Welcome to the Oxford Industries, Inc. third quarter fiscal 2019 earnings conference call. At this time, all participants are in a listen-only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Anne Shoemaker, Treasurer. Ms. Shoemaker, you may begin.
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&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-K. 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 at oxfordinc.com. Please note that all per share amounts discussed on this call are on a diluted basis. Our disclosures about comparable sales include sales from our full price stores and e-commerce site and excludes sales associated with outlet stores and e-commerce/clearance sales. Now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO, and Scott Grassmyer, CFO. Thank you for your attention. Now I'd like to turn the call over to Tom Chubb.
Thank you for joining us this afternoon. I want to start today's call by reminding our listeners what Oxford represents. We are a portfolio of powerful lifestyle brands, Tommy Bahama, Lilly Pulitzer, Southern Tide, and a collection of smaller brands like The Beaufort Bonnet Company, Duck Head, and Oxford Golf. Our amazing people develop fantastic differentiated products, create compelling and innovative brand messages, and deliver incredible shopping experiences to our customers in our stores, bars, restaurants, and online. I couldn't be prouder of our people and the work they do to bring happiness to our customers. As we reported, our third quarter generated solid results, highlighted by a 6% positive comp on top of a 7% gain a year ago and earnings at the high end of our guidance range.
While the third quarter remains our smallest quarter because of the seasonality of our largest lifestyle brands, there are a few items of note during the quarter that merit emphasis. In September, Lilly Pulitzer held one of its semi-annual clearance events. With very limited opportunities to purchase Lilly on sale, this event continues to generate excitement for veteran Lilly lovers and those just aspiring to the brand. In just three days, we profitably cleared almost all of our end-of-season inventory. This year's after-party sale generated just over $30 million online with higher gross margin compared to the prior year. In addition to the successful sale, Lilly Pulitzer opened a couple of stores during the quarter that represent potential new market opportunities for the brand. First, Lilly opened a store in Palm Desert, California, as we continue to build Lilly's presence out west, where the brand is still significantly underrepresented.
We also believe there is an opportunity, with the right store concept, for Lilly Pulitzer to fill in some of the market opportunity in premium coastal communities with assortments that are curated precisely for the needs of a customer on vacation. To test this potential opportunity, at the end of the third quarter, Lilly opened its first beach shop in Siesta Key, a quaint eight-mile Long Island near Sarasota, Florida. This shop is smaller than our typical store and merchandised slightly differently with more casual and relaxed selections from the line. We are looking forward to seeing its performance as this region moves into its high season. Both of these stores have relatively short lease terms that allow us to test the market opportunity before committing to a long-term lease. In the fourth quarter, we are continuing our investments in carefully selected retail locations.
In November, we opened our first company-owned Southern Tide store in St. John's Town Center in Jacksonville, Florida, and we have two other Southern Tide stores planned for the first half of 2020, Las Olas Fort Lauderdale and Sandestin, Florida. Tommy Bahama will continue its Marlin Bar rollout with locations in Dania Pointe, Florida, and the relocation and conversion of our Las Olas Fort Lauderdale store into a Marlin Bar. Both projects are slated for completion in January. We have four more Marlin Bars planned for fiscal 2020, St. John's Town Center in Jacksonville, Fashion Valley in San Diego, Lahaina on Maui, and Las Vegas Town Center. As we noted in our press release earlier today, fourth quarter to date sales are tracking a bit behind our previous forecast, which Scott will comment on in more detail in a moment.
With a lot of holiday selling still ahead of us and the all-important resort season beginning in a few days, we are confident that we can deliver a solid fourth quarter. We believe it was prudent to modestly trim the top end of our earnings outlook. We remain confident that our strategy of operating a powerful portfolio of lifestyle brands like Tommy Bahama, Lilly Pulitzer, and Southern Tide, and emphasizing full price direct-to-consumer channels will drive increased shareholder value over the near and long term. I'll now turn the call over to Scott Grassmeyer for more details on our results and plans for the rest of 2019.
