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 on this call, including during the Q&A, could be considered forward-looking statements under federal securities laws. These statements aren't promises, and what actually happens may end up being quite different from what's expressed or suggested in them. The key factors that might cause our operating results or financial condition to come out differently are laid out in the press release we put out earlier today, as well as in the documents we've filed with the SEC, and that includes the risk factors in our Form 10-K. We're not taking on any obligation to revise these forward-looking statements. Also, throughout this call we'll be talking about some non-GAAP financial measures. A reconciliation between non-GAAP and GAAP figures is available in the press release from earlier today, and you'll find it posted under the Investor Relations tab on our website, oxfordinc.com. At this point, let me introduce who's joining us on the call. Here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO and COO. I appreciate everyone's attention. And with that, I'll hand things over to Tom Chubb.

Brian, thanks. Good afternoon, everyone — I'm glad you could join us. I'll start by walking through how we're carrying out our plan for Q1 of fiscal 2024, and then share what we're currently anticipating for the balance of the year. Because of our strong brands and a committed team that works hard to deliver on our strategy, we were able to land sales and adjusted EPS within the guidance ranges we'd set for Q1, despite persistent macroeconomic headwinds and softer consumer sentiment. Although the majority of economic indicators are still reasonably favorable, consumer sentiment has fallen significantly since the beginning of this year, which has caused shoppers to be more hesitant than we initially expected when it comes to discretionary purchases like fashion resort apparel — the heart of what we do. Net sales declined by $22 million, or 5%, compared with the first quarter of fiscal 2023. Most of that net sales decrease comes from a $17 million drop in wholesale sales year over year for Q1, which we had expected since we were up against a very strong first quarter of fiscal 2023. We continue to enjoy a very strong position with our largest retail accounts, and sell-through performance remains excellent. Even so, in response to softer consumer confidence and the weaker demand that followed, most of these partners took a highly cautious approach to inventory commitments for spring and summer, which shows up in our Q1 sales numbers. Looking ahead, thanks to the consistently strong results we're delivering with these key partners, our future order book is in good shape, and we expect to make up about 50% of the wholesale revenue we lost in Q1 over the other three quarters this year. A second factor behind the sales decline was the change in the timing of promotions and events for Lilly Pulitzer that we discussed back in March. So when you add all of that up, Lilly's Q1 sales were down compared to the prior year, yet we expect Lilly Pulitzer's Q2 sales to come in much higher than what we saw last year. The third thing driving the decline in sales year over year was a negative 7% comp across our direct-to-consumer businesses, since the consumer we're still running into is watching her spending more closely than was the case 18 to 24 months back. Remember that in last year's first quarter, we posted a positive comp in the double digits. There's still heightened interest in our brands — traffic grew at a double-digit rate — but lower conversion has canceled that out, and the negative comps we're seeing are a reflection of consumer caution. As we look toward the rest of the year, on an encouraging note, our second quarter-to-date comps have bounced back relative to the first quarter, turning positive versus last year, and have improved sequentially. Although that gives us a reason for optimism, given the declining consumer sentiment and the still choppy market, we're lowering our comp assumption for the remainder of the year. Even with the obstacles we're facing, our outlook still calls for top line growth across every brand, gains in every direct-to-consumer channel and distribution, plus positive comps for the entire year. Looking at cash flow, we expect 2024 to be strong as well, and we'll continue carrying out the core elements of our long-term plan, including investing in what lies ahead for our company. Thanks to those investments, we'll be positioned to sustain profitable growth along with solid cash flow over time. A product that stands out and draws people in is always central to how we approach our strategy. With gorgeous, one-of-a-kind offerings like the Artist Series items we make in Tommy Bahama, we continue bringing joy to those who buy from us. Each year, we celebrate a fresh set of artists through a limited-edition line that honors all that Island Life represents. During the 2024 Artist Series, we picked seven artists from various parts of the world and invited them to design customer pieces that captured the essence of Tommy Bahama. The resulting shirts, dresses, and other items bring joy to longtime Tommy Bahama fans by offering them genuinely unique garments, while also attracting new buyers to the brand through the appeal of the designs' craftsmanship and the remarkable backgrounds of the artists who made them. The highly elevated Lilly Pulitzer Capsule collection for the 65th anniversary, which we introduced earlier this year, serves as another excellent illustration. The response to that capsule was overwhelmingly positive from shoppers, and the sales results it delivered have created room for us to pursue further expansion—specifically, extending our assortment down the road into more premium offerings with larger price tags. Putting money toward growth down the road also matters a great deal to our broader strategy, so our rollout of additional shops and Marlin Bars locations remains on track this year. Across the quarter, we launched 7 new shops: 2 under Tommy Bahama, one of them a brand-new Marlin Bars, 3 under Johnny Was, and 1 apiece under Southern Tide and The Beaufort Bonnet Company. With these additional sites, we're reaching further and can bring our stunning shops and outstanding in-store experience to a larger customer base. Over the rest of the year, our plan is to launch 4 additional Tommy Bahama Marlin Bars along with another 15 to 20 locations across our brands. That pipeline positions us nicely for revenue growth in 2025 and afterward. On top of that, we're moving along very well in shifting our distribution capacity to achieve better balance between the Eastern Seaboard and the West Coast. As we entered the year, our West Coast capacity exceeded what we needed, while the East Coast lacked enough to handle every present and upcoming requirement along the Eastern seaboard. We've shut down a portion of that West Coast capacity, cutting costs, and we're actively constructing a new distribution site in Georgia. That facility will help us serve and expand a strong existing customer base across the Eastern and Southeastern regions of the country. When it's complete, we'll be in a much stronger position to satisfy current demands and support future growth, all while maintaining highly competitive distribution expenses. Even as we work through a consumer market that isn’t as strong, our attention stays on the long term and on making sure we can generate lasting, profitable growth. As ever, we feel tremendous appreciation for our outstanding team and everything they contribute to our success. Thank you for listening. At this point I’ll hand things over to Scott, who has more specifics. Scott?

