Greetings, welcome to the Oxford Industries second quarter fiscal 2019 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, 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&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 financial results and outlook information discussed on this call, unless otherwise noted, are from continuing operations and all per share amounts are on a diluted basis. Our disclosures about comparable sales include sales from our full price stores and e-commerce sites and excludes sales associated with outlet stores and e-commerce flash clearance sales. Now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO, and Scott Grassmeyer, 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 taking a moment to remember and honor the victims of 9/11, their families, as well as the survivors and first responders. That tragic day will always serve as a reminder of our country's resilience and the strength of the American spirit. Our second quarter performance included top and bottom line results that were within our guidance ranges, despite some marketplace headwinds. 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 continues to produce enhanced profitability and drive long term shareholder value. I am pleased to report that for the 10th consecutive quarter, we posted consolidated comparable sales growth and expanded consolidated gross margin and operating margin in the quarter.
To win with today's highly informed and empowered consumer, you need to have a brand that stands for something, a lifestyle or culture that resonates with your target audience, and you have to reinforce that lifestyle and culture in everything you do, from product and marketing to service and distribution. This is the Oxford approach and the foundation for the company's ongoing success. Looking at each of our channels in more detail, the growth of our e-commerce business continues to be a highlight of Oxford's modern distribution network. Our high average ticket, high gross margin, modest return rates, and efficient distribution centers make this a very profitable channel. E-commerce represents 22% of our consolidated sales on a trailing 12-month basis, up from 20% this time a year ago, and remains our fastest growing channel of distribution.
At the same time, our unique combination of bricks and mortar retail stores, restaurants, and bars remains strategically important. These physical assets allow us to showcase the true nature of our brands through a very compelling in-store experience that features beautiful brand appropriate buildouts and friendly staff that provide superior service levels. For these reasons, our stores are very important to not only driving sales, but also communicating our brand message and acquiring new customers. We continue to invest in carefully curated brick and mortar locations. Late in 2019, we will be opening two new Tommy Bahama Marlin Bar locations, a Lilly Pulitzer store in Palm Desert, California, and our first company-owned Southern Tide retail store in Jacksonville, Florida.
As part of our strategy to strengthen our brands for the long term, we continue to cultivate relationships with select specialty retailers, licensed signature stores, and online retailers who are helping elevate our wholesale presence. At the same time, we are finding fewer opportunities for mutually beneficial relationships with department stores, which excluding Lanier Apparel, now represent only 10% of consolidated sales. As department stores continue to adjust to changes in the marketplace, we believe our lack of dependence on this channel for our Tommy Bahama, Lilly Pulitzer, and Southern Tide brands further differentiates Oxford from its peers. On the communications front, we continue to evolve our tactics to stay front and center of our consumer. It is a multipronged approach.
While digital and social media anchored by our beautiful websites have moved to the forefront of our marketing strategy, our catalogs continue to energize our consumers and act as measurable calls to action. Meanwhile, events such as Lilly Pulitzer's three-day flash clearance sale, which ends tonight, generate a lot of brand excitement for both existing customers and those just getting to know the brand. We planned this year's sale to be comparable to last year, and while results are not final yet, we are happy with the results to this point. Regardless of how well we position our brands or how clear and compelling our messaging is, without great product, the operating model simply does not work. Therefore, we have purposefully constructed Tommy Bahama, Lilly Pulitzer, and Southern Tide as commercially informed but design-led businesses.
Being design-led allows us to generate the compelling, innovative, and differentiated product that resonates with our consumer and ultimately gets her to open her wallet. 2019 has been a particularly strong year in terms of new products and collections. Highlights have included the emerging strength of key high-performing styles like the Palm Coast Polo or Boracay pants and shorts at Tommy Bahama, the application of Lilly Pulitzer's beautiful prints to Luxletic wear and new and fresh dress and sportswear silhouettes, and the expansion of performance fabrications across Southern Tide's coastal collection. We are quite pleased with the consumer response to this year's offerings, which has helped fuel strong full price selling across our brands and channels. As we move into the second half of 2019, the fundamentals of our business remain strong.
We continue to focus on executing our consumer-centric growth strategies while working to minimize the impact of additional tariffs on both our consumers and our financial results. As I mentioned on our last call, we have had success in negotiating price reductions on goods produced in China and will continue to shift production to other countries. We were also able to accelerate deliveries of some product ahead of the September 1st tariff increase and have made a handful of carefully selected price increases. While we have revised our outlook for the year to reflect the increased cost of goods associated with these tariffs on the back half of the year, we are still on track to deliver solid results in 2019.
