Good day, everyone, welcome to today's Oxford Industries, Inc. third quarter 2018 earnings conference. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the floor over to Ms. Anne Shoemaker. Please go ahead, ma'am.
Thank you, Yolanda, good afternoon, everyone. 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, 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, 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 store 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. Because fiscal 2017 had 53 weeks, each fiscal week in fiscal 2018 starts and ends one calendar week later than in fiscal 2017.
To provide a more accurate assessment of our fiscal 2018 comparable store productivity, we are presenting fiscal 2018 comparable store sales on a calendar adjusted basis by comparing the fiscal 2018 period to the comparable calendar period in the preceding year. Thus, comparable store sales for the third quarter of fiscal 2018 compare sales in the 13-week period ended November 3rd, 2018, to the 13-week period ended November 4th, 2017. Now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO, 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 to discuss our third quarter results and outlook for the remainder of fiscal 2018. We were very pleased with the strength exhibited by our branded businesses during the quarter, which was a continuation of the positive trends we witnessed during the first half of the year. While our revenue came in slightly below our guidance range, the shortfall was primarily attributable to Lanier Apparel. With this being our lowest volume quarter, swings in timing or demand are more magnified compared with the other three quarters of the year. Given this, I think it's worth spending a few minutes talking through the key drivers of the third quarter.
As you know, our branded businesses, Tommy Bahama, Lilly Pulitzer, and Southern Tide, are quite seasonal, and with their focus on spring, summer, and resort, they do most of their business in the first, second, and fourth quarters. While the third quarter remains our smallest volume quarter, it includes the incredibly popular Lilly Pulitzer After Party Sale, which was a huge success this year in terms of revenue and margins. During this event, Lilly's website goes on sale for three days only. This year, After Party achieved record-setting e-commerce sales of $29 million, with a gross margin over 40% once again. This is an outstanding way to move end-of-season inventory, and this amazing clearance strategy continues to support Lilly's higher than average operating margin. Beyond the After Party Sale, Lilly Pulitzer delivered a strong 15% comparable sales increase in its full price direct-to-consumer channels and expanded their operating margin.
Congratulations to the Lilly team on a quarter to be proud of. Tommy Bahama also delivered another solid quarter, highlighted by a positive comp of 5% with particular strength in their e-commerce channel. Wholesale sales were lower year-over-year as planned, driven by our deliberate pruning of certain retail accounts. Importantly, operating results improved at Tommy Bahama with third quarter's progress driven by enhanced gross margin. Add Southern Tide to the mix, which is on track to meet their top and bottom-line growth objectives for fiscal 2018. We are quite pleased with the overall positioning of our branded businesses as we entered the fourth quarter. Shifting to Lanier.
You may recall that on our September earnings call, we said there was going to be a significant shift in revenue at Lanier from the third quarter into the fourth quarter. The actual dollar amount that ended up moving was a bit higher than our original plan. On top of this, Lanier experienced some unexpected softness in some of its replenishment business, which is continuing into the fourth quarter. While we expect to have a large year-over-year sales increase in the fourth quarter at Lanier, we now expect the increase to be smaller than we previously planned, resulting in a modest top-line decrease for the full year. Finally, as it relates to third quarter profitability, our tax rate swung from a tax benefit in the third quarter of fiscal 2017 to an effective tax rate of 42% in the third quarter this year.
This was higher than planned and higher than our full-year tax rate projection of 26%. The third quarter tax rate is an outlier caused by some minor discrete items that ended up being more impactful than they normally would due to the lower level of taxable income we generate in our seasonally smaller third quarter. We are on track to deliver solid growth for the fourth quarter and fiscal 2018, which is especially notable since we have one week less in the fourth quarter this year than last year. That said, we have tempered our fourth quarter comparable sales assumptions as demand in our direct-to-consumer channels has moderated versus third quarter levels. Trends at both Tommy Bahama and Lilly Pulitzer are running below our initial expectations, with Lilly off more than Tommy due to greater pressure on e-commerce sales through the first six weeks of the fourth quarter.