Thanks, Tom. We finished the first quarter of fiscal 2024 with results on both the top and bottom lines that landed inside the guidance range we had given. The macro backdrop remains uncertain and is hitting every distribution channel, as Tom mentioned, and we were up against wholesale growth as well as direct-to-consumer comps of 10% from the first quarter of 2023. Even so, our team remains focused on carrying out our strategies and delivering for shareholders. Consolidated net sales for the first quarter of fiscal 2024 fell 5% to $398 million. Looking at Q1 2024, net sales were down pretty much everywhere in our full-price channels. Wholesale was especially tough — it fell $17 million, or 16%, which was in line with what we'd anticipated. E-commerce came down $6 million, or 5%, and full-price bricks and mortar retail slipped $3 million, or 2%. The bright spot that continues to stand out is Food and Beverage, which grew a solid 8%. Outlets also did well, up 6%, boosted by customers chasing promotions and bargains. Also stemming from shoppers hunting for discounts and special offers, our adjusted gross margin came in at 65.4%, which is 40 basis points tighter, and that decline came about because a bigger portion of net sales fell during promotional periods at Tommy Bahama, Lilly Pulitzer and Johnny Was. The deal-heavy retail environment is what's behind the lower adjusted gross margin, although two things softened the blow: fewer inventory markdowns in our Emerging Brands group, plus a different sales mix, given that wholesale made up a smaller piece of overall sales in Q1 of '24. On the adjusted SG&A side, expenses climbed 5%, reaching $210 million, compared with $200 million during the same period last year. During Q1 of 2024, our expenses went up because of money we've recently put into the company and continue to put in — mostly related to 27 new physical stores that have launched since Q1 of last year, plus the addition of the Jack Rogers brand that we bought during Q4 of fiscal 2023. On top of that, we've begun paying costs for some of the approximately 15 to 20 extra physical stores we plan to add, including 4 Marlin Bars locations expected to launch at some point later in this fiscal year. Adjusted royalty income also came in a bit higher, thanks to the Tommy Bahama Miramonte Resort & Spa. All of that produced $57 million in adjusted operating income, equal to a 14.4% operating margin, versus $83 million, or 19.8%, a year ago. The decline in adjusted operating margin — or operating income — mirrors the SG&A investments against a tough consumer climate for sales and gross margins. Beyond operating income, our effective tax rate also edged up modestly, which was offset by reduced interest expense thanks to our continued debt paydown. Taking everything together, we delivered $2.60 in adjusted earnings per share. Now I'll turn to our balance sheet, starting with inventory. In the first quarter of fiscal '24, we managed to bring inventory down 10%, or $26 million, versus a year earlier on a FIFO basis. Inventory levels declined thanks to our continued discipline in that area, along with our efforts to reduce the surplus stock we'd previously introduced into supply chains as protection against potential disruptions—risks that have largely subsided now. On the liquidity side, we continue directing our robust cash generation toward debt reduction. At the end of fiscal '24's first quarter, we had $19 million in borrowings outstanding under our revolving credit facility. That's down $10 million from the $29 million we carried at the end of fiscal '23, and represents a $76 million decrease relative to the first quarter of 2023. During the first quarter of fiscal '24, operations produced $33 million in cash, which allowed us to reduce what we owed on our debt and still cover $12 million in capital expenditures plus $11 million in dividends. Let me now spend a little time walking through what we expect for 2024. After a 7% decline in comparable sales during Q1 2024, our quarter-to-date comps for Q2 are now in positive territory, since we're starting to lap the more restrained spending behavior among consumers that first emerged partway through last year's first quarter. We expect this upward comp momentum to persist across the remainder of the year, delivering positive comps for the full year — that includes mid-single-digit comps in Q2 and the back half, as we move into a stretch where we're comparing against negative comps from a year ago. Our assumptions are more conservative than what we originally laid out in March, so we've adjusted our sales outlook to match. Looking at the entire year, our projection for net sales is now somewhere in the range of $1.59 billion