lifestyle positioning of the Tommy Bahama brand, ultimately assisting us in attracting new customers, keeping current ones, and boosting engagement among all customers, while simultaneously producing meaningful though modest royalty income over time. Another strong illustration of capitalizing on our brands' strength to generate business results in Q3 was the debut of the beautiful new Johnny Was website. As you may remember, that new site combines the stunning Johnny Was imagery, brand messaging, and product with the best-in-class Lilly Pulitzer e-commerce technology we've rolled out across the past several years. With the new site plus a switch in digital marketing agencies, we're quite enthusiastic about our capacity to expand our Johnny Was web business moving forward. Thanks to these efforts and numerous other initiatives by our brands, traffic and full-price selling stayed solid throughout the quarter, and we managed to actually grow Adjusted Gross Margin. Beyond that, our active customer count and our rate of adding new customers each rose mid-single digits compared with last year, while average annual spend stayed roughly level. Every one of these metrics is an exceptionally positive signal about the strength of our brands. Lastly, Scott will give more detail shortly, but I'd be remiss not to highlight how strong our cash flow from operations was, at $169 million year-to-date, along with our balance sheet, and the fact that we actually managed to lower inventory year-over-year during the quarter. Now, looking ahead to Q4, we're enthusiastic about what we have planned and the chances we see in a marketplace that's still pretty uneven. Our direct-to-consumer operation had a somewhat slow beginning in early November, but then delivered solid performance over the hugely significant Thanksgiving weekend. As everyone knows, the calendar this year gives us the maximum selling window between Thanksgiving and Christmas — 32 days. Understandably, business since the middle of the week after Thanksgiving has been up and down. Based on history, when the calendar looks like this one does, we can anticipate a significant acceleration in sales across the 10 to 12 days leading up to Christmas; we anticipate that acceleration will happen this year, and we're thrilled about the initiatives we have across every one of our brands to make the most of that chance. Turning to wholesale, we do anticipate facing certain headwinds in Q4. Our brands and products keep performing quite strongly with our major wholesale partners. That said, because of the unpredictable consumer climate, wholesale accounts have grown more hesitant with their buying for spring of 2024, so spring bookings have declined due to that hesitancy, not on account of performance. Since a large number of our early spring orders usually go out during the final month of each fiscal year, we anticipate some weakness in our Q4 wholesale operation. Scott is going to walk through more specifics shortly, but because of the wholesale circumstances and the uneven direct-to-consumer marketplace, out of an abundance of caution, we're dialing back our guidance for Q4. Looking past this year, we're incredibly enthusiastic about the plans we're developing for 2024 and beyond. Though it's premature for us to provide our preliminary outlook for 2024, we'd like to offer you a preview of a few of our main plans. We think the most probable economic scenario is a soft landing, and assuming there's no widespread macroeconomic downturn, we think we can keep leveraging our remarkable brands to inspire customers and create demand for our brands and services that will fuel growth in our business. So far this year, we've grown our store count by a net 17 locations over the first three quarters and anticipate another 5 openings in Q4. The majority of those openings took place in the latter part of the year, and because of the timing and the usual ramp-up period after opening, we won't get the full advantage of these stores until fiscal 2024. Beyond that, we'll also capture the full benefit from the improvements we've made to the Johnny Was E-commerce business, which were finished in the third quarter of this year in 2024. Along with annualizing the effect of many of our 2023 initiatives, we also intend to keep driving future growth, which includes projects we have lined up for 2024. To start, our net new store additions are projected to exceed 25, as Tommy Bahama and Lilly Pulitzer go back to a store opening pace closer to what we saw before the pandemic. One thing we're especially enthusiastic about is the 6 Marlin Bars planned over the coming 12 months, among them our Winter Park, Florida, site, set to launch in January; we also expect significant openings from Johnny Was along with our emerging brands, areas where continued retail expansion remains possible. The pre-opening work tied to these locations—especially the 5 Marlin Bars—will create a bit of strain on 2024 operating margins, yet once these stores are up and running, they'll drive our growth path in 2025 and afterward. We're equally enthusiastic about the chance to leverage our Emerging Brands Group platform as a growth engine. That platform has developed well, and its capacity to help smaller brands grow and develop has been demonstrated. The Beaufort Bonnet Company stands out as a strong illustration. From the time we bought TBBC in 2017, its compound annual growth rate has been 23%. Duck Head serves as another strong illustration—an iconic brand featuring an iconic product and a history spanning more than 150 years.