Thanks, Tom. As Tom mentioned, our full price direct business continues to grow at a healthy pace. Tommy Bahama and Lilly Pulitzer each posted a 6% comp gain in the quarter, with positive comps in both stores and e-commerce. On a consolidated basis, this was the 11th consecutive quarter of positive comps, speaking to the strength of our brand portfolio and the great execution by our teams. Our gross margin held well in the third quarter. Gross margin at Lilly Pulitzer expanded at both direct consumer and wholesale. This was offset by a decrease at Tommy Bahama, primarily due to sales mix, with off-price wholesale sales representing a greater proportion of sales in the quarter. SG&A as a % of sales increased 50 basis points in the third quarter, primarily due to increased marketing spend.
Operating income came in slightly better than planned at $2.7 million, resulting in earnings at the high end of our range for the quarter. Moving to our balance sheet. Our cash flow remains strong, and as of November 2nd, we had no borrowings under our $325 million credit facility and $22 million in cash, compared to borrowings of $32 million and cash to $7 million as of November 3rd, 2018. At the end of the third quarter, our inventory increased to $154 million from $138 million last year. On a FIFO basis, after adding back our $62 million LIFO reserve to both years, the increase was 8%, which reflects additional inventory to support key items at Tommy Bahama, anticipated sales growth, and new retail stores and Marlin Bars. Our balance sheet and capital structure remain solid underpinnings for Oxford's future growth and investment. Turning to our outlook.
As Tom mentioned, we are tracking a bit behind our earlier plans for the fourth quarter. I'd like to give you some more detail on what we are seeing quarter to date. The calendar shift with a later Thanksgiving and six fewer shopping days have made planning and forecasting more challenging. On a consolidated basis, we went into the quarter with a plan for a mid-single digit comp increase, which we have now moderated to a low single digit comp increase. In our direct-to-consumer channels quarter to date, we have seen strength at Lilly Pulitzer, but Tommy Bahama is lagging our earlier expectations in their existing stores and online. We have also had delays in Marlin Bar openings. We are still rolling out great product and marketing and are confident we will gain traction at Tommy Bahama over the remainder of the holiday and resort season.
In our wholesale channel, Lanier Apparel's replenishment business is softer than anticipated. Tommy Bahama's wholesale business is lower than our earlier plan. Putting that all together, for the fourth quarter, we now expect sales to range from $300 million-$310 million, slightly higher than last year, and adjusted earnings per share of $1.01-$1.16 compared with $1.08 in the fourth quarter of 2018. For the full year, we now expect net sales to grow between $1.125 billion and $1.135 billion, compared to $1.107 billion last year. Adjusted earnings per share are now expected to be between $4.25-$4.40, compared to $4.32 per share last year. Capital expenditures in fiscal 2019, including $27 million in the first nine months, are expected to be approximately $40 million, primarily reflecting investments in information technology initiatives, new retail stores and Marlin Bars, and investments to remodel existing retail stores and restaurants.
Free cash flow for fiscal 2019 is expected to exceed $50 million. Our sourcing and merchandising teams continue to make very good progress on our initiatives to mitigate the impact of punitive tariffs on our business by reducing our exposure to China, negotiating price concessions, and making selective price increases. We expect the impact of punitive tariffs to be fully mitigated by the second half of fiscal 2020. Finally, our board of directors has approved a quarterly cash dividend of $0.37 per share. Oxford has paid a dividend every quarter since becoming a public company in 1960. Now, Omer, we are now ready for questions.
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question is from Susan Anderson, B. Riley FBR. Please proceed with your question.
Hi, good evening. Nice job on the quarter.
Hi, Susan.
Thanks for taking the question. Hi. I guess just a follow-up on the lighter sales so far for fourth quarter. It sounds like it's mainly within wholesale. Is that correct? Also maybe if you could talk a little bit about what you're seeing in your resort locations, particularly Hawaii, and if there's been any kind of change in performance in any of those also. Thanks.
The sales moderation is both a combination of Tommy Bahama direct-to-consumer, and the wholesale at both Tommy and at Lanier. As we mentioned, we have moderated our comp assumption. We had a mid-single-digit comp assumption before, and we've moderated that to a low-single-digit in our direct businesses, and that's mostly coming from the Tommy side. Lilly's been off to a good start and been consistently strong, we feel good there. As we mentioned, this has been a really difficult holiday to plan. The calendar shift. It does create some havoc as we have six days less. You're not really on a true comp basis, when you look at to date.
Yeah.
We feel good about Tommy's business. We think we'll make up some ground, but we are moderating, and hopefully we'll just be prudent in doing that.
