Earnings Call: Q3 2021

Dec 9, 2020

Greetings, and welcome to Oxford Industries Inc. 3rd Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Anne Shoemaker, Treasurer. Please go ahead. Thank you, and good afternoon. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q and A session may constitute forward looking statements within the meaning of the federal securities laws. Forward looking statements are not guarantees and actual results may differ materially from those expressed or implied in the forward looking statements. Important factors that could cause actual results of operations or our financial condition to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC, including the risk factors contained in our Form 10 ks and Q1 10 Q. We undertake no duty to update any forward looking statements. During this call, we will be discussing certain non GAAP financial measures. You can find a reconciliation of non GAAP to GAAP financial measures in our press release issued earlier today, which is posted under the Investor Relations tab of our website atoxfordincdot com. And now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO and Scott Grassmeier, CFO. Thank you for your attention. And now I'd like to turn the call over to Tom Chubb. Good afternoon, and thank you for joining us. I am encouraged by our Q3 results as each of our branded businesses, Tommy Bahama, Lilly Pulitzer and Southern Tide exceeded our internal plans. During our historically smallest quarter of the year, our full price e commerce business grew 51%, helping partially offset the headwinds in other channels due to COVID-nineteen. Our sustained digital success this year underscores the power of our brands and their strong consumer connections and is a great indication that our business is well positioned for success in the post pandemic environment. With the onset of COVID-nineteen in March, we focused on 3 priorities: the safety of our people and our customers, protecting the integrity of our brands and preserving liquidity. We have done a good job executing on all three of these fronts. At the same time, our business and industry are facing significant changes that have only accelerated during the last 9 months. As we have progressed through the year, while not taking our eye off the 3 priorities I outlined, we have resumed our focus on initiatives that will help us to better capitalize on important market trends in both the near term and the long term. In the post pandemic world, we believe products will continue to trend towards easy to wear and easy care, traffic malls will remain significantly below 2019 levels, department stores will be less relevant than they were before, e commerce will be bigger and more important than ever, company owned stores and restaurants will be a physical representation of the brand seamlessly integrated into a total direct to consumer ecosystem, including e commerce and heavily digital, diversified marketing channels will be essential. All of these trends should benefit our business as we emerge from this crisis. We are building upon our already strong foundation and are well prepared for the post pandemic environment. We continue to identify ways in which we can better build a customer focused, digitally driven, mobile centered and cross channel personalized and seamless shopping experience that recognizes and serves the customer in their brand discovery and purchasing habits of the future. We are delivering innovative and differentiated products that are on brand and in sync with consumers' desires and needs. From offering virtual shopping appointments, curbside pickup, digital clienteling and having our store associates field customer service calls to delighting our guests with our exciting Marlin Bar concepts, each of our brands continues to develop and implement new ways to enhance the customer experience. We continue to invest in improved customer data and analytics that are helping and will help us assimilate, analyze and use customer data to provide a better, more personalized experience that boosts retention rates and spending levels. Importantly, these tools are also helping us identify and acquire new customers, a critical initiative for us. We continue to expand our enterprise order management capabilities to increase our ability to ship from our company owned stores. By matching demand from anywhere with inventory located anywhere, we are able to minimize stockouts, increase customer satisfaction and improve inventory efficiency. This is helping us navigate through the pandemic and positions us well to grow and thrive in a new post pandemic normal. Across Oxford, our talented teams have risen and continue to rise to the occasion by staying focused on our core purpose of making our customers happy. Our brands are all happy brands and our customers look to us to deliver happiness through our products, communications and brand experiences. Throughout this challenging period, our people in every function from creative and design to shipping and fulfillment and everything in between have helped us deliver happiness to our customers. We are grateful for their efforts and proud of their achievements. We have been in the apparel business for almost 80 years and have a portfolio of businesses, which has adapted over the years to remain relevant to the marketplace and the consumer and to deliver shareholder value. Today, we announced our most recent action, the decision to exit our legacy Lanier Apparel business, which has been a part of our portfolio for more than 50 years. Throughout that time, Lanier Apparel has been well run by an exceptional group of people. That said, Lanier's business model, which provides licensed tailored clothing to department stores