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 during this call, including in the Q&A portion, might be considered forward-looking statements under the federal securities laws. Such statements aren't promises, and what actually happens could end up differing significantly from what those statements express or suggest. The key factors that might lead our 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 filings we make with the SEC, among them the risk factors in our Form 10-K. We're not obligated to revise any forward-looking statements. On this call, we'll also touch on some 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 under the Investor Relations tab on our site, oxfordinc.com. Let me now bring in 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 time, and I'll now hand things over to Tom Chubb.

Good afternoon, and thanks for being with us today. We're happy with how fiscal 2023 turned out — it stands as the second-best annual earnings result across the 82 years we've been in business. FY '23 also marks the close of a 5-year stretch in which our compound annual adjusted EPS growth came in above 18%; on top of that, cash flow from operations was strong at $244 million during fiscal 2023, which let us put money into organic growth as well as acquisitions, give capital back to shareholders through the quarterly dividend and buy back shares when opportunities arose, and retire nearly all of what we owed. During this call, we'll take you through how we've been performing lately and share where things stand with the plans we've laid out for fiscal 2024, which we think will put us in position to keep delivering sustained profitable growth and build long-term shareholder value for many years ahead. As for how the fiscal year finished, January came in somewhat weaker than we'd anticipated, so both the fourth quarter and the full year landed at the low end of what we had forecast, with fiscal 2023 sales of $1.571 billion and adjusted earnings per share of $10.15. That softness in January carried over into the new fiscal year, and February was down too since we were up against strong double-digit comps from February of last year; once we got to March, comparisons got easier, business has improved, and month-to-date we're running modestly positive on a comp basis; we see the choppiness we've been through as reflecting a somewhat unusual situation in which most economic indicators are actually fairly positive and yet consumer sentiment remains materially below where it stood during the 4 to 5 years before the pandemic. That muted consumer sentiment is showing up in shoppers who are able to spend but are being far more careful about what they spend on discretionary items like fashion apparel, which sits at the core of our business. What we've learned is that in times like these, when near-term demand is choppy, the best approach is to keep our eyes on the long-term opportunity and shore up the fundamentals of the business that built our strong foundation, and that's precisely what we intend to do in fiscal 2024. First, we'll redouble our efforts to ensure we have fresh, new differentiated product that gives the consumer a good reason to open her wallet. Second, we'll ensure we keep up the elevated, happy and optimistic messaging that represents each of our brands. Third, we'll ensure we stay diversified and creative with the media channels we use to try to get our brand messages across to the customer. And finally, we'll ensure our product is available to our customer when and where she wants it, including our own stores, e-commerce websites, restaurants and bars and the wholesale accounts. For every one of our brands, we've got plans in place for fiscal 2024 that address all 4 of those fundamentals. At Tommy Bahama, which is our largest brand, the priority is to keep building out and expanding our hospitality operation. That hospitality operation—covering our brand-new Tommy Bahama Miramonte Resort, our full service restaurants and bars, and our distinctive upscale, fast casual Marlin Bars—plays an essential role in what makes our brand successful. In the customer's mind, hospitality is what completes the Tommy Bahama dream. That's how it helps move the brand forward, bring in new customers, keep the ones we have and lift how much the brand's guests spend each year. As we've said before, when a store of ours is attached to one of our restaurant and bars, it almost always generates a larger share of its business in women's than the fleet average, and its sales per square foot beat the fleet average by a wide margin. Over the past several years, hospitality has contributed heavily to our achievement in expanding our women's business, and women's has consequently reached 36% of our total Tommy Bahama direct-to-consumer business. During the 2024 calendar year, our plans call for launching 6 new Marlin Bars, among them one at Winter Park Village in Florida, which opened in January, plus one at La Cantera outside of San Antonio, Texas, which opened in February. Both of these newest fleet additions have gotten off to a fantastic start. Another 4 Marlin Bars are scheduled for the back half of fiscal 2024, among them one at SouthPark Mall in Charlotte, King of Prussia Mall, which ranks among the nation's premier malls, The Oaks in Oklahoma City and the upscale Lakewood Ranch Community in the Sarasota, Florida area. 2024 brings the 65th anniversary of the Lilly Pulitzer brand. Plans that are sure to excite are already in motion for the brand, among them a capsule collection at a higher price point and a more elevated level celebrating the anniversary, which has sold extremely well at retail and leads us to believe we can widen the price continuum of our assortments. A number of exciting collaborations are also in the works, and several have already launched. On the product side, we've introduced a Lilly Pulitzer print wrapped MOC America Resort Cruiser, a special edition Lilly Pulitzer Natalie's Juice, a line of Pottery Barn home goods and a gorgeous capsule collection made together with Badgley Mischka. Lilly Pulitzer and Vogue have teamed up as well to create an exciting collection of collaborative media content under Vogue's Styled By Vogue banner. On the commercial side, Lilly Pulitzer continues to focus on shaking things up so the customer stays delighted and surprised. We shifted several of the promotional events we ran a year ago into the first and second quarters, so we anticipate Lilly Pulitzer's first quarter being materially smaller than last year, with the second quarter materially larger than a year ago. Our expectation is that this choice sets us up for a strong first half, though the way it falls across the 2 quarters won't match last year's pattern. At Johnny Was, we felt great about finishing up the bulk of integration work following the acquisition during fiscal 2023. As we move through 2024, lifting the profitability of that business becomes our priority. Boosting store productivity and sharpening how well and how efficiently our marketing performs make up the 2 core pieces of that improvement effort. Johnny Was posted a 10% operating margin last year — a solid figure that we think can be built upon in 2024 and stretched even further in the years to come. Our enthusiasm for the Johnny Was brand hasn't dimmed at all, and we see it playing a key role in our continued push to build long-term shareholder value. Turning to the Emerging Brands Group, and beginning with Southern Tide, we launched a number of stores during 2023 and picked up a number of our signature stores, which brought our total company-owned Southern Tide locations to 19 as the year closed. Several additional openings are planned for fiscal 2024, plus at least one store for The Beaufort Bonnet Company. For both brands, a 2024 priority involves generating strong results through their recently built retail store platforms. We're also thrilled that the iconic Jack Rogers footwear brand joined the Emerging Brands Group in late fiscal 2023.