On the Hawaii question, Susan, I think we've seen good things in Hawaii, and we're expecting more there. This time last year, people had been kind of scared off by the volcano issues, and so I think we'll see a nice rebound there. In other resort locations, particularly Florida, which is a huge state for us in Tommy and Lilly. The business has really been good, consistently good there for quite a while now. Good to see all that.
Great. That sounds good. I guess at Tommy then, are you seeing the lighter sales across both men's and women's, or are there any product categories specifically you could point to, or it's just really across the board?
It's really, actually, women's has been performing very, very nicely and has been really tracking, I think, a little bit above what our expectation would've been. Men's is lagging a little bit, and that actually, we believe, we're gonna make that up in large part. I think when we look back at the 2012, 2013 calendars, which is the last time we had this exact same calendar shift in the way that the business built then, it really ramps up in the week or two before Christmas, and I think that's what's gonna happen again this year. We've done what we think is prudent to the guidance, but we're also very excited about the opportunity that we have in front of us.
As we always remind people, resort's very important to our brands as well, and we'll be starting to do some of that resort type business in the next couple of days, really. We've got in Tommy-
Great
A wonderful women's resort mailer that should be hitting homes, including hopefully yours, this week. It's beautiful. We've got great product to support that.
Great. I'll look for that. I guess finally, just on the gross margin, maybe if you could talk about a little bit the puts and takes for fourth quarter, but then also for Tommy, is there still opportunity, particularly with the lighter sales, to continue to grow that margin?
Yeah. I think there is certainly opportunities at Tommy. The gross margin, at Tommy, we were a little bit lighter, but that was in third quarter, but that was really the wholesale mix where our wholesale business had more off-price sales, which is extremely low margins, which weighed that down. Fourth quarter, I think we'll be a little bit closer year-over-year. We need direct-to-consumer to have a good holiday, and I think it will.
Great. That's helpful. Thanks so much. Good luck for holiday.
Thanks, Susan. Happy holidays to you.
Our next question is from Paul Lejuez, Citigroup. Please proceed with your question.
Thanks, everyone. This is Tracy filling in for Paul. I had two questions. I was hoping, in your DTC businesses for the third quarter, you could tell us what the drivers were of the comp between AUR, traffic, UPT, et cetera. Also how that's looking fourth quarter to date, I guess really at the Tommy business, what's changed there? Is it traffic conversion, et cetera? I have a follow-up. Thank you.
I would say, Tracy, the big driver on the comp is really conversion. That's the story, I think, is getting better conversion out of the traffic that we're getting. I don't think there's big movement in the AUR ADT so much. It's really the conversion that's driving it.
Was AUR up for the quarter at both brands? The major brands?
Hang on just a second. It was down slightly at Tommy, I believe, but I want to confirm that. Up slightly at Lilly. Not big movements. Some of that bounces around from year to year. I don't think we saw anything too earth-shattering there. Again, where we're seeing bigger movements really in conversion.
Is that the issue in fourth quarter where I think you said that Tommy comp had slowed on the retail side a little bit? Did conversion just fall off a little bit?
Well, the problem is you're really not comped with the calendar.
Yeah.
That's the difficult thing about it right now. We're really having to compare back to our plan. Our plan maybe was a little more front-end loaded than it should be when we really study history. Still, we are off our earlier plan by a little bit. We wanted to be prudent there. Really, I don't think you're going to be able to really conclude a comp until you get through the whole holiday season.
Got it. My follow-up was, I was just wondering if you could update us on some of your omnichannel initiatives, like buy online, pick up in store. Thanks.
Yeah, great question, Tracy. Thank you for asking it. We've got some really exciting things going on there. We recently, in Tommy Bahama, went live in all stores with our enterprise order management system. Which allows you to go into your local store, and if they don't have the particular item you're looking for, your size in stock, they can, in the same transaction with the other merchandise that you're purchasing, they can ring it up, same transaction, one receipt. Automatically gets routed to the best store for that to ship to. You have it basically the next day. That's something that we've always been able to do, but it required a lot of labor and a lot of work to get there. A separate transaction in a lot of cases. This is a single transaction for the guest, single receipt.
