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

Thanks, and good afternoon, everyone. I want to start by reminding those joining that some of what we say on this call, including during the Q&A, could count as forward-looking statements under the federal securities laws. Such statements aren't promises, and what actually happens could differ substantially from what those statements express or suggest. The key factors that might cause our actual 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 file with the SEC, among them the risk factors in our Form 10-K. We're not obligated to revise any forward-looking statements. We'll also be talking about some non-GAAP financial measures today. A reconciliation between non-GAAP and GAAP financial measures appears in that same press release from earlier today, which you can find under the Investor Relations tab on our site, oxfordinc.com. Now let me introduce who's joining us. Here with me are Tom Chubb, our Chairman and CEO, and Scott Grassmyer, our CFO and COO. I appreciate your time, and with that, I'll hand things over to Tom Chubb.

Good afternoon, and thanks for being here with us. I'll begin by covering how our plan for the second quarter of fiscal 2024 is being executed, along with what we now anticipate for the rest of the year. Through the second quarter, we kept achieving great strides toward our long term strategic objectives, yet we came up short on our near term financial targets. For the quarter, sales came in at $420 million and adjusted EPS was $2.70, both beneath our guidance range, largely because the consumer kept pulling back. That pullback got worse sequentially over the quarter, matching a drop in consumer sentiment to an eight-month low in July, and that pattern has carried on into August and the beginning of our third quarter. Although the majority of underlying economic indicators are still fairly strong, the buildup of several years of inflation could be starting to affect the consumer. At the same time, the second quarter featured a number of national and global noteworthy events that caused the consumer to be more distracted at various moments during the summer. A few things, in our view, likely made these challenges worse for us in particular. To start, we focus on wealthier shoppers aged 45 and older, a group that reacts more strongly to news coverage and market swings. Next, we have significant presence in Florida — that state accounts for more than one-third of our physical store operations and expanded extremely quickly once the pandemic faded, though growth has since cooled as the new normal takes hold. Last, we made certain errors in buying and selling, such as getting assortments wrong and mistiming when promotions ran. What we've seen in terms of the deceleration in our business comes down to lower conversion, even though traffic levels have stayed solid. That tells us shoppers remain quite engaged with our top brands, yet they're hesitating at the point of purchase. When we look at the broader market, there are two things consumers are still reacting well to: newness and value. This quarter, we got a robust full-price reaction on fashion as well as on fresh and differentiated items, whereas demand for core offerings was softer. Value also drove a response from shoppers during the period — a larger share of our sales came through promotional events and outlet locations than was the case in the second quarter a year ago. Off-price sales made up more of our mix than we'd anticipated, and that weighed on gross margin. Combined with revenue that came in under our forecast, this pushed operating margin, operating profit, and in the end EPS all short of what we'd planned. The key point is that our balance sheet is still in solid shape. By the time the quarter closed, our inventory levels had fallen compared with the same period last year. At the same time, healthy cash generation let us keep putting money into what comes next for the company — that includes our store pipeline and the distribution center project in Lyons, Georgia, which Scott will walk through in a moment — as well as eliminate our debt and give cash back to shareholders straight away via our quarterly dividend. Looking at the rest of the year, we anticipate shoppers will remain more hesitant, so we have lowered our outlook for the full year. Our strategy for reaching the targets we've laid out hasn't changed: we protect the lasting strength and identity of our brands by avoiding anything that damages them or amounts to a short-term reaction to current conditions. At the same time, we'll build excitement and energy behind our brands during the back half through specific initiatives, including new lines such as the Tommy Bahama Indigo Palms range of denim and denim-adjacent pieces, which we brought to market early in Q3. That launch has drawn a strong initial reaction. Indigo Palms spans a variety of styles for men and women alike, and this initial win is feeding our confidence about how it can help us keep building and expanding our business ahead across both our direct channels and wholesale. Giving our guests a fully on-brand assortment of Tommy Bahama product suited to colder temperatures strengthens our capacity to stay relevant during the cooler months, especially out west, in the Midwest, the Mid-Atlantic and the Northeast. Over in the denim space as well, Johnny Was is teaming up with Sasson Denim, tapping into nostalgia for the original premium denim label and rolling out a gorgeous marketing campaign with Lily Aldridge serving as the face of the brand. A campaign of this kind is uncharted territory for us, and we're eager to see what we take away from it. On the value front, we'll once more safeguard our brands' integrity, yet inside that boundary provide abundant chances for customers to receive great value for their dollars in ways that suit the brands. A few illustrations include the seasonal Lilly Pulitzer flash sale, running at this very moment, plus our holiday marketing programs featuring special value items, gift with purchase, gift cards, bounce-back offers, and numerous others. Beyond our emphasis on top-line efforts, our second half will bring attention to operating margin, with strong interest in chances for SG&A reductions. Take, as an example, the funds we committed to relocating Johnny Was distribution center operations out of costly facilities in Los Angeles and into Lyons, Georgia — a move that is going to produce substantial reductions in operating costs, and Scott is going to walk through that in more detail in a bit; in the same way, we will continue examining each area of the company for opportunities to reduce SG&A expense without compromising what we hope to achieve down the road. Even though the results we posted lately and the reduced guidance for the current year leave us disappointed, our people have made it through difficult economic downturns before, and I have no doubt that the correct team members and strategies are in place for us to emerge from this challenging market with our brands in better health and our connections to shoppers stronger than at any point previously. Thank you for listening, and I'll hand the call to Scott now for further detail. Scott?