to $1.63 billion, which represents an increase of 1% to 4% over the $1.57 billion we recorded in 2023. Under our revised 2024 sales plan, every brand is still anticipated to grow, driven by new store openings and positive comps for the full year, which will make up for a slight decrease in wholesale across the full year. Additionally, we anticipate that all direct-to-consumer channels will expand, and that includes full-price brick-and-mortar, e-commerce, food and beverage and outlets. As for wholesale sales, which dropped considerably in the first quarter just as we had anticipated, we expect them to see modest growth for the rest of the year when compared with the prior year, while the full fiscal year '24 should see wholesale sales come in roughly $10 million lower. Although our fall order books remain open, they are showing better trends than what we saw in earlier years, and the inventory positions at key department stores have gotten better. For 2024, we now expect gross margins to come in roughly even with last year. As we had anticipated, heavier promotional activity involving our brands will cancel out the margin gain that comes from having a smaller share of wholesale sales. Revenue growth will stay about level, and the margin gains we see getting wiped out by rising SG&A, which we expect to climb faster than sales during 2024. The main driver there is what we're putting into the business: roughly 25 net new stores, five additional Tommy Bahama Marlin Bars, ongoing IT spending, and the addition of Jack Rogers. On top of that, as we mentioned last call, Jack Rogers — the brand we acquired in the fourth quarter of fiscal 2023 — should post an operating loss of about $2 million in 2024 as we work to reset and refocus that business. Looking further ahead, we expect interest expense to fall by $2 million across the year, compared with $6 million in 2023, alongside higher royalty and other income, mostly because the Tommy Bahama Miramonte Resort will be contributing for a full year. On top of that, we're projecting a higher adjusted effective tax rate of roughly 25%, up from 23% in 2023, since that year benefited from some favorable items we don't expect to see again in 2024. When we factor in everything we've discussed, we expect a slight drop in operating margin compared with where we landed in 2023. For 2024, our current outlook puts adjusted EPS somewhere in the range of $8.60 to $9, which compares with adjusted EPS of $10.15 last year. The reason: softer results across our businesses, plus a higher tax rate, are only partially cushioned by lower interest expense and by gains in adjusted royalties and other income. Turning to the second quarter of 2024, we're projecting sales of $430 million to $450 million, versus $420 million in sales for the same quarter of 2023. On top of that, we expect gross margin to shrink by about 50 basis points, and we look for the same trend we've been seeing, where a bigger share of sales comes during promotional events. SG&A deleveraging, $1 million of reduced interest expense, an effective tax rate near 24%, and royalty and other income that is flat. We anticipate this yielding second quarter adjusted EPS between $2.95 and $3.15, against $3.45 during 2023's second quarter. To expand on the investments we are making during 2024, I want to briefly cover our revised CapEx outlook for the rest of the year. We've updated our cash flow and timing estimates for the aligned shortage distribution center project, and we've also made changes to some of our other capital projects. As a result, we've reduced our capital spending outlook for fiscal 2024. We now expect it to come in at approximately $170 million, compared to $74 million in fiscal 2023. Around $90 million of that is connected to a major multiyear initiative: building a new distribution center in Lyons, Georgia. That facility will expand the direct consumer throughput capabilities of our brands. The rest of our capital expenditures go toward rolling out our pipeline of Marlin Bars, adding more stores across Tommy Bahama, Lilly Pulitzer, Johnny Was, Southern Tide and The Beaufort Bonnet Company, and putting more money into our various direct-to-consumer technology systems initiatives. We expect this higher level of capital spending to ease up in 2025, then come down even more in 2026 and later on, after the Lyons, Georgia project wraps up. Our view on cash and liquidity is also favorable. Operating cash flows ought to be quite robust, leaving plenty of capacity to cover the investments we mentioned earlier, the dividend we pay each quarter, and paying off what's left of our debt. We appreciate you spending time with us today, and now we'll open the line for questions. Shamali?