Much easier and quicker for the store associate, which means that they can get you checked out quickly and then move on to helping the next guest. In Lilly Pulitzer, something that we've got going on that's really exciting, is that we've got a curbside pickup option this time around, which is great. You can get your order. For our very busy Lilly customer, we've got legitimate gift wrapping. Not just a gift box, but we wrap it for you in the store in beautiful wrapping paper with a ribbon and a bow. You can pick it up at curbside. There are lots and lots of ways that we're using technology to really enhance our relationship and interaction with guests. We're excited about those and think that they're going to be meaningful contributors to our fourth quarter business.
Great. Thank you, guys, and good luck for holidays.
Thank you, Tracy. Happy holidays.
Thank you. You too.
Our next question is from Edward Yruma, KeyBanc Capital Markets. Please proceed with your question.
Hey, good afternoon, guys, and thanks for taking my questions.
Hi, Ed.
On promotion. Hey, how are you.
Yeah.
You guys are trying a little bit of a different strategy this year, it seems like within Tommy Bahama with some key item pricing. I noticed you also ran a Lilly Pulitzer promo that I think was $20 off $100, which we haven't seen in a while, I guess. How would you score the efficiency of those promos, and did they perform as you would have expected? Thank you.
Thank you, Ed. Good question. The key to all of that is, as you know, during that Cyber Five or whatever you want to call it, that Thanksgiving weekend through Monday, as you know, the market is very noisy. There's lots going on. Everybody's got a deal and an offer. What we want to do in our brands is make it simple for our customers. Some of our typical marketing activities are a little bit complicated. Our customer understands them well. During that very busy time of year, we wanted to offer them something that's simple, respectful of their time during that very busy time of year. It worked. We loved the results that we got. To go to the $20 for every $100 you spend in Lilly Pulitzer, that actually, we don't think on a net margin basis, that was any worse.
In fact, I think there's a chance it ends up being better than what we did last year with our gift with purchase program. In Lilly, that was for Sunday and Monday of Thanksgiving weekend. Thursday, Friday, Saturday, they had a stackable ornament gift with purchase offer, that was a very simple, I believe it was $75. Every $75 you spend, you get another Christmas tree ornament. Again, very simple. Customer doesn't have to spend a lot of time thinking about it. They can spend what they want to spend, and they get a nice little treat for every $75 of that. Also, Ed.
Great.
Promotions the same number of days. It wasn't additional days. It was just mixing the promos up during those same days. It wasn't more days on promo.
Just gift with purchase part of the time, and then the $20 off $100 part of the time, where last year was gift with purchase the whole five days.
Great. One just follow up, if I may, on inventory, I guess, how do you feel about the quality of inventory and how do you plan to exit the quarter, given that the comps are a little bit maybe softer than you initially planned? Thanks very much and happy holidays to you and your family.
Yeah, thanks. Well, we feel good about the inventory. Tommy, we're up 8% year-over-year. The lion's share of that is at Tommy. Most of it is really being in stock in key items. That's one thing we feel good going into holiday, where last year we were starting to break. In some key items, we are well-stocked in things like the Boracay, the Newport Coast, Long Sleeve Woven, some of those key items that become very important holiday. We are in stock, where last year we weren't quite stocked properly. I think this adjustment in inventory is appropriate. Last quarter, we were up 16% year-over-year. Now we're up 8% year-over-year, which I feel is about the right running rate for us.
Thanks again, guys.
Thanks, Ed. Happy holidays.
As a reminder, we are now conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. One moment please while we pull for questions. Our next question is from Rick Petrar, Needham & Company. Please proceed with your question.
Hey, good afternoon, guys. Congrats on the strong third quarter performance.
Thanks, Rick.
I'm hoping you can help us understand what's embedded in the updated guidance. Tom, you talked about expecting to see a bounce back into Christmas. Is that improvement reflected in your current guidance right now, or are you assuming that the weakness persists?
We have some improvement baked in. We believe there's opportunity for improvement above what we have baked in, but we do have some improvement baked in. Just looking, studying the calendar, studying the last time this calendar existed, that's exactly what happened. Again, the planning is difficult here. I think there's a lot of shopping days and some key shopping days, so we do have some improvement baked in, but we believe there's opportunity for improvement above what we've baked in.
I would add to that, Rick, that our stores have never been better prepared to do a lot of business over the next couple of weeks. I think in both brands, we've got the right items in stock. Our staffs are better than they've ever been before. They've always been terrific, but they're better than they've ever been before. We've got the tools like the enterprise order management that I mentioned to you, a clienteling tool that we have in Lilly Pulitzer. We're giving them lots of tools to enhance the relationship and the interaction with the customer. Again, as Scott's mentioned, you look back to the 2012, 2013 calendar shift, we're actually tracking a little bit better than the way that one unfolded. Hopefully, that same curve will continue, and we think we're ready to get our share of the action for sure.