Jack Rogers is a famous label built around one signature item. The years of the pandemic, along with those that followed, proved difficult for the Jack Rogers operation. Although Jack Rogers is going to be somewhat dilutive to earnings during 2024, we intend to dedicate this year to resetting the brand, tidying up inventory and getting the brand ready for success and profitability down the road. Last, across the whole enterprise, we will be putting in serious effort during fiscal 2024 on our new cutting-edge distribution center located in Lyons, Georgia, which is going to let us store and ship a greater amount of our product far nearer to the markets where a very substantial share of our business is done; this ought to let us place product into consumers' hands faster, refill our stores more rapidly and in the end permit us to conduct more business while carrying less inventory. The initiative additionally lets us draw on our lengthy history in the Lyons community and the outstanding workforce we have in that place. We think we can accomplish all of this and still keep shipping costs extremely competitive. We likewise have thrilling plans to look into chances to broaden our deployment of Artificial Intelligence throughout the enterprise. We currently use AI in a broad array of particular scenarios and believe we will keep uncovering additional use cases where AI can be applied to boost our efficiency and effectiveness. Turning to our forecast for fiscal 2024, as described above, we have outstanding plans for every one of our brands this year. Even so, we anticipate that consumer cautiousness will last across the whole year. The present operating environment has caused caution among numerous retailers, and consequently, we anticipate that our wholesale business will decline meaningfully in the first quarter relative to a very strong first quarter for wholesale a year ago. We anticipate wholesale will be positive versus the prior year for the remainder of the year, which will partly, though not entirely, offset the first quarter decline, meaning we will be down slightly in wholesale across the full year. Scott will give more detail shortly, but because of the wholesale decline, the cadence change at Lilly Pulitzer that I referenced a few minutes ago and the weak February, we anticipate the first quarter will be materially beneath last year's first quarter results. Across the full year, we anticipate mid-single-digit top line growth, with new stores and modestly positive comps offsetting the headwinds I have described. On the profitability side, gross margins will be flat to up slightly, while we will see some pressure at the SG&A line stemming from the effects of inflation across expense categories as well as the new stores, Marlin Bars and other investments we are making for the future. We take great pride in the portfolio of brands we have assembled and the strong connections we've forged with our customers. Above all, the truly remarkable group of individuals who make these things happen daily is something we take immense pride in. Our dedication, as it has always been, is to hit the goals we've set for the near term, while keeping our attention on the efforts that will fortify our brands and the core of our business for years ahead. At this point, I'm going to hand things over to Scott, who can provide more detail regarding 2023 and what we intend to do in 2024. Scott?