At the time we acquired this brand, it was essentially defunct. After bringing it onto our platform, we relaunched and rebuilt it, turning it into a profitable, fast-growing operation with revenue above $10 million and considerable upside. We're always searching for similar opportunities. Last, we're strengthening our long-range distribution capacity by constructing a larger, state-of-the-art, automated distribution center close to our current site in Lyons, Georgia. Our goal is to finish this during 2025. When it's done, our yearly shipping capability will rise from 7 million units to more than 20 million units, and could reach 30 million units if we make some further equipment investments. This project will deliver many major advantages to the company and will help sustain future growth. To begin with, thanks to increased automation, the cost of handling and shipping each unit at this facility will remain very competitive. Second, it will provide the extra capacity we require to serve the dense cluster of stores we operate in Florida and other parts of the eastern United States, enabling us to manage inventory more effectively by restocking stores faster and more often. Last, it will let us take better care of more of our online shoppers in the eastern United States by delivering products to them sooner. These initiatives, along with the others we'll discuss in March when we share our preliminary guidance for the year, should help propel growth in 2024 and after. Nothing we achieved in 2023 or have planned for 2024 could happen without our incredible, committed team. This holiday season, we want to say how truly thankful we are for everything they do. I'll now hand the call to Scott for further remarks on our third-quarter results and our outlook for the rest of the year. Scott?

Thanks, Tom. Like Tom said, we're happy to share that we delivered yet another strong quarter, landing inside the range we had guided to. Even with macroeconomic conditions that remain tough for shoppers, our operating groups performed nicely, and they did so against DTC comps of 12% from the third quarter of 2022. For the third quarter of fiscal 2023, consolidated net sales came to $327 million, a figure that included $49 million in sales from Johnny Was, versus $23 million across the six weeks we held Johnny Was a year ago, plus a modest organic decline, which added up to 4% growth over the $313 million in net sales posted in last year's third quarter. If you look at Tommy Bahama, Lilly Pulitzer, and Emerging Brands as a group, full-price bricks and mortar was off 2%, full-price e-commerce slipped 3%, and wholesale dropped 9%. That overall figure was 3% lower than the prior year, but our food and beverage spots kept turning in a solid performance — the softness there came from remodels and from closures connected to the Maui wildfires. At the same time, we reduced inventory levels in each of our operating groups, and that let us lift adjusted gross margin by 60 basis points to 64%, compared with 63.4% the year before. A number of things contributed to the better adjusted gross margin. First, we had a whole quarter of Johnny Was sales at higher margins, compared with just part of a quarter last year. We also had fewer markdowns on inventory, a larger share of direct-to-consumer business among our emerging brands, and cheaper freight. Working against those improvements was a drop in full-price e-commerce sales at Lilly Pulitzer. On adjusted SG&A, we landed at $191 million, up from $171 million the prior year. The main driver of that increase was an additional $17 million in SG&A related to Johnny Was, because we owned that business for the entire third quarter of 2023 but only a portion of the third quarter in 2022. That combination yielded adjusted operating income of $21 million, which works out to a 7% operating margin, versus $32 million in 2022. Included in the $21 million figure was $1 million of additional operating income attributable to Johnny Was, since we owned that business for the entire quarter this year. The drop in operating income reflects the SG&A investments in our team and operations that we had budgeted. We also saw a slight decrease in revenue from our licensing partners. Outside of operating income, higher rates and larger average debt balances pushed our interest expense up. That said, we got a lift from a lower effective tax rate, which came from certain discrete items. Those items have an outsized impact on our tax rate in Q3 because our earnings are smaller in that quarter than in other fiscal quarters. All things considered, adjusted EPS came in at $1.01, which sits comfortably within our guidance range. Let me now move to the balance sheet, beginning with inventory. Measured on a FIFO basis, our inventories declined 4% versus a year ago, a drop of $9 million, and we did that while adjusted gross margin expanded. Every one of our operating groups saw inventory come down, reflecting the inventory discipline we continue to apply. Over the last year, we used our solid cash generation to pay down a large portion of the debt we incurred to fund the Johnny Was purchase. There was a slight increase in borrowings in the third quarter, which is typically a time when cash goes out, since our earnings during that period came in below what we see in other quarters of the fiscal year. Even with that, we closed the quarter with borrowings of $66 million under our revolving credit facility, compared with $119 million in borrowings at the start of the year. During the first nine months of 2023, our cash flow from operations came to $169 million, compared with $86 million in the same period a year earlier. That allowed us to reduce outstanding debt by $53 million since fiscal 2023 began, even while funding $54 million in capital expenditures, $31 million in dividends, and $20 million in share repurchases. We anticipate solid cash flow through the remainder of the year and look to further reduce debt in the fourth quarter. I'll now spend a few moments discussing our outlook for the rest of 2023. Tom mentioned earlier that we're adjusting our outlook for the entire year because shoppers have kept showing reluctance during Q3 and Q4. Looking at the whole year now, our projection for net sales falls somewhere between $1.57 billion and $1.59 billion, which represents 11%-13% growth over the $1.41 billion we brought in during 2022. Within the 53-week 2023 period, the anticipated sales lift comes partly from having Johnny Was for all four quarters, plus low single-digit expansion across our current brands, fueled by gains in our direct consumer operations while our wholesale channel stays roughly level. The revised outlook we're giving you takes into account comparable store sales dropping by a low single-digit percentage, along with a weaker wholesale picture. Even so, for the entire year of 2023, we continue to expect a slight improvement in gross margin, and that includes what we'll see in Q4. We're looking at sales rising compared to last year, plus somewhat better gross margins, but those gains should get canceled out by higher SG&A — and that expense line is projected to climb faster than sales during every quarter of 2023. That said, in Q4 the pace should look closer to what we saw in Q3 rather than what happened in the first two quarters. Following what we started in Q3, we'll keep going through the income statement line by line and make careful cuts to costs where it makes sense, even as we keep putting money into the business and investing in what's ahead. On top of that, we're projecting Q4 royalty income to come in around the same level as a year ago. When we add all of this up, we're looking at an adjusted operating margin of roughly 14% for the entire year. We also expect interest expense to land at 6% for the full year, higher than before, following close to $5 million in interest expense during the first nine months. For comparison, full year 2022 interest expense was $3 million, since we carried no debt until we acquired Johnny Was in Q3. Additionally, we're anticipating an effective tax rate around 24%, which is up from 23% during 2022. When we factor in all these elements, our adjusted EPS outlook for 2023 now sits between $10.10 and $10.30, whereas the adjusted figure was $10.88 last year. This captures how a complete year of Johnny Was earnings is being outweighed by lower operating income from our current business lines, an increased effective tax rate, and higher interest costs. After comps rose 9% during Q4 2022, we're projecting high-single-digit sales gains for this year's fourth quarter. Two things lend a hand there: the additional week in the calendar and the stores we've newly opened. Working against that, as covered earlier, are softer comparable store sales plus a weaker wholesale environment. On top of that, we expect gross margins to tick up a bit, direct-to-consumer to make up more of the mix, and modest SG&A deleveraging, given that SG&A is expanding at a quicker pace than sales. Regarding interest expense, our projection for Q4 is that it will be lower than the figure we posted in last year's fourth quarter. This is due to the significant debt paydown we completed in 2023, along with an increased effective tax rate, as Q4 of 2022 saw benefits from certain favorable items we don't expect to see again in this year's fourth quarter. As for fiscal 2023, capital expenditures are anticipated to be about $80 million, compared with $47 million for fiscal 2022.