Thanks, Tom. As Tom said, the quarter's financial performance took a hit from a number of macro headwinds affecting the broader market, with the biggest being weaker consumer sentiment and a more intense promotional landscape. Even with those pressures, our teams remain focused on carrying out our strategies — bringing consumers newness and compelling products that connect with them — so we can push back against these difficulties and support selling at full price. Consolidated net sales came in at $420 million in the second quarter of fiscal 2024, which was comparable to the second quarter of fiscal 2023 but fell short of the $430 million to $450 million range we had initially guided to. Sales in our outlets notably rose 4%, since that channel gained from shoppers hunting for deals and promotions, while full-price brick-and-mortar sales climbed 1%, helped by new stores and more promotional activity, partly offset by negative low single-digit comps. Our wholesale channel had a tough second quarter with sales declining 5% versus the second quarter of 2023, after being especially difficult in this year's first quarter. Specialty store business across our brands is still struggling, partly offset by higher sales to major department stores, and e-commerce plus food and beverage sales were roughly flat against the second quarter of 2023. Adjusted gross margin narrowed 100 basis points to 63.3%, mostly because a larger share of net sales came during promotional events at Tommy Bahama, Lilly Pulitzer, and Johnny Was. At all three of our brands, consumers responded strongly to our promotional and clearance events; within our Emerging Brands Group we managed to partly offset that decline through ongoing work to strengthen our inventory position and lessen reliance on off-price wholesale and promotional direct-to-consumer sales. Adjusted SG&A expenses rose 5.7% to $213 million, up from $202 million a year earlier. In the second quarter of fiscal 2024, we took on higher costs tied to recent and ongoing investments in the business, mainly from adding 30 new brick-and-mortar locations since the second quarter of last year and from adding the Jack Rogers brand, which was acquired in the fourth quarter of 2023. We've also taken on costs at some of the roughly 15 net new brick-and-mortar locations, among them four Marlin Bar locations we anticipate opening in the fiscal year's second half. On top of that, we recorded about $1 million of expenses excluded from adjusted SG&A tied to moving Johnny Was' distribution center operations from Los Angeles to Georgia; we anticipate another $1 million in charges connected to that relocation during the second half of the year, yet we project the move will save Johnny Was roughly $4 million in operating costs annually, with room for even more savings. Okay, so what we ended up with was 500 — sorry, this produced adjusted operating income of $57 million, which is a 13.5% operating margin, versus $73 million, or 17.3%, a year ago. That drop in adjusted operating income is a reflection of the SG&A investments we've been making against a tough consumer backdrop for both sales and gross margin. Beyond operating income, our effective tax rate came in flat. Interest expense ran $1 million below where it was in Q2 of 2023, and that's because our average debt levels were lower. Taking all of that together, we delivered adjusted EPS of $2.77. Now let me turn to the balance sheet, starting with inventory. In Q2 of fiscal 2024, we brought inventory down by 6%, or 13%, or $13 million on a year-over-year basis under FIFO. That reduction came from the inventory discipline we keep applying across our portfolio. We also managed to pay off what remained of our outstanding debt, and we closed the quarter sitting on $18 million in cash. On liquidity, the $122 million in cash flows from operations we generated during the first half of fiscal 2024 let us cover our elevated capital expenditures of $54 million and pay out $22 million in dividends, and we still were able to repay the $29 million of borrowings that had been outstanding when fiscal 2023 ended. Let me now take a few minutes on our 2024 outlook. We closed Q2 of fiscal '24 with comps down 1%, which came in below the mid-single-digit positive comps we had previously forecast for that quarter. Much like what we saw in Q2, comp sales so far in Q3 are negative. Our view is that this negative comp trend will persist, producing negative comps in the low to mid-single-digit range through the rest of the year, layered on top of similar comps a year earlier; those assumptions compare against what we expected back in June, when we assumed mid-single-digit positive comps for the balance of the year, so we've adjusted our sales forecast to reflect that. For the full year, net sales are now projected to land between $1.51 billion and $1.54 billion, which works out to a decline of 2% to 4% against the $1.57 billion we posted in 2023. Under our revised 2024 sales plan, Tommy Bahama and Lilly Pulitzer each see low to mid-single-digit sales declines, partly offset by low single-digit sales growth at Johnny Was and Emerging Brands Group. Looking at channel, wholesale accounts for most of the sales decrease, with a slight uptick in our direct-to-consumer channels providing a partial offset. For wholesale sales, we saw a decline of roughly $20 million during the first half of the year, and we're expecting them to be fairly flat in the back half compared with fiscal 2023, since the comparisons get easier from here relative to the first half. Over in direct-to-consumer, we're looking for growth in outlets, as those spots keep performing well given the current environment, and in our full-price retail plus food and beverage doors, which get a lift from the roughly 30 new openings added this year. For e-commerce, our expectation is that sales come in flat to slightly negative for the full year. When we look at the broader marketplace, plenty of macroeconomic risks and uncertainties could shift our outlook, among them the consumer headwinds and industry trends we've already covered. Then there are November's elections and what follows from them, which could potentially shake up demand. Additional challenges exist too, such as shipping disruptions to global trade driven partly by the Red Sea attacks, which could also disturb the flow of goods throughout the economy and push freight costs higher. We now expect gross margin for the year to fall somewhere around 50 basis points to 100 basis points versus last year. As we anticipated, heavier activity around promotional events across our brands will more than make up for the gross margin gain that comes from a proportionally smaller wholesale mix; on top of that, we expect a modestly negative effect in the second half from rising freight rates. Built into our guidance is our best estimate of how those higher freight expenses will hit earnings.