Thanks, Tom. Like Tom said, we're happy to share that our top line and adjusted bottom line came in inside the guidance range for the fourth quarter as well as the entire fiscal year 2023. Even with the obstacles presented by a tough consumer backdrop, our operating groups kept their attention on the things they could influence and turned in strong performance, doing so against positive DTC comps of 9% and 17% for Q4 and the full fiscal '22, respectively. During 2023, consolidated net sales rose 11% to $1.57 billion, which includes a $130 million sales increase for Johnny Was, a brand we owned for 19 of 52 weeks in fiscal 2022. Net sales for 2023 also reflect a benefit of roughly $16 million from the 53rd week, which produced $10 million in additional gross profit. Taken together, Tommy Bahama, Lilly Pulitzer and Emerging Brands posted growth across the majority of our full price distribution channels, with gains of 6% in restaurants, which have performed strongly throughout the year, 3% in full price e-commerce, and 1% growth in a wholesale channel that was especially difficult. Full price bricks and mortar came in roughly flat versus 2022. On top of that, we saw sales increases of 5% in our outlets and 3% in Lilly Pulitzer e-commerce, with flat sales, both gaining from consumers in search of deals and promotions. Along with higher sales, we managed to grow adjusted gross margin 50 basis points to 64%, while at the same time bringing inventory balances down significantly. The rise in adjusted gross margin came from a full year of higher margin sales from Johnny Was, a reduction in inventory markdowns and lower freight costs. Those gains were partly offset by more promotional sales at both Tommy Bahama and Lilly Pulitzer. Adjusted SG&A expenses reached $807 million, versus $684 million a year earlier, with roughly $76 million, or 62%, of that increase attributable to a full year of SG&A from Johnny Was. The 2023 figure also includes about $11 million of incremental SG&A tied to the 53rd week. Throughout 2023, we took on higher costs tied to increased deployment costs, advertising costs, variable costs and other expenses needed to support sales growth and our larger store footprint. As a result, we generated $216 million of adjusted operating income, or a 13.8% operating margin, compared with $234 million, or 16.6%, in 2022. The drop in adjusted operating income shows planned growth in SG&A investments in our people and business running ahead of revenue growth. We also took on start-up losses connected to the Tommy Bahama Miramonte Resort and experienced modest declines in royalty income stemming from lower income from our licensing partners. Beyond operating income, we took on more interest expense because of higher interest rates and higher average debt levels, though we gained from a slightly lower adjusted effective tax rate. Taking all of that into account, we delivered $10.15 of adjusted EPS, comfortably inside our guidance range. As part of the annual goodwill and indefinite-lived intangible asset impairment test we carried out during the fourth quarter of fiscal 2023, we determined that the fair values of the Johnny Was goodwill and trade name were below their respective carrying values, which produced an impairment charge totaling $111 million. That charge mirrors the macroeconomic difficulties every one of our brands has encountered since we acquired Johnny Was in September 2022, along with this substantial and extended rise in interest rates. Management firmly believes in the strength and long-term potential of the Johnny Was business notwithstanding these difficulties, and we are working hard to find ways to drive growth in the business and control costs. Now I'll turn to our balance sheet, starting with inventory. In 2023, on a FIFO basis, we managed to bring inventories down by 18%, or $51 million, compared with the prior year. At the same time, we were able to grow adjusted gross margin, as mentioned earlier. The lower inventories came about because of our ongoing inventory discipline, plus a reduction of the extra inventory we had previously built into our supply chains during 2022 to guard against possible disruptions that were mostly worked out in 2023. Regarding liquidity, we leveraged our strong cash flows to pay down a significant amount of the borrowings that had funded the Johnny Was acquisition. We ended 2023 with $29 million of borrowings outstanding under our revolving credit facility, a drop of $90 million from the $119 million of borrowings we had at the start of the year. Our cash flow from operations of $244 million in 2023, versus $126 million in 2022, let us lower outstanding debt while also paying for $74 million of capital expenditures, $42 million of dividends, $20 million of share repurchases and $12 million of acquisition-related expenditures tied to the purchase of Jack Rogers and 6 former Southern Tide signature stores. I'll now take a few moments on our 2024 outlook. For the full year, net sales should land between $1.63 billion and $1.67 billion, which is growth of 4% to 6% against sales of $1.57 billion in 2023. The higher sales plan for 2024 encompasses growth across all brands, with growth in the mid-single-digit range for Tommy Bahama and Lilly Pulitzer and in the low double-digit range for Johnny Was and Emerging Brands. That growth is made up of full-price brick-and-mortar, e-commerce channel growth, growth in food and beverage and outlets; we expect wholesale sales to face headwinds in 2024, with roughly $10 million less in wholesale sales than in 2023, with declines in the first quarter partly offset by modest growth over the rest of the year. We expect gross margins to rise slightly in 2024, including an anticipated higher share of full-price direct-to-consumer sales and a lower share of wholesale and all price direct-to-consumer sales. This rise in sales, along with better gross margin, should be counterbalanced by greater SG&A. That expense line is projected to expand faster than sales during 2024, largely because of spending on personnel, IT and marketing, plus money put into extra brick-and-mortar sites slated to open next year, among them 5 new Marlin Bars. We anticipate our net brick-and-mortar total will grow by around 25 locations. As Tom noted, during the fourth quarter of 2023 we bought the Jack Rogers brand. Adding this iconic name, with its iconic product, to our portfolio is something we're thrilled about, and it moves us into the footwear category. We searched carefully for the proper opening in that space and feel this is a natural match, since it sits among stable, happy, differentiated lifestyle brands. Even though we have faith in what this brand can become, we do expect it to produce an operating loss of roughly $2 million across 2024 while we reset and refocus the business. In addition, we foresee interest expense coming in lower, at $3 million for the year, versus $6 million in 2023, along with greater royalty and other income, chiefly from a full year of the Tommy Bahama Miramonte Resort; we likewise expect an adjusted effective tax rate that is higher, at about 25%, against 23% in 2023, a figure that gained from certain favorable items unlikely to repeat in 2024.