The figure is under what we previously projected, because some CapEx tied to our fulfillment center initiative is moving out of fiscal 2023 and into fiscal 2024. During last quarter's call, we noted that the higher planned CapEx figure covers money going toward physical stores, among them build-out work tied to roughly 35 sites spanning every brand, among them two new Marlin Bars plus around 10 additional Johnny Was spots. Several of those sites involve relocation and remodeling, and when you pair that with a handful of store shutdowns, we ought to finish the year with a net gain of roughly 22 full-price stores, of which about 5 net new sites arrive during Q4. Roughly half of the capital expenditure amounts planned for 2023 go toward these physical store sites. On top of that, we'll keep pushing forward with our spending on a range of technology systems initiatives. Last, we foresee only a small amount of initial capital outlay in Q4 tied to the multi-year fulfillment center initiative Tom discussed earlier; we foresee spending on that initiative carrying on through 2024 and 2025, and the bulk of that spending lands in 2024. We project the initiative's total spend at roughly $130 million. Our view on cash and liquidity remains quite favorable too. Having produced cash flow from operations of $126 million during 2022 — a figure that reflected an $85 million working capital increase — we look for a significant rise in cash flow from operations, reaching a level comfortably above $200 million across 2023. That degree of positive cash flow from operations gives us plenty of cash to cover capital expenditures, dividends, share repurchases, and continued paydown of our outstanding debt throughout the year. Even though SG&A investments will weigh on 2023 margins, these moves position us nicely for mid- to upper-single-digit top line growth and a long-term operating margin target at or above 15%. I appreciate everyone's time today, and at this point we'll open the call for questions. Shamali?