Beyond the modest decline in sales and the negative gross margin, we anticipate that SG&A will increase faster than sales during 2024. The main reason is the investments we're making in the business, such as growing our store base by a net of roughly 30 locations, which includes five new Tommy Bahama Marlin Bars, along with ongoing IT investments and the addition of Jack Rogers. On top of that, as we mentioned on our previous call, the Jack Rogers brand, which was acquired in the fourth quarter of fiscal 2023, is expected to produce an operating loss of about $2.5 million in 2024 while we reset and refocus that business. Additionally, for the full year we're projecting a $2 million reduction in interest expense, compared with $6 million during 2023, while royalty and other income should increase, mainly driven by twelve months of operations at the Tommy Bahama Miramonte Resort. On top of that, we're expecting our adjusted effective tax rate to come in higher, at approximately 24%, versus 23% for 2023, since last year included some favorable items we don't anticipate seeing again in 2024. When we factor in everything we've discussed, our projection is that operating margin will come in lower than what we saw in 2023. For 2024, our updated expectation for adjusted EPS is a range of $7 to $7.30. Last year, that figure stood at $10.15. We're looking at downturns in every one of our business segments, plus a tax rate that's higher, and those factors will only be partially counterbalanced by reduced interest expense along with increased adjusted royalties and other income. Turning to the third quarter of 2024, our sales guidance is $310 million to $325 million. To compare, second quarter of 2023 sales were $327 million. On gross margin, we anticipate a contraction of about 50 basis points to 100 basis points. Since we anticipate that the pattern of stronger revenue around promotional periods will continue, along with SG&A deleveraging, a $1 million reduction in interest expense, and a flat royalty contribution within other income, our outlook is for third-quarter adjusted EPS of between zero and $0.20. That compares with $1.01 during the same quarter in 2023. Given how our costs are structured and the seasonal nature of what we do, the third quarter usually represents the lowest point of the year in terms of both sales and EPS. In 2024, it will face an additional drag from significant preopening expenses tied to new stores and Marlin Bars. Let me give you a quick rundown of where our capital spending stands for the remainder of the year, building on what we've already said about 2024 investments. We've updated the CapEx outlook to account for more precise cash flow timing on the Lyons, Georgia distribution center, along with some changes to other capital projects. For fiscal 2024, capital expenditures have been brought down and should now come in at roughly $150 million. That figure includes $54 million spent in the first half of the year, versus $74 million in fiscal 2023. About $75 million of it ties to the major multi-year effort to construct a new distribution center in Lyons, Georgia, which will boost the direct to consumer throughput capabilities of our brands. The rest of our capital spending is tied to carrying out our Marlin Bars pipeline, adding more stores for Tommy Bahama, Lilly Pulitzer, Johnny Was, Southern Tide and The Beaufort Bonnet Company, plus greater investment in the different direct to consumer technology systems initiatives we have; we anticipate that this higher level of capital expenditure will ease in 2025 and ease further in 2026 and beyond once the Lyons, Georgia project wraps up. We're feeling good about our cash and liquidity position too. We expect cash flow from operations to stay — to be really robust, which leaves us plenty of capacity to finance the investments I just described. Our quarterly dividend, and reduce how much we need to draw on our revolver, though we do anticipate carrying a modest debt position through much of the second half because of the higher capital expenditures. Thank you for joining us today. We'll now open the call up for questions. Paul?