When we weigh all of that together, we're looking at a slight decline in operating margin versus where we landed in 2023. For 2024, our adjusted EPS should come in somewhere between $9.30 and $9.70, compared with $10.15 on an adjusted basis last year. The drop reflects lower results across our businesses and a higher effective tax rate, though those pressures are partially cushioned by less interest expense and more royalty and other income. Turning to the first quarter of 2024, we're projecting sales of $395 million to $415 million, down from $420 million in the same period of 2023. Looking ahead to the first quarter, the expected drop is driven primarily by wholesale revenue running somewhere in the range of $15 million to $20 million below what we saw in Q1 of 2023. That channel continues to be soft. On top of that, we're up against a tough comparison since we ran a Lilly Pulitzer promotion offering 30% off during last year's first quarter, and there's no repeat of that this time around. February also got off to a sluggish start across our direct-to-consumer businesses, though things picked up in March. Several other items are also playing into the numbers: gross margin holding steady, some deleverage on SG&A, and interest expense coming in about $1 million lower — all of which will shape how the first quarter turns out. Even so, we anticipate an effective tax rate of roughly 25%, which would match what we saw in Q1 2023. Based on that, we're projecting adjusted EPS for the first quarter to land somewhere between $2.60 and $2.80, versus $3.78 during the same period in 2023. Turning to what we plan to invest in 2024, I want to take a moment to walk through our capex outlook. For fiscal 2024, we're looking at capital expenditures of about $200 million, up from $74 million in fiscal 2023, and roughly $100 million of that relates to our major multiyear effort to construct a new distribution facility in Lyons, Georgia, which will boost the direct-to-consumer throughput capacity across our brands. The rest of our capital spending goes toward carrying out our Marlin Bars pipeline, which includes five locations slated to launch during fiscal 2024, along with adding more stores for Tommy Bahama, Lilly Pulitzer, Johnny Was and Southern Tide, plus bigger investments in the various direct-to-consumer technology system initiatives we have underway. We anticipate that this higher level of capital expenditure will ease back in 2025 and beyond. Beyond that, we feel good about where our cash and liquidity stand. We're projecting very robust cash flows from operations, which leaves us plenty of capacity to cover the investments I just described as well as a 3% bump to the quarterly dividend we pay. I appreciate everyone's time today, and now we'll open the call for questions. Betsy?