and big box retailers, does not fit our long term vision for the enterprise and the challenges presented by the pandemic have amplified this misalignment. Exiting this business will result in a portfolio that is completely in sync with our strategy. We are working closely with our licensors, customers and suppliers to ensure a smooth process. And I want to personally thank the dedicated employees of Lanier Apparel for their contributions to Oxford over these many years. I'll now turn the call over to Scott with more details on our Q3 results and our plans for the rest of the year. Scott? Thank you, Tom. We were quite pleased with our performance in the Q3 given the circumstances. As a reminder, our Q3 is historically our smallest quarter of the year with Lilly Pulitzer Springsummer clearance event making a meaningful contribution. This year, we made some changes to the event. We did not hold sales in our stores. Lilly's customers show up in force and for the safety of our employees and our customers, we decided to limit the sale to online. The other big change was to hold the event in 2 parts. The first in June in our Q2 and the second in September in our Q3. The 3rd quarter event was $12,000,000 or 41% lower than last year due to the shift. The combined online events, however, were very successful in $2,000,000 or 7% higher year over year. For our full price e commerce business, we saw solid growth in each of our brands. On a consolidated basis, our full price e commerce comps increased 51%. Each of our brands exceeded our internal plans for the Q3 with full price e com at Tommy Bahama increasing 38%, Lilly Pulitzer up 93% and a 36% increase at Southern Tide. Our full price retail sales decreased 45% as traffic was down significantly and most of our stores continued to operate under various restrictions. Our important Hawaiian locations were severely impacted by travel and other restrictions. Tommy Bahama operates 19 locations with a food and beverage component. Excluding Hawaii and New York, where we had extended closures and restrictions, we were very pleased with our restaurant comp of negative 6%. Our newest mall and bar in Jacksonville, Florida, which opened in the Q2 exceeded even our pre pandemic plans. Overall, restaurants were down 30% year over year. Our gross margin was 55% in the quarter comparable to last year, and SG and A decreased 15% or $21,000,000 some of which is permanent. Impacting both gross margin and SG and A were charges related to the exit of Lanier Apparel, which Tom just discussed. During the Q3 of fiscal 2020, we recorded a $10,000,000 pretax charge related to the Lanier Apparel exit. About $6,000,000 of this was inventory markdowns impacting cost of goods sold. Most of the inventory markdown was reversed and included in a LIFO accounting credit in corporate and other. Approximately $4,000,000 were SG and A charges related to operating lease impairment, severance and retention cost and non cash fixed asset impairment. In addition, between now and the completion of our asset in the second half of 2021, we expect to incur approximately $5,000,000 of incremental charges. Approximately half of these charges are expected to occur in the Q4 of fiscal 2020. We expect the exit linear apparel to be cash flow positive. Moving to our balance sheet. We ended the quarter with inventory 4% lower than last year, which we believe is properly reserved and positions us well for future sales. As Tom mentioned, reserving a high level of liquidity has been a priority for us, and we have executed well on that front. The strength of our balance sheet entering the pandemic as well as the actions we have taken to mitigate the COVID-nineteen impact positions us well for the future. We ended the Q3 with $35,000,000 of borrowings $53,000,000 of cash. This left us in a net cash position of $18,000,000 compared to $22,000,000 in the Q3 last year. And we had $287,000,000 of unused availability under our revolving credit agreement. We have reevaluated all of our capital projects. Our technology projects to support our digital initiatives retain their high priority. We also remain committed to expanding our successful Marlin Bar concept. Year to date, we have converted 2 locations to Marlin Bars and opened a new location. In the Q4, we expect to open 2 Marlin Bars in Lahaina, Hawaii and Fashion Valley in San Diego. And Southern Tide has opened 2 more stores in Florida this year, bringing their store count to 3. We have also taken advantage of the current situation to do some pruning. Year to date, we have closed 4 Tommy and 2 Lilly stores. We expect to close 2 more locations this year and have a handful slated for closure in 2021, unless the landlord provides us a compelling reason to stay. Looking ahead, with the recent resurgence in COVID cases, we continue to see depressed traffic in our stores, with particular concerns around our 25 stores and 3 restaurants in California. Meanwhile, e commerce has remained strong quarter to date. Based on current trend, combined with our view of how we think the remainder of the season plays out, we believe our 4th quarter revenue will decline on a percentage basis similar to what we experienced in the Q3. As we think about fiscal 2021, it's too early to comment on anything specific, but with our exit from linear and other macro changes, we expect our top line to be smaller than 2019. However, we anticipate returning to profitability. Lastly, our commitment to returning value to shareholders is clear. Offered has paid a dividend every quarter since we became public in 1960 and our Board of Directors has declared a quarterly dividend of $0.25 per share. Thanks for your time today and we will now turn the call up for questions. Laura? At