We now expect comparable sales to increase in the low single digits, and we have seen some continued softness in the wholesale replenishment, which, along with our third quarter results, has been factored into our updated full-year outlook. As we sit here today, we have more than half the fourth quarter still ahead of us. That includes very important holiday selling, resort selling, and early spring deliveries of the wholesale. Looking at the calendar in a bit more detail, with Christmas falling on Tuesday this year, that means shoppers still have two full weekends and Christmas Eve on Monday to shop before turning their attention to enjoying the holiday with their family and friends. In addition, New Year's also falls on Tuesday.
With both Christmas and New Year's falling on Tuesday, many people will take either one or both of the full weeks off and spend it in markets like Florida, Hawaii, and the desert, all of which are very important to us. Our fiscal year does not end until February 2nd. The point of all this is that we have a lot of opportunity to do business between now and the end of the quarter. As we head into the final stretch, our incredible team of dedicated people is laser-focused on delighting our customers with outstanding products and memorable experiences. I'll now turn the call over to Scott Grassmyer for a bit more on our third quarter results and more details on our guidance for the remainder of the year. Scott?
Thanks, Tom. I'll first touch on gross margin and our balance sheet before discussing our outlook for the rest of the year. Our adjusted gross margin in the third quarter expanded 160 basis points to 55.3% from 53.7% in the same period of the prior year. This was primarily due to a change in our sales mix, with the higher margin branded businesses making up a greater proportion of sales than in the same period last year. Also, we saw gross margin at Tommy Bahama expand in both its direct-to-consumer and wholesale businesses. Our balance sheet and capital structure remain very strong and support our growth initiatives and investments. We saw our inventory balance increase to $138 million from $127 million at the end of the third quarter last year.
The increase was due to the shift in timing of some Lanier Apparel shipments and planned increases in our direct-to-consumer businesses in the fourth quarter. We also ended the quarter with $225 million of unused availability under our revolving credit facility. Now on to our outlook for the remainder of the year. We have seven weeks ahead of us, which include a key holiday shopping period, followed by our important resort season. As Tom mentioned, based on what we have seen to date, we have reduced our comp assumptions from high single-digit increases to low single-digit increases and reduced our wholesale replenishment expectations. We expect sales in a range from $297 million-$307 million, compared to net sales of $293 million in the fourth quarter of fiscal 2017, which was a 14-week quarter.
On an adjusted basis, earnings per share for the fourth quarter are expected to be in the range of $0.96-$1.11, up from $0.93 last year. For the full year fiscal 2018, we expect sales to grow between $1.106 billion and $1.116 billion, compared to $1.086 billion last year. Adjusted earnings per share are expected to be between $4.75
and $4.35. This compares to fiscal 2017 earnings on an adjusted basis of $3.66 per share. Our interest expense is expected to be approximately $2.5 million, and our effective tax rate for fiscal 2018 is expected to be approximately 26%. Capital expenditures, including $31 million in the first nine months of fiscal 2018, are expected to be approximately $45 million, primarily reflecting investments in information technology initiatives, new retail stores and restaurants, and investments to remodel and relocate existing retail stores. Free cash flow for fiscal 2018 is expected to be approximately $50 million. Finally, our board of directors has approved a quarterly cash dividend of $0.34 per share. Oxford has paid a dividend every quarter since becoming a public company in 1960. Yolanda, we are now ready for questions.
Certainly. If you would like to signal for a question at this time, please do so by pressing star one on your telephone keypad. If you are using a speakerphone, please ensure that your mute function has been turned off to allow your signal to reach our equipment. Again, that's star one for any questions. Our first question will come from Edward Yruma with KeyBanc Capital Markets.
Hi, Ed.
Hi. Good afternoon. Thanks for taking my question. I guess first, on the comp weakness, I know you guys cited some pressures in e-com. I was wondering if you could talk a little bit about product acceptance. Are you seeing particular pockets of weaknesses in certain product categories? Then as a follow-up to that, regarding inventory levels, do you expect that you'll need to be more promotional in the fourth quarter given some of the comp slowdown? I did notice that Lilly has a promo on S'well water bottles today, which I think is somewhat unusual.