I was just hoping you might give us a bit more detail on the patterns we're seeing across brands within the second quarter guidance, and also anything brand-specific regarding how things looked as we exited the first quarter? Then I've got one more question.

For Q2, every one of our brands has definitely gotten better, and we anticipate positive comps and are currently posting positive comps. during the second quarter so far. So we're looking for something in the mid-single-digit positive range. It has definitely picked up steam as the quarter has progressed, with June coming in stronger than May.

As Scott mentioned when he spoke earlier on this call, during Q1 the comparison was against a 10% gain in the prior year, while in Q2, if I recall correctly, last year came in at negative 5%; that makes for a softer comparison, yet we're performing well against it up to now, and we feel good about what lies ahead.

All right, that's helpful. Now, turning briefly to gross margins — you mentioned that some contraction is anticipated for 2Q, and there was a bit in 1Q as well, yet your guidance for the full year is flat. If we work backward from that, it seems you expect some expansion during the back half. Could you walk us through how that takes shape? And any detail on what's behind it would be useful too.

Sure. Part of it, I'd say, is that many of these new stores are going to be — particularly during the fourth quarter — up and running. So my sense is that our direct business, along with the promotion — the level of promotions ought to be closer to like-for-like, rather than running somewhat higher through the first half.

I'd like it if you could go into a bit more detail regarding the wholesale segment. From what I gather, it's more or less tracking what we saw in Q1, and you now anticipate growth coming back across the rest of the year; even so, I'd really like to know more about what your wholesale partners are telling you. And along those lines, perhaps you could say a little more about where extra door possibilities exist, and the chance for new door expansion at both Tommy and Lilly?

All right. Thanks, Janine. I believe that, as we laid out in March and it played out — naturally, we enjoy fairly strong visibility since the bulk of wholesale gets booked ahead of time — but in last year's first quarter, we had an exceptionally strong quarter on the wholesale side; most of the market didn't, yet we did. That left us up against a difficult comparison; after that, it truly came down to, in our view, retailers acting quite cautiously, and once they perceived weaker consumer demand, they simply didn't want excess inventory. So they paused their forward orders, which produced the $17 million decline versus the prior year that we recorded. Having said all that, throughout, our retail performance has remained rather strong; because of that, and with their inventory levels now looking to be in fairly healthy condition. The forward order book appears very solid, and we anticipate recovering, I believe, roughly half of that Q1 shortfall across the remainder of the year. Regarding door expansion, I believe an opportunity exists for us at Lilly Pulitzer — we have the chance to add doors; that is already underway and will continue over the coming 2 years, in my view. Through that route, I think we can expand the wholesale business. At Tommy Bahama, it's likely somewhat more about generating higher dollars within the doors we already have, along with a certain amount of door expansion potential too. And then there's the ongoing expansion of our women's wholesale business at Tommy Bahama, which has genuinely been a standout across the last 2 years, though I believe there's still room for us to grow. So we're fairly optimistic on wholesale. It remains — we will be a business led by direct-to-consumer, and so will each of our brands, yet we firmly believe wholesale matters greatly to a healthy brand. And given where we stand today and how we collaborate with our wholesale partners, we believe growth there is achievable.

Great. And perhaps just one additional item. You mentioned consumer cautiousness somewhat, and it sounds as though that has only intensified throughout the year. I know your customer is really drawn to newness, particularly Tommy Bahama. Do you believe you have the appropriate assortment to provide that newness, or is there anything we ought to anticipate regarding how you may shift the merchandise in order to accommodate what they are seeking in this climate?

Excellent question, Janine, and I do believe newness continues to truly connect with the consumer. And honestly, that's something you'll hear from plenty of others in our industry as well, but it's what the shopper wants. I'd say another major chance we have involves talking about things company-wide and speaking a bit more broadly; however, we've done a great job addressing the very casual side of what we offer; that means athleisure items and lounge items are handled well, and we're also handling occasion wear well. Where I believe we — the chance we have is with a bit of that middle segment, meaning the everyday items you might wear to work, or perhaps out to dinner with friends. My feeling is that our current variety is somewhat lacking. I expect improvement on that front as the months pass, plus we have solid new items on the way. So when we view things from an enterprise standpoint once more, our selection should please us more toward the end of the year. During spring, I'd say it was acceptable, though it strengthens going forward.

Starting with the revised sales guidance. What I'd like to get clear on — I believe you said comp sales should rise by a mid-single-digit amount in Q2. And my understanding is that applies to the remaining months too, or at least the back half. So what I'd like to know is what the earlier outlook looked like, since you brought the sales guidance down? And also, are there any differences worth pointing out regarding which parts of the brand portfolio are underperforming versus overperforming?

Yes. Our initial guidance had it 2 points higher. And across the full year, we anticipate finishing with a comp that's slightly positive; so we essentially offset that Q1 negative, whereas previously we were nearer to mid-single for the year, and now we sit more in the low single range for the year.