I am confident that the strength of our dynamic portfolio of iconic brands, our talented people, and our balance sheet and capital structure have Oxford well-positioned to deliver sustained success over the long term. I'll now turn the call over to Scott 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 be healthy and growing. Lilly Pulitzer's top-line growth was fueled by double-digit e-commerce comps and the addition of three stores since the end of the second quarter last year. Tommy Bahama's full price direct business also remained strong with a 3% comp increase on top of an 8% comp increase in the second quarter of last year. Southern Tide's revenue increased 6% year-over-year, driven by growth in e-commerce. These increases were offset by reductions in wholesale sales at Tommy Bahama and Lanier Apparel, as well as softness in our outlet stores as traffic in outlet malls continues to decline. We achieved a 40 basis point improvement in our consolidated adjusted gross margin in the second quarter, with modest expansion in both Tommy Bahama and Lilly Pulitzer.
This includes a change in sales mix as the higher margin direct consumer businesses represented a larger portion of sales in the quarter. Adjusted operating profit increased from $40.6 million to $41.7 million. Our adjusted operating margin expanded to 13.8% in the second quarter, compared to 13.4% in the same period last year. A higher year-over-year tax rate resulted in an adjusted net earnings increase of only 1% as compared to a 3% increase in adjusted operating profit. Our balance sheet and capital structure remain very strong to support our growth initiatives and investments. On July 31st, we amended our $325 million credit facility. This amendment extended the maturity to 2024, added a lower pricing tier, reduced our unused line fee, and other favorable changes.
As of August 3rd, 2019, we had no borrowings outstanding compared to $25 million at the end of the second quarter of fiscal 2018. Our cash balance increased to $31 million, compared to $7 million in the prior year. These changes were attributable to our strong cash flow from operations. Also want to spend some time walking you through our inventory position at the end of the second quarter. On a FIFO basis, after adding back our $62 million LIFO reserve to both years, the increase was 16%. We increased stock levels on high volume key items and replenishment programs and accelerated the receipt of some goods ahead of the September 1st tariffs. We believe our increased inventory levels are appropriate for our plans for the back half of the year. Turning to our outlook.
As Tom mentioned, we have modified our earnings estimates for the back half of the year to reflect the impact of the recently enacted tariffs. We have estimated the impact to be approximately $0.20 per share, with about $0.05 impacting the third quarter and about $0.15 impacting the fourth quarter. For the third quarter, which is our smallest quarter due to the seasonality of our direct consumer businesses, we expect net sales in a range from $235 million-$245 million, compared to net sales of $234 million in the prior year. On an adjusted basis, earnings per share for the third quarter of fiscal 2019 are expected to be between $0.01 and $0.11, compared to adjusted earnings per share of $0.14 in the third quarter of fiscal 2018. For the full year, adjusted earnings per share are now expected to be between $4.25 and $4.45.
We expect net sales to grow between $1.135 billion and $1.155 billion. This compares to net sales of $1.107 billion in fiscal 2018 and adjusted earnings of $4.32 per share. For fiscal 2019, our interest expense is expected to be approximately $1.5 million, and our effective tax rate is expected to be approximately 26%, compared to 25% in fiscal 2018. Capital expenditures in fiscal 2019, including $16 million in the first half, are expected to be between $45 million and $50 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. 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.
Dana, we're now ready for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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. Our first question comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.
Hey, thanks, guys. You mentioned the $0.20 tariff hit. I'm curious if that is a gross number that you will still try to offset and you're not sure if you'll be able to, or is it a net number? In which case, I'd be curious to know what the gross number was and how much you were able to offset it. Second, just curious if you could maybe talk a little bit more about performance at mall versus off-mall locations. You mentioned some weakness in outlet. I'd be curious if you could provide any sort of quantification as to how much the outlet underperformed the rest of the business. Thanks.
Okay. With respect to tariffs, that's an estimated net impact of the higher tariff. That's sort of taking everything into account. As we referred to in the call, we have been able to get price reductions that are offsetting a significant portion of the gross amount. I think it would be in the neighborhood of 40% or so.
Right.