this time, we will be conducting a question and answer session. Our first question comes from the line of Paul Lasalle with Citigroup. You may proceed with your question. Hey, guys. Thanks. Curious if you can maybe talk a little bit more about what you're seeing quarter to date, both in terms of sales trends and how that ties into what you expect for the rest of the quarter. Also curious about the promotional environment, what you're seeing currently and how you're thinking about the gross margin line for 4Q. And I think part of the gross margin improvement that you saw this quarter was probably from change in Lilly promos, but maybe can you also talk about the other moving pieces within the gross margin line in 3Q? Thanks. Okay. I'll talk about the sales trends a little bit. Paul, this is Tom Chubb, and then I'll let Scott comment on anything else he would mention on the sales trends as well as walk you through the gross margin issues. So sales quarter that we've actually been really pleased with, our business has been strong With the election, November as expected, started out a little bit slow, but we have really planned that. And then since then, it picked up momentum. And I think absent the California situation, we'd probably be thinking that the sales decline 4th quarter would be a bit less than the 3rd quarter. But because of what's happening there with the new restrictions and having 27 stores and 3 restaurants there, we backed off our expectation a little bit for the Q4. But what we've seen has been good. It's been stores quarter to date have actually been better. That's continued to pick up a little bit of steam and e commerce has continued to be strong. I will point out the obvious that e commerce with FedEx and UPS having the issues they're having that will probably start to wind down earlier this year than it has in years past. But of course, we build all that into the plan as well. So really happy with what we're seeing so far, but obviously still a challenging environment out there. As far as the gross margins in Q3, consolidated basis, we're a little bit up, but slightly up year over year and that did benefit from the shift in the Lilly clearance event as where some of it was moved back to the Q2. But Tommy was just a little bit lower year over year and Lilly was meaningfully higher, but again, that mix influenced that. Then Southern Tide and Lanier were both meaningfully lower due to mainly some inventory markdowns. So but it all blended together to be up slightly. Got it. And then how should we be thinking about gross margin for 4ks? For the Q4, we'll probably be down slightly year over year, but it will be pretty comparable in Q4. Down just a little bit is the way it's looking right now. Our next question comes from the line of Edward Yuma with KeyBanc Capital Markets. You may proceed with your question. Hey, guys. Thanks for taking the questions today. I guess, first, just as a follow-up to Paul's question, I know that your promo at Tommy was restructured this year and wasn't the classic kind of bounce back. I guess, kind of how do we think about if there's any modeling implications to the lack of a bounce back? And then 2, I know Lanier has historically been really managed for cash flow. Obviously, the world has changed. But how should we think about kind of what the normalized cash flow was from Lanier as we think about kind of modeling your business post Lanier? Thank you. Actually, let's see. Okay. On the bounce back, Tommy, we did the same event. The timing was just a little bit later, where last year, we the cards went out and then late October and this year, they didn't go out until, I guess, the 2nd week of November. So it's just really a little bit of a timing shift at Tommy, but they still have the both the cards, the cards and then the flip side of that where you spend a certain amount and we will expect a little bit less transactions because of the traffic in the stores, but we are still doing it online also. And the next question is okay. Cash flow. Yes. Lanier's cash flow was I mean, it was very volatile over the last couple of years. I mean, yes, it would have some ebbs and flows. But normally, on a normal year when they weren't having a significant inventory build or contraction, linear would have very little capital expenditures, very little D and A. So it's really the tax affected operating profit was really usually translated to their cash flow. But they did over the last couple of years have a lot more volatility with inventory levels at times running up and then at times running back down. And then this year, obviously, they've had a very challenging year. So they've been using cash in their normal operations this year. And so it was becoming the we didn't have confidence that we could maintain that cash flow. And I think, Ed, if you look back at that and sort of normalize the inventory peaks and valleys through the years, the sales were really sort of flat lining. And so you really shouldn't if you averaged it out over time, you're talking a pretty small amount of cash flow that was actually coming out in the year. Got it. Thanks so much guys. Our next question comes from the line of Susan Anderson with B. Riley FBR. You may proceed with your question. Hi, good evening. Thanks for taking my question. I guess, I'm curious just looking at Q4, are you doing anything different with the product or the business? I think typically you would be rolling out your resort line, but with limited people, I guess, traveling to resorts, I guess, how are you marketing the product to consumers? And then also, I'm just curious, if you could talk a little bit about the home project at Tommy and how that's doing? Yes. So, the theme is, of course, as we talked about in product, it's really easy to wear and easy care. You see that throughout the industry and that's true for us as well. So what that means is a lot of lounge type wear across all our brands, all that type of product is doing quite well as they always do this time of year in Tommy Bahama. 