Let me address the comp sort of in totality to help you figure out what's going on there. If you look at what we're doing to our forecast for the fourth quarter, there's a piece of it that's wholesale, and that's that sort of softer replenishment business that we talked about hitting Lanier in the third quarter. We're seeing some softer wholesale replenishment in the fourth quarter. Then on the comp piece, you really have to break it into the Tommy part and the Lilly part. As you know, we had a very aggressive high single-digit comp assumption built into the fourth quarter in our last forecast. What we've seen since then in Tommy is that they had a very good November. They enhanced their marketing activities for the month of November versus last year, and it worked.
They probably were a little lighter on marketing in the first couple of weeks of December, and that's where we started to see some softness in our comps. It's not like the bottom's dropping out. They're just not as strong as they were. For purposes of forecasting, December is 50% of the quarter in Tommy Bahama, and we felt like we had to sort of look at the most recent history and run that out through December. That's where a big piece of the reduction in the comp assumption is coming from. The other piece is really in Lilly Pulitzer e-commerce, and there's sort of two things that are going on there. The first is that as you know, Ed, in December, we do two big gift-with-purchase sort of events in Lilly Pulitzer.
One is the Lilly Pulitzer's birthday event during the earlier part of November, and then the Cyber 5 sort of gift with purchase event starting on Thanksgiving Day and running through Cyber Monday. Neither of those performed as well as we would like them to and as well as we had planned, which created a little bit of a hole. In Lilly, November is as big as December, and about twice what January is. That created a bit of a hole that is gonna be hard for them to overcome. The second thing that's going on in Lilly Pulitzer with e-commerce is, as you know, we re-platformed in Lilly Pulitzer earlier this year.
We're very pleased with the technology, but in terms of the way we've set up that website and the way it's operating, we've got some bugs that we still have not worked out that we believe have negatively impacted the shoppability of the website. We're hearing that from our customers. Some of our own employees who shop the site a lot are telling us the same thing, and that's kind of weighing on e-commerce. We think we've got a plan. We're working on the plan. That won't all get corrected by the end of the fourth quarter. That's really where we're coming from in reducing the comp assumption. It's really not about lack of product acceptance or lack of consumer enthusiasm overall.
Great. Thanks so much, and best of luck for the balance of holiday.
Okay. Thank you, Ed.
Thank you. As a reminder, that's star one for any questions at this time. We'll go next to Susan Anderson with B. Riley FBR. Please go ahead.
Hi, good evening. Thanks for taking my question, nice to see another strong quarter. I guess just to follow up on the previous question on Lilly, you had mentioned the gift with purchase wasn't as strong as expected. I guess, are there any thoughts around why it would have been weaker? It doesn't sound like you feel like there's a lack of product acceptance. Maybe if you could just give any color around why it would be weaker. On Southern Tide, if you could maybe give some color. It looks like the growth there had slowed a little bit in the quarter.
Yes. First of all, thank you for mentioning the quarter. We were proud of the third quarter. If you look at it was good for Tommy with a good strong comp, improved gross margin, and improved operating results in Lilly. Got top-line growth, an unbelievable After Party Sale. You had a strong comp that's on top of the After Party Sale. After Party does not get included in the comp, that comp was in addition to After Party, and then an improved operating margin in Lilly. It was a good third quarter. In terms of what didn't work with the gift-with-purchase events, obviously, we're studying that very closely. Susan, I think you know that those are sort of tiered events, if you will, where you get different gifts at different levels.
I think we believe that part of what we probably could have improved upon or can improve upon in the future is making the gifts at various levels more compelling for what the level is. A second issue that was true with respect to Lilly's birthday in early November is we did that the same weekend as we were doing the grand opening of our beautiful new store on Worth Avenue in Palm Beach, which is the birthplace of the Lilly Pulitzer brand. We think the message got a little lost about the gift-with-purchase event. There was so much excitement, justifiably, about the opening of Worth Avenue that we believe that the message about the gift-with-purchase event might have gotten a little bit lost in the mix there.