We are also continuing to push for more. The various levers that we're addressing are moving production out of China, which we've done a lot of already. We'll continue to do more of that. Where we're staying in China, trying to get the price concessions to offset some of the impact. In some cases, we have done some select price increases, and there will be more of that to come. In terms of the outlet stores, Scott, do you want to Yeah. The outlet stores were certainly negative comps and the traffic was weak at the outlet stores. We are certainly, I think feeling what I think which most people in the industry. The good news is, I believe we have about 34 outlets in the U.S., so we're not heavily outlet dependent.
Our outlets are mainly clearance vehicles. We never went down the making a lot of goods for outlets. They're primary clearance vehicles and they're a pretty small fleet of outlets, but we have seen some down traffic. Paul, you're relatively new to the story, but we going back several years ago, we really curtailed any future growth of outlets. They're still a good channel for us to clear end of season merchandise, but we have not grown that channel in
have actually dropped a couple over the last couple of years. We like our position on outlets. We don't think we're overexposed there. We did see some weakness there, I think that's one of the strengths of our model, is that we're not overly dependent on outlets.
Yeah. Thank you. How about mall versus off-mall performance?
Certainly in malls, we see the traffic. In off-mall, you don't necessarily see the traffic counts for the venue the same way. Mall traffic continues to decline, as you know. That is one of the reasons that we're glad that we're not over-stored, and also not over-represented in malls. For example, in Tommy Bahama, less than 40% of our retail locations are mall locations.
Got you. If I can, just one follow-up. Tom, where are you going to be at the end of the year in terms of China sourcing, and where do you expect that number to go to for next year?
Scott, do you want to give them?
Yeah, we were 54% last year. We've begun shifting. I think that we'll really feel most of the shifting in next year. Certainly next spring and summer sourcing plans of China's much smaller. Hopefully, by next year, we'll be more in the 40% range, maybe even less. We're continuing to look for other countries. We do have our China factories. They want to keep the business. Also, as the dollar is getting stronger against the China currency, I think concessions will continue to come. That'll weigh into how much we move. We do want to de-emphasize China more than we have so far.
Okay. Thanks, Scott. Good luck.
Thanks, Paul.
Our next question comes from the line of Rick Patel with Needham & Company. Please proceed with your question.
Hi, Rick.
Hey, guys.
Hey, Tom. Congrats on copping the comp.
Thank you.
I have a follow-up to Paul's question on tariffs as we think about how to model 2020. On the last call, you touched on what the impact would be on prices at the retail level, but given the business also has wholesale and restaurants, it's a bit tricky to back into the impact on cost. I'm curious, is there any way to characterize how much of your cost of goods these tariffs will be touching?
Well, I think restaurants is pretty easy. I don't believe we're using any Chinese food resources there or liquor to speak of.
Right.
I don't think it'll impact restaurants much at all. In the wholesale, that is one of the challenges of addressing pricing, is that we've got to move that channel or try to as much as possible in sync with retail, and that means you've got a little longer lead time on changing prices that show up in both on products that show up in both wholesale and retail. We think we've got room to move there and do what we need to as well.
Yeah.
Yeah.
Rick, I think if you back out our restaurants and then of the apparel, about 75% of the cost is dutiable. When you pull out the non-dutiable aspects, and as the China percent keeps coming down, now it's just under 50%. That will come down next year. Then some of the price increases we're doing, there'll be more price increases that'll affect next year. Very little is affecting this year. More will affect next year. That will lower the impact also, will help mitigate the impact.
Can you also help us on how to think about comps for Tommy and Lilly in three Q versus four Q? At Tommy, you lapped a very tough comparison in two Q, so I'm assuming that you still expect higher comps in the back half. Please correct me if I'm wrong there. For Lilly, you're lapping a +15% in the third quarter from last year. Should we be modeling a step down in three Q, and any thoughts on four Q?
I think our plan assumes for the back half of the year sort of low single-digit comp in Q3 and then mid-singles in Q4 is what we've got baked in there.
Yeah.
Great. My last one is on Southern Tide. Interesting development with the owned retail strategy. What gives you conviction that now is the right time to expand? Any high-level thoughts on what you see as the market opportunity for stores?
I think we don't want to get too far ahead of ourselves on what the market opportunity is. A guy like you can pretty easily imagine what it might be. I think where our confidence is coming and why we've decided now is the time is that we have had good success with the signature stores. The line has developed and matured to the point where we think it can fill out a retail store nicely. You look at the strength of our e-commerce business and the fact that the guest is responding to us. They love the brand, they love the product, and when we give them an opportunity to buy it direct from us, that becomes another important channel for them. Wholesale will still be important, e-commerce will still be important, but we think there's a good opportunity there in company-owned retail as well.