2nd layer knits for men are doing really, really well. They're giftable items. They're comfortable items. They actually lend themselves really well to the work from home Zoom environment. And then the sort of athleisure type performance inspired products that we have in all the brands have done really well. And that's where we've tried to tilt the product assortment. Of course, we were reacting on very short notice, but that's what we've tried to set up for a holiday and that's really selling that's what's selling well. One of the highlights, Susan, in the selling so far in Tommy Bahama has been on the women's side, where typically for Tommy women sort of takes a step back this year at this time of year, and it becomes really all about the men's business. Well, this year, it's different in that men's is doing well, But women's is really stepping up. And we've got quite a few items, women's items in our top ten right now for Tommy Bahama. And those are really things that are coming out of our Island Soft line, which I would describe as being cozy loungewear. And then our Island Zone line, which is performance product that we described as sort of effortless function and feel. So those are real bright spots that we're very excited about. We've got a really cool thing in Lilly Pulitzer right now, which is a couple of items that have a built in face mask that you kind of pull up when you need it and when you don't need it, you can drop it back down, which is a fun nod to the current environment and that's creating some excitement and some buzz as well. That's great. And then what about the home product at Tommy? Yes, well, home kind of stuff, giftable type items, of course, very, very popular. It's not a massive part of the line at Tommy Bahama, but it is popular as always this time of year. Cookies also sell well, which is an interesting extension of our food business, but we do offer packaged cookies in our stores. Those are doing really well right now. Awesome. Wow, that's interesting. I guess really quick too just on the regional performance. Did you see any change from Q2 into Q3? And then also I guess it sounds like Hawaii still is a pressure point, but has that improved at all? Yes. I think the big theme has been that sort of throughout the year, and I'm trying to draw some generalizations, but sort of Florida and the Southeast tended to be the strongest pretty much throughout this whole situation. And then the rest of the country has been weaker with movements and traffic really sort of corresponding to the level of COVID infections and hospitalizations and things like that. So the Midwest has been weaker lately than some of the other regions. Obviously, California has its challenges. And Hawaii with for a long time, you fundamentally couldn't travel at all there. They have created path for you to be able to travel now at least, so that's improved a bit in Hawaii. Scott, anything I'm missing there on the regional flavor? No, I think that covers it. Okay. And then just lastly, really quick on Southern Tide. Was it the new stores, I guess, that helped to drive the growth there? Or did you guys see also, I guess, maybe growth driven by online pickup? It was both and then a little bit of a whole off price wholesale to believe that helped. But we were pleased with what we saw in direct to consumer. Ecom, as we mentioned, was plus 36 for the quarter, which was great to see. And then also, we were happy to have the stores open. And Southern Tide continues to do some great marketing. I think they punch above their weight in that regard and that's been true this year too. I think they've tailored their marketing very well and continue to deliver a lighthearted upbeat happy message, but one that was not tone deaf to what's going on in the world either. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. You may proceed with your question. Hi, good afternoon, everyone. As you think about the shift with Lilly Pulitzer and the Flash sales, how are you thinking about promotional cadence going forward for all of the brands? And then also as you think about this Q4 and into next year, the expense structure giving shipping and shipping surcharges with online, how are you planning? Thank you. Okay. I'll talk about the promotional thing. I think what we learned this year is that shifting the promotional cadence around is not a bad thing at all. I think the customer actually enjoys the variety a little bit. It takes some of the predictability out of it, which is good for us from a business basis. So I don't know exactly what we'll do next year. It's way too early to say that. But I do think the idea of mixing things up a bit is a good idea and it's something that sort of was inspired, if you will, by the coronavirus situation this year. But I do think it's one of those valuable lessons that we'll take away from this year, because we're really pleased with the way that our promotional activities played out this year. And we think it's been good for the guest, created some excitement and variety for her, and it's good for our business. And then on the shipping charges and the surcharges and how that will impact the quarter, I'll let Scott comment on that. We are obviously getting some surcharges, but we've also implemented the enterprise order management abilities to ship e comm from store at Tommy, and that's going to help mitigate that some. We're not shipping all orders in