Hi there, good afternoon, and I appreciate you taking my question. Regarding Tommy Bahama, we saw that you replaced the usual Flip Side with a gift-with-purchase offer, something Lilly has apparently made work well. I'd like to know whether you believe that contributed to the weakness you mentioned in direct to consumer. And then, taking a broader view, I recall that during the previous quarter you brought up certain assortment problems, and that some of the newer items were selling more quickly than the older ones. Did any of those patterns carry over? Thank you so much, and enjoy the holidays.

All right. To begin with, regarding those promotional events tied to the Black Friday and Cyber Monday period — looking at what happened a year ago, the Flip Side actually wasn't launched during that weekend. The most recent time we ran it that way, as I recall, was 2020, and from that point on, we moved the Flip Side's beginning later and kept those events apart. What separated the prior year's weekend from the current one was that a year ago we offered a few discounts across entire categories. For instance, I believe we took 30% off everything in Island Soft during the prior year. This time around, we didn't do anything like that. We offered a few special value pieces, where we provided certain styles at highly attractive price points, though it was only a small number; after that, we ran the gift with purchase, a beach chair tied to a $300 spend, which incidentally did extremely well. We felt great about how that turned out, across both online and in store, which tends not to happen with gift with purchase — having it succeed in both channels. So that pleased us. Beyond that, Ed, we essentially still have the same pack cards, or gift cards, that we've offered for as far back as I can recall. And then there's the Flip Side, whose timing is close to where it has sat over the past few years. So what I'd say is that in Tommy, we are considerably less promotional than we were a year ago.

The novelty factor.

Yeah, and regarding that novelty factor, I'd say honestly, when you look across all our brands, what's fresh is drawing shoppers in more strongly in 2025. They're eager for something different. During the past 2 pandemic years or so, they stocked up on plenty of items, and now they're really excited about what's new. Luckily, we have plenty to offer them, so from that angle, I'd say our position is quite strong.

I really appreciate it. Enjoy the holiday season.

Thanks a lot. Same to you, Ed.

Thanks, that's helpful. So to start, you mentioned there's been some unevenness in the business during the fourth quarter up to now. I'm just wondering whether you've noticed any differences in how consumers behave when they shop in brick-and-mortar stores compared with e-commerce, and also whether you're seeing any variations from one brand to another?

Sorry, variations between what?

When it comes to physical store locations—

When it comes to every one of the—

online commerce.

Yeah, when you look at physical stores versus online. Ashley, what stands out most to us is that conversion rates, you know, they're dropping. That's the key distinction. Traffic, you know, in general, and it varies somewhat across the various brands and, and the channels. But the, the major story for me this year, and this is where you notice the caution or the more judicious spending from the consumer showing up, is that conversion rates have, have dipped a little from, you know, where they stood 1 year ago.

All right, that's helpful. Now for my second question, if we could switch gears quickly to emerging brands — you've clearly had some momentum in that area over the course of the year, and you've launched a few locations there as well. Could you give us a sense of where you believe you stand regarding the potential for rolling out more stores in emerging brands, and how you're viewing that opportunity over the longer term?

Sure. So at this point, within the emerging brands group, we have three brands where, as you know, we hold full ownership of the business, and they're included in our reporting — those three being Southern Tide, The Beaufort Bonnet Company, and Duck Head. Stores are currently open for two of those brands, and Southern Tide is up to-

15.

Right now I believe it's 15, and we intend to open additional ones; as for Beaufort Bonnet Company, 3 are currently operating, with a few others in planning; those remain at an early phase. What we're seeing pleases us, though we want to get the approach just right. Assuming we manage that and develop a retail model that performs well — and we strongly believe we can with both brands — then in my view they could quite readily support a store count comparable to what Lilly Pulitzer has. Geographically, I'd expect their footprint to align quite closely with Lilly Pulitzer's; they occupy a similar place when you consider price point and market positioning; so when I picture a Lilly-style count and think about 75, 80 locations over the longer term, that's quite simple to wrap your head around. Naturally, all of this comes with the caveat that we need a retail approach generating solid cash return on cash invested.

That's excellent, really useful, thanks, caller.

All right. Thanks, Ashley.