Thanks very much. Good luck this fall.
Thanks a lot, Rick.
Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, guys. This is Carlin Lynch on for Susan. I just wanted to follow up on something you had just said on the Tommy comps in the back half. With the business being as strong as it is, how much more room do you see for margin improvement, and what are the steps that the company's taking to drive that expansion, especially in the fourth quarter with the mid-single-digit comp?
Yeah. Tommy Bahama operating margin improvement continues to be a high priority. First, we've made some progress in cleaning up Asia last year. We have gotten our initial gross margins. We continue to work on trying to get those higher. Obviously, the tariff situation puts a little pause on that as we're navigating through that. We continue to grow a really healthy direct consumer business. I think Tommy Bahama's operating margins have room to expand. Hopefully each year we'll make some steady progress towards that goal.
Got it. I just wanted to touch on some of the new categories that you guys have been adding to or expanding over the course of the last year, whether it's golf, swim, tennis. How are those performing relative to your initial expectations? Is tariffs impacting that in any way? As you think about the broader portfolio, are there any other gaps in the merchandise that you see the need to fill in or are glaring holes? Thanks.
We've been really pleased with the performance. I think you're talking about Lilly Pulitzer in specific, where we've added swim, golf, and tennis within the last year. That's part of a broader category really that we would think of as we call it, Luxletic, that's really activewear within Lilly Pulitzer, and we've been thrilled with the way it's performed. Golf and tennis and swim, each of those by themselves are pretty small. When you look at that whole activewear realm within Lilly Pulitzer, it's become a pretty meaningful piece of the overall pie. To answer the second part of your question, I don't think that's been impacted any worse than any other part of the business by the China tariff situation. It's certainly not exempt from it, but I don't think it's necessarily been hit any harder than that.
In terms of new categories, we're always looking for opportunities and white spaces that we think we can fill. Not prepared to announce anything at the moment, but that's always an objective in all of our businesses, is to look for new areas that we can go into. A great example of that's in Tommy Bahama, where as great as that business is and as great as it has been for a very long time, we've never had the strongest sort of key item type business. Now with things like the Boracay pants and shorts, which is really a whole family of bottoms products, we've really built a franchise there. The Palm Coast Polo was our first foray into a true performance polo, and I believe it's become our number 1 selling polo and it's just got tremendous legs.
Over the last couple of years, we built another of others in Tommy Bahama. We're always looking for those opportunities, and I think we'll continue to discover new ones each year.
All right. Thanks, guys.
Thanks a lot.
Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon, everyone. As you think of the current retail environment beyond tariffs going into the balance of the third quarter and into the fourth quarter, what are the biggest puts and takes that you see could be the differences between this year and last year in relation to the consumer, in relation to your business initiative? Thank you.
In relation to the consumer, look, we know there's a lot of noise out there about where the economy is headed. If you look at the consumer themselves, unemployment numbers are still incredibly good and favorable. The number of people working full time is the highest it's been since before the Great Recession. Wage growth is over 4% on a trailing 12-month basis. You look at all these things, the savings rate's actually still quite high. Gas prices are favorable. You just look and the list goes on and on and on. I believe there's significant reason to believe that the economy is going to remain strong for the next 12 months and that the consumer is going to remain strong, and that's certainly what we've factored into our plans for the fourth quarter. I'm not sure if that answered everything you asked.
As you think of each brand in terms of whether it's Lilly, whether it's Tommy, is there marketing? Is there a new product that we should look to in terms of driving the excitement as we go through the balance of the year? Then how do you think about inventory levels as we move through the year?
Yes. I'll let Scott comment on the inventory levels in a minute. In terms of marketing and new products, we'll talk about this more on our December call as we're closer to the heart of the holiday season. In Tommy in particular, in women's, we have a number of new products coming this fall. We've got some that are already out, some that are coming a little bit later that we're very excited about. They're more seasonally appropriate than I think we've ever been in Tommy Bahama women's. We've got more things with sleeves, more warm and cozy product that's on the way. We're very excited about that. In terms of marketing, I don't think we have any initiative that's like a new technique, but we are going to be doing some things a little bit differently.
Not all of that is fully crystallized at the moment, but we would anticipate having at least one extra mailer, I think, in Tommy Bahama during the fall holiday season. As you know, those are very important for us. Then, we're going to mix up the cadence a little bit and make some tweaks to our marketing activities. We've got lots of things that we're excited about in terms of what we're doing. Then we still think there's good reason to believe that the consumer is in a good position to spend money at holiday time.