store, obviously, but we are able to take advantage of that. So we do have a bit of mitigation because we're shipping a lot of orders a lot closer to the person's home. So not only will it be better customer service, it also will reduce some freight costs. So net net, it will probably be a little bit higher, but we do have a little bit of mitigation with the enterprise order management system. And one last thing, of the stores that haven't reopened, are you looking to close them? Do you keep them? How do you think about that store base? And in like Manhattan, how do you think about it? Well, we've got, I think, a handful of stores that have already closed this year, a few more that will close during the year and then a group next year. And altogether, I think that's about 22. Yes, the 2 together, yes. The 2 years together. Those are that could change depending on landlord negotiations or whatever. But what we're really doing, Dana, is looking very hard at any opportunity where we have a kick out clause in the lease that allows us to get out at a certain point or we've got a renewal. We're just looking at them and evaluating them very carefully to see whether it makes sense to continue to operate that store or can we satisfy that demand some other way, either through targeting e commerce more heavily to that area or through an enhanced wholesale relationship or whatever it may be. So we're being smart about it, I think being very analytical about it, taking a 3 60 degree view of those stores. And if we were to close them, how will we continue to serve that guest and capture those dollars. And I think what will happen is that will lead to some closures, but we're also opening a few stores too, as you know. So net net, I think the store count will probably drift down maybe just a little bit over the next few years, but we'll end up with a portfolio of stores that are better positioned and more profitable for us. Thank you. Our next question comes from the line of Steve Marotta with C. L. King. You may proceed with your question. Good afternoon, Tom, Scott and Ann. Forgive me, my phone disconnected briefly if this question was asked. My apologies. But can you talk a little bit about inventory being down 4% versus sales down being 27% and what gives you confidence that the inventory composition is good? Yes. Our inventory on all groups at Tommy is down and Tommy is pretty flat. And they remember that we shifted their summer line to serve as kind of the resort spring, much of the resort spring line. So we do have that spring inventory in house where last year some of that would have not left factory yet. So at the end of the quarter, I think we have that difference. But I think our inventories are in good shape. Our old inventories, our aged inventories are actually lower year over year. And our core inventory, some of the basics, is a little bit higher year over year, but we feel good where we that, that will work out in ordinary core. So we think we feel good about our inventory and the items that we felt we do need to liquidate, we've taken proper reserves on those. So I think overall, we are in good shape. That's very helpful. I'd also like to review what you said about Marlin Bar that they are tracking at pre at your pre COVID planned levels. That's pretty amazing considering what COVID has done to restaurant traffic in general. Can you unpeel that a little bit more? Yes. Not only are they tracking it pre COVID plan levels, the new one that we opened in Jacksonville is actually exceeding the plan that we had for it before we had even heard of the coronavirus. It's been really awesome to see and it's also driven a big increase in our retail business there. It's not technically a comp because we moved the location of that store within the center. But whereas our Tommy stores in general are comping down about 40%, that location this year is comping up since the opening in the Marlin Bar, I think about 30% or so. So you have a massive difference, which is attributable, I think, primarily to the existence of the Marlin Bar there. And one of the greatest things about that is a huge amount of that comp increase is actually being driven by women's. So that's turning into one of our strongest women's stores. And as you know, Steve, we've always thought we had a bigger opportunity in women's than we've been sort of bringing into the cash register. And what we're seeing is that in these Marlin bars, not only do they help drive the overall business, but they really help drive the women's business, which is a big opportunity for us. And then you've, Steve, heard from Scott before about all the advantages of the Marlin Bar with the lower capital commitment, the lower rent number that's typically involved in the lower labor level that you can operate on there. So they're winning formula. I would also say that from a consumer standpoint, they're more about how people want to eat out these days with the more of a grazing approach than a full sit down multi course meal that we have in our full service restaurants. So they offer great quality of food, but it's in a sort of a small plate type and sandwich and bowls and salads format with great cocktails and wine and beer and such. And that's something that's very appealing to people in the contemporary market. That's terrifically helpful. I'll take the balance of my questions offline. Thank you again. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Tom Chubb for closing remarks. Okay. Thank you, Laura, and thanks to all of you for your interest in our company. Stay safe, and I wish you and your families a very happy holiday season, and we'll look forward to talking to you again in March. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.