Got it. Can you also provide some color on your new store test for Lilly? Maybe compare and contrast that smaller format location with your legacy stores. If the test does go well, what's the longer-term opportunity you see for these smaller format locations?
It's kind of a nooks and crannies strategy, if you're familiar with Siesta Key. It's our store in Sarasota, one of them. We've got a couple of them, but one of them is on St. Armand's Circle, which is actually on, I believe it's called Lido Key. The next island below that is Siesta Key. It's a beautiful west coast of Florida beach place where people have second homes and go and stay at rentals and other places. The idea is that a lot of people that go to Siesta and other places like that, once they get there, they really don't want to leave, even to go the couple of miles up to St. Armand's Circle. What we're offering them is on that island in a very small storefront, I think it's 1,100 feet or something.
It's a casual, beachy kind of Lilly Pulitzer store that's got a very casual and relaxed assortment. It's all out of the line, but we've just assorted it a little bit differently. There are two things that that store can do for us, I think. One is we can do some incremental business because we're serving her right there where she is, a walk or a bike ride from her house. We can get her that cover-up or pair of shorts or whatever it is she forgot to pack and do some incremental business. Then I think the second thing it does for us, is it reinforces our positioning as a true resort brand because we're right there in the place with her.
Finally, it gives us some exposures to some eyeballs that might not otherwise notice us, and whether they shop while they're there, or maybe when they get back home to wherever they came from, they get online and check us out a little bit further. We can make money doing this. It's not just a marketing exercise. The rent on these types of locations is not much, and we think we can make money. If it works, we think there are a number of these places. There are probably four or five of them just on the West Coast of Florida, where you could fill in with a little store like this. At the end of the day, it's not going to be the biggest thing that ever happened at Lilly Pulitzer, but we think it's a nice addition.
Thanks very much. Have a great holiday.
Okay. Thanks, Rick.
Our next question is from Steve Marotta, C.L. King & Associates. Please proceed with your question.
Good afternoon, everybody. Scott, as far as the quantitative impact of tariffs, next year, I understand clear in what the mitigating factors are, but I believe you said that it wouldn't be until mid-next year that they'd be fully offset. Can you talk a little bit about, obviously, without giving specific guidance for next year, what would be a normalized impact of unmitigated tariffs or partially mitigated tariffs for a half a year?
Well, we think it's probably going to be similar to the second half of this year, which will be in kind of that $0.15-$0.20 range. We think right now that next year will probably be something in that ballpark, and a lot is the way goods flow, and exactly when they flow out. We're really happy with the actions our teams have taken. Working with vendors, moving sourcing, and we've made some really good progress. We feel good about it, and we feel very confident that the second half of the year, this is going to be a non-event. Even if tariffs are in, we're going to have done what we've had to do. It just takes some time to get it put in place, given the long product development cycle.
We started work on this a long time ago, and we've made some good progress.
As far as the Marlin Bars that were open this year, are they all tracking on plan? Can you talk about how long those delayed Marlin Bars were delayed?
None have opened this year.
I mean, the ones that are open.
Yeah. The two that opened have been, Coconut Point just continues to do fantastic. Palm Springs is doing well. That area is still being developed, so it's not at full production, but it's in a money-making mode. We feel good about it. The ones we're gonna open, those have kind of delayed a little bit, just permitting and getting possession of the spaces. There's a lot of things, but we're gonna get two open late this year, and those are in construction now and we've got four slotted for next year. We really believe this pipeline is there and, we were hoping that we were going to get three open this year and that they were going to be early in the fourth quarter. Now we're going to get two open and they're going to be towards the end of the fourth quarter.
We're not going to get much impact at all this year from the two that open. Next year, we'll go into the beginning of the year with two up and running and another one coming relatively early in the year, and then the rest will be spread out during the year. It always takes a little longer than we would like, but we've got them coming.
Very helpful. Thank you.
Thanks, Steve.
We have reached the end of the question and answer session, and I will now turn the call back over to Tom Chubb for closing remarks.
Okay. Thank you very much for your interest and all the best to you and your families for a very happy holiday season.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.