As far as inventory, Dana, inventory is up 16% year-over-year. If you really peel the inventory back, it's not an aged inventory increase. It's really in mostly key items and replenishment type programs. Things like the Boracay, where we were breaking some last year. We're in good stock there, where we can replenish our stores, and we're in stock on e-com. We've got some other key items. Merchandising wise, we're trying to stress key items in both men's and women's at Tommy, and that has really caused the inventory to be up some. We feel good about the inventory levels and the composition of the inventory.
Is there anything excluding tariffs, anything on the expense buckets in the back half of the year of what is or isn't comparable to last year?
Yeah. We have a couple of things. In the second quarter is, in case you missed it, as Scott called out, we had a higher tax rate, that created about a $0.045 drag. I think the way we think about that tax rate is it's more the normal. Last year was the unusual, but it was favorable to us. Then in Q3 and Q4, we've got some of the Marlin Bar pre-opening expenses.
About $0.04 in Q3 and about $0.05 in Q4. The Marlin Bar, it's not just the two we're opening this year. It's about a six-month lead time. The rent, even if we're in a free rent period, the rent goes through our P&L from the time we take possession. We're going to have five different Marlin Bars running some pre-opening expense through this fiscal year. That's causing a little bit of a headwind expense wise.
Yeah. It's all baked into the guidance, but to answer your question, there are a couple of things that are year-over-year drags on the bottom line.
Thank you.
Thank you, Dana.
Our next question comes from the line of Steve Marotta with C.L. King & Associates. Please proceed with your question.
Good afternoon, Tom and Scott. As far as the discretionary spend expectations go for the balance of the year, were there any changes in the annual guidance associated with deltas in discretionary spend, either up or down, or was that $0.20, 100% wholly tariffs?
That's all tariffs. Yeah, the $0.20 is all tariffs.
There again, there was no changes in discretionary spend from the last time you spoke to the street on guidance.
Correct.
That's right.
Great. My second question is as it pertains specifically to the Q3 comp guidance, is there any acceleration in the business expected between now and the balance of the quarter? Or is it more or less steady as she goes?
Not really. It's steady as she goes.
Very helpful. Thank you.
I think right now we're tracking really right where we would-
Yeah
what we would need to do for the quarter.
Yeah.
Helpful. Thank you very much.
You got it. Thank you.
Our next question comes from the line of Edward Yruma with KeyBanc Capital Markets. Please proceed with your question.
Hi, Ed.
Hey, how are you guys? Thanks very much for taking the questions today. First, since you use outlets as your promotional vehicle or your disposition vehicle, are you seeing inventory backing up on outlets given some of the commentary you had? Do you expect to clear through them in due course? Second, as we step back and think about the overall promotional strategy, either the bounce back or the Lilly sale, I know you indicated you may make some tweaks to marketing or some strategies. Are you changing promotional strategy at all, and how does it impact your back half view? Thank you.
Ed, I would say, first of all, with respect to the outlets, they are still an important clearance channel for us. As you know, we've developed some others over the last couple of years, including twice a year, doing some clearance within the Tommy Bahama stores, which has made us less reliant on outlets and overall has allowed us to get better realization on our end of season, sort of residual inventory. With respect to the inventory levels in outlets, they're actually quite low right now. They're clean as a whistle, as we would say, and that actually gives us some room. If needed, there's room to push additional inventory through the outlets.
In terms of basic strategies, and you know all our basic strategies, Ed, the gift with purchase, the catalogs, the Tommy Bahama gift cards, the bounce back, or the flip side sale, as we call it. I don't think there's any real change in strategy, but we will make some tweaks in some of the timing of some of those events. Of course, those are all designed to enhance results in the fourth quarter. That's certainly the plan.
I got it. Maybe just sneak in one final one. Any interesting commentary on tourism that we should consider, and particularly as you think about Hawaii and California, given some of your new emphasis on that state? Thank you.
I don't think we're seeing what we view as a big impact one way or the other from tourism right now, Ed, is what I would say. There have been times where we felt like it was either a strong positive or a strong negative, and I don't think that's the case at the moment.
Great, thank you.
Ladies and gentlemen, there are no further questions at this time, and I'd like to turn the call back to Tom Chubb for closing remarks.
Okay, thank you, Dana, and thank you very much to all of you for your interest. We look forward to talking to you again in December.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.