Hello, and thank you for fielding my question; Chandana Madaka here, filling in for Ashley. I'd like to explore a bit further how you're approaching promotional activities as we head into the second half, perhaps with some detail broken out by brand, given that the strategy around promotions has shifted somewhat; I'd also appreciate it if you could elaborate on what you're learning from your wholesale partners, perhaps with an update regarding the order books. Thanks.

Alright, regarding promotions, I can't really say our approach has changed. What I'd say is that we understand these will matter a great deal in 2024, particularly since they're always significant over the holidays. Because of that, we'll kick things off somewhat sooner. The holiday shopping window, as you're aware, spans roughly 5 days — precisely 5 days less this time around compared to the prior year. Consequently, it's crucial that we get moving right at the start of November. There will be a variety of mailers; we're putting out a Tommy Bahama mailer, something we haven't done for 2 years. That represents a slight shift. We have an excellent gift-with-purchase promotion lined up for Cyber Weekend, kicking off on Black Friday and running across the weekend — in fact, I believe it begins on Thursday. Our usual gift cards are in place as well. There are bounce-back sales, and the Lilly Pulitzer Flash Sale will happen in January. So really, these are the same kinds of initiatives. I'd say our attention to them will simply be somewhat more deliberate than previously. On the wholesale side, as Scott noted during his prepared comments, the full year has proven more challenging for that channel. We anticipate the latter half coming in roughly even with the prior year, while the first half declined by approximately 5%; even so, our results with the major accounts — the area where we can best gauge our standing — have been pretty strong. And as spring bookings begin coming in, what we're seeing there is genuinely heartening.

Awesome. Thanks. Nice to hear.

Thank you.

Hello, and good afternoon to everybody. When you consider how the consumer is doing and compare what you observed in outlets against the remaining distribution channels — across the brands, across Tommy, across Lilly — what stands out as different? What was the pace like as the quarter unfolded? Are there any categories that did better or worse than the rest? Regarding the promotional landscape, how steep are the markdowns, and what is your thinking on promotions for Q3 and Q4? Thank you.

All right, thank you, Dana. So far as the quarter's pace goes, the way we described it, it deteriorated on a sequential basis as the quarter went on. May turned out to be a decent month. June eased somewhat, though not dramatically. Then July became considerably worse, particularly during the latter portion of July. After that, as we said, August was soft too when it comes to what the consumer is seeking. I believe you understand quite well that at present this is a market driven by value. Our intention is to hold to our approach of offering a complete portfolio of full price premium brands, and we aren't truly departing from that. Even so, we will be devoting considerable attention and staying highly focused on the kinds of promotional activities that you have observed from us previously, Dana. Then, as we stated in our prepared remarks, throughout the second quarter a larger share of our sales occurred during those events. There may have been slightly more promotional days in terms of their count, yet the main driver was simply that this was the period when the consumer felt most inclined to shop and most inclined to convert, so to speak. I would add that discounts were somewhat deeper as well in the second quarter, and it seems reasonable to anticipate a comparable pattern across the third and fourth quarter. That is what we incorporated into our guidance, and Scott, perhaps you would like to restate and expand on our guidance a little.