I appreciate the detail you provided regarding how the consumer is doing and their current situation. Could you expand a bit further on what you observed from January through February and then into March? I'd like to know whether any differences showed up across brands. Also, do you believe weather had any effect, and what is behind the uptick as we moved into March?

Thank you for asking, Janine, and we're glad you joined the call today. As we mentioned, things were weak during January and February. A few brands diverged somewhat, yet the softness was felt by essentially everyone, and my sense is that weather likely contributed to some degree, though our view is that it had more to do with how consumers feel and their position along with their readiness to open their wallets, as we described in our remarks.

On top of that, the comparisons we face versus last year are really tough. Both January and February were up against quite strong figures from twelve months earlier. That means, in our view, we're confronting the hardest year-over-year comparisons during this period, and those comparisons began to ease starting in March and continuing afterward. As a result, we remain hopeful that we can still achieve positive comps for the full year, even if only by a slight amount.

Great. Now, regarding the wholesale channel, you mentioned it declined in Q1 and then was set to improve in Q2. I'd like to get a sense of whether that lines up with what you'd expected. I'm simply wondering if you're detecting any shift in attitude among your wholesale partners, or if this matches your prior outlook.

I'd say I've been fairly careful for some time now. Perhaps it's that — they've shown a bit more caution than we'd anticipated during the later stretch of this year; but the positive thing, Janine, is that our wholesale results are actually pretty solid. Among those accounts providing us data, most of the major retailers give us solid insight into how we're doing on the floor. And those figures genuinely look pretty strong. So over the longer haul, we're confident we aren't giving up any ground whatsoever. As a matter of fact, we're beating our competitors on the floor, and once retailers grow somewhat more hopeful about their position in their overall business, we'll be compensated for how we're performing right now. We're also hopeful. This isn't truly part of the plan, but we could pick up a bit of in-season business. And finally, I'd say we discuss the caution frequently, but I believe much of it, or at minimum some portion of what's happening, is that retailers are bringing their inventories back into balance; after the pandemic, there was a stretch when they were — owing to all the supply chain problems, they were purchasing too much, perhaps somewhat, sort of just-in-case inventory since they couldn't tell what they'd receive or when it would arrive; and I believe most vendors are now shipping largely on time and complete. So that sort of safety stock purchasing is happening less; thus we see this as a short-term blip, Janine; we truly don't believe we're losing ground in wholesale. And as a matter of fact, we think we're likely growing stronger in that area.

And looking back at the first quarter of last year, Janine, wholesale was exceptionally robust for us. In an industry where things were generally heading the other way, we actually posted gains during Q1 of last year, as I recall. So once again, we're measuring ourselves against a really powerful wholesale stretch from the prior year.