Hey there, good afternoon to you all. Tom and Scott, when you look at the situation right now and what you've observed, what portion of what's going on stems from the outside environment affecting the brands? And what portion do you attribute to product improvements that are in the pipeline and ought to give sales growth a boost? Then regarding the wholesale channel — which in my mind has always been quite small for you — what's your view looking ahead, and where are the chances to get that business back on stable footing? Thanks.

Yes. So regarding that first question, Dana, I don't want to come across as a company that constantly blames outside forces and never examines itself. The initial thing we check is: where can we do better? We have a list that's roughly six pages in length of items, lessons from this year that we'll bring into next year and, you know, attempt to make things better; but honestly, in my view the largest element is what's happening in the external market, and I don't believe we're alone in that regard whatsoever. If you examine the sector and the businesses we'd genuinely consider peers, I think most are experiencing comparable patterns. I think the largest element truly is a consumer who is more cautious and more judicious. Having said that, once again, we are examining things internally and exploring methods to improve; and we do this annually, regardless of whether business is strong or not so strong, we're continuously seeking ways to get better. And we've certainly observed, as we mentioned when answering Ed's question, that newness is performing very well and innovation is performing very well. We believe we're skilled at that, and we'll make certain we keep doing it. And then, when it comes to wholesale, Dana, we don't truly believe we've forfeited any ground whatsoever; and where we have solid information on it, how we perform at retail, our sell-through, so to speak, and our natural gross margin has been fairly strong. It's just that the retailers have somewhat reduced their orders for spring, and we're experiencing the impact of that. You know, from the perspective of brand health, we don't really object to that because we'd prefer they not be over-inventoried. But I think what will occur is they'll move into spring, and they'll be scrambling for inventory. And naturally, we'll do whatever we can to assist, but my guess is there will be a bit of demand left on the table.

Thank you.

Thank you, Dana.

Thanks, and good afternoon. I have a couple of questions. First, regarding the Q4 sales guidance, what does that assume for same-store sales, for organic growth, and how much should the extra week add to the top line? Second, on your outlook comments, I believe you said something about margin pressure in fiscal 2024 tied to store-opening investments. Does that mean that on top of the 14% margin you're expecting for 2023, we should model yet another year of operating margin decline? Thank you.

Sure, I'll take the first one. I wouldn't read this as an indication that operating margin will necessarily shrink. What it does mean is that margin will face some headwinds. At the same time, there will be factors working in our favor as well, such as lapping a full year of all the stores we opened during this year, plus the Johnny Was website. In the back half, we'll likely see the wholesale market get better, so I wouldn't rush to that conclusion just yet. I'll turn it over to Scott to go deeper on that. As for the fourth quarter outlook, that's a fair question, because it isn't only the comp — you also have the 53rd week, and then there's what's happening in wholesale. Scott can also try to help close that distance for you.

Yes. Mauricio, keep in mind that we said six Marlin Bars are set to launch in the coming year. The first of those will debut right at the very start of the year. That was one we expected to have in January. It's slipping later. But significant pre-opening costs will apply to the remaining five. As you know, pre-opening rent begins roughly 7 months ahead of the actual opening, so that's what happens when you have so many of them; still, we expect the 24 stores to help offset that impact. On the 53rd week, top line for that extra week should land in the vicinity of $25 million; and for comps, our fourth quarter plan assumes low single-digit comps. After that, the new units we opened during this year should contribute roughly $10 million in the fourth quarter.

Got it, that makes sense. Thanks a lot.

Hi there, thanks. This is Tracy Kogan, sitting in for Paul. I believe earlier you were discussing conversion, and I think on the prior call you noted a slowdown in August that was driven by conversion. What I wanted to ask is how your overall trends ended up playing out for the remainder of the quarter, and did conversion slow further from what you saw in August, or did it more or less level off? Also, what was your AUR for the quarter? Thank you.

Regarding conversion, Tracy, I'd say it's somewhat more of a continuation, honestly, of what August showed us. If you wanted to get really granular, I'm certain we could tease out a few distinctions; but I'd say it's really that same phenomenon August presented. And to be clear, it isn't as though conversion is falling off a cliff. It's simply below last year; and when you look at comp sales, that's really a result of traffic, conversion, and then how much they're spending. And to try to give you a solid sense, a clear sense, of what's happening, among those levers, it's really conversion that's, you know, that's dragging the numbers down somewhat; and then on the AUR, Brian, or...?

It's holding; it's holding pretty flat.

Yeah.

Understood. And after that — oh, my apologies.