Yes. Like we said earlier on this call, we've pulled back on the comps — previously, under our guidance, we'd anticipated those being positive — and we've lowered them into roughly the low to mid-single digit range. And really, given what we've been observing lately regarding how the consumer is behaving, we simply felt it made sense to take that step. Also, there are fewer days this time between Thanksgiving and Christmas, and our view is that it will be a promotional stretch, so we'll aim to run similar kinds of events. But, as became clear during the second quarter, we wound up carrying somewhat more inventory to support those events than was the case a year ago, and that chipped away at gross margin somewhat.

Now, Dana, when it comes to what we’re selling, my view is that whatever is genuinely fresh, genuinely inventive, genuinely set apart — those items stand the best chance of drawing the shopper’s eye. More generally speaking, I’d note that the looser segments, the athleisure-style goods, swim, have lagged. That sort of item has been slower. Dresses have performed very well throughout the portfolio, and I’d say the more dressed-up side of the range, the more polished side of the range, is where we’ve generally observed the comparative momentum.

Moving on, if we break down freight expenses, what's your view on the various pushes and pulls affecting margins?

Sure, we've factored in roughly 15 to 20 basis points of margin pressure from higher freight. So it isn't a massive figure we're monitoring, and it's mostly tied to certain Red Sea problems that have driven rates up. We're observing, or keeping a close eye on, what's happening on the East Coast regarding the union talks, and we're rerouting some goods to the West Coast, which in certain cases means we'll need to transport it across the nation. So that's a situation we keep tracking, but we've allowed for some disruption from it. Clearly, should the East Coast ports actually strike, that will create disruption for, in my view, everybody.

Just one final item. Given how business patterns have shifted, are there any tweaks you're contemplating — be it around marketing, new store launches, or Marlin Bars — either in terms of timing or in how you're approaching any of those initiatives? Thank you.

Not truly. We're essentially moving forward at full speed.

Correct. When it comes to expanding what we're doing, SG&A is a line item we constantly review. Clearly, though, whenever chances arise in that area, we examine them; we brought up relocating the Johnny Was distribution center, which should let us keep a little more cash, and we're reviewing further chances to bring SG&A down. When it comes to growth efforts, however, we're pressing ahead.

That takes in the locations we're bringing online, the Marlin Bars, plus the Lyons distribution center. And honestly, Dana, our view is that what we're facing is worse than a traditional downturn — possibly not even that severe. This isn't the kind of situation we went through during the pandemic or the financial crisis. We want to be positioned for when things turn upward. We have faith in our direct-to-consumer operations, just as we do in wholesale, and expanding stores and Marlin Bars, along with a DC capable of supporting retail, wholesale, and our e-com operations, will matter a great deal once we're a year, two, three years down the road. So we need to ensure we're in place; these projects are long-term ones that require long-term management.

Thank you.

Thank you, Dana.

Hello, and good afternoon. We appreciate you answering our questions. Perhaps you could go into a bit more detail regarding promotional efforts for each of the three major brands? I remember there was a change involving promotional events at Lilly Pulitzer, but apart from that, was there anywhere promotions caught you off guard in a bad way? Any additional specifics on that would be quite useful. Thank you.

Mauricio, what I'd say is this: what happened was simply that we moved a somewhat smaller amount of merchandise at full price than we'd anticipated, which left us holding extra inventory when we ran, say, Tommy's end-of-season sale — we had a larger amount of inventory than we did a year earlier, and with Lilly and Johnny, that situation applied even more. So the outcome was — and shoppers were far more inclined to purchase during those events — so it wasn't the case that we made a significant alteration to the events or differed greatly in how deep the discounts went. It was simply that additional inventory was on hand and it got sold. So during the usual clearance windows, we essentially swapped a portion of full-price sales for off-price sales.