As you move to the Cyber 5 event, I think you have the additional factor of people started their promotional events very early this year. A lot of people started Monday of that week as opposed to waiting till Thursday or Friday. I think to be very direct about it, some very high-quality brands that you wouldn't think would do it went straight to 30 off everything. That's a challenging environment in which to communicate. We're looking at all that and obviously, that'll all factor into our plans for next year.
Got it. On Southern Tide also.
Oh, yes. I'm sorry. On Southern Tide, look, third quarter is not Southern Tide's natural strength. The fact that it doesn't look like it's a big growth quarter, I wouldn't take as indicative of momentum at all or ability to growth. I think with them, they're a much more a first half business, a spring, summer business. I think by the end of the year, we will have achieved our growth targets both top and bottom line for them. We believe we're set up well to continue that in fiscal 2019. Not that we wouldn't love to do more business in the third quarter and not that we're not working on ways to do that, but we're not concerned about it.
Yeah. They were right on our internal plan for the quarter.
Great. Okay. Then if I could follow up too on the wholesale channel, you had mentioned the replenishment had been weaker. If you had any thoughts around, I guess, why it's been weaker and is this related to the major department stores?
Yeah. Most of the replenishment programs are run through what we would call majors, whether they're technically department stores or not. To be honest, it's a little bit of an enigma to us because our selling, and this is across all the brands really in the majors, has been quite good. The biggest piece of replenishment business is in Lanier Clothes, and their sell-throughs have just been off the charts. It seems like for whatever reason, the big retailers are just sort of stepping on the inventory brakes a little bit.
We don't think it's related to the health of our particular brands or products within those retailers. That means that generally, it'll come back fairly quickly.
Got it. Okay. One last one if I could follow up. I'm not sure if you mentioned, I may have missed it on the gross margin, just thoughts around fourth quarter. You guys had a pretty good gross margin expansion for third quarter. I guess with the lighter sales, how should we expect that to pan out?
Yeah. In Lanier, we'll have year-over-year growth in the fourth quarter where Lanier was
A decrease year-over-year in the third quarter. That will play on our consolidated gross margins. I think our consolidated gross margins might move backwards a little bit, they're really mixed with Lanier being stronger year-over-year, less than our earlier plan, still a pretty significant increase year-over-year at Lanier. In a way, Lanier is a very low gross margin business, and it'll weigh heavier in our mix. For the year, we still should have some nice gross margin expansion, but in the fourth quarter, the consolidated might move backwards just a little bit due to mix.
Okay, got it. Thanks so much. Good luck with the rest of the holiday season.
Thank you, Susan.
Thanks.
Thank you. As a final reminder, that's star one for any questions at this time, star one for questions. We'll hear next from Michael Kawamoto with D.A. Davidson. Please go ahead.
Hey, guys. Thanks for taking my question. Just on the wholesale side and your pruning of doors, do you expect that trend to continue into next year? Was that some of the unexpected weakness as well, or was it mostly all on the Lanier replenishment side?
Our softness really versus, I guess, our previous forecast was mostly about replenishment. I think we don't really have the numbers for next year yet. We don't have our budget yet. I don't know that we're anticipating a big step back in the wholesale for next year.
Yeah. I think our door pruning is pretty much.
Yeah. That's for the most part.
Okay, that's helpful. Just on the hurricanes this year, it seems maybe less impactful than last year. Is that fair to say? Just any commentary around the doors that were impacted this year?
Yeah. Look, first of all, as is always the case in these scenarios, our first concern is about the well-being of our employees and our customers in those places. Obviously, fortunately, I don't think we had any big problems with employees, but a lot of people were negatively impacted by those hurricanes. In terms of our business, just given the time of year and where those hurricanes happened, we did have a fair number of store closing days, but they happened during a timeframe that's a pretty small business time of year. I don't think there was any real discernible impact on our business. I don't think there's anything that we'd call out. It just didn't amount to that much. I'm sure we lost a few dollars, but nothing material.
Got it. Thanks. Best luck for the rest of the year.
Thanks a lot, Michael.
Thank you. Our final question today will come from Dana Telsey with Telsey Advisory Group. Please go ahead.
Good afternoon, everyone. As you unpack
Hi, Dana.
Hi. As you unpack this third quarter and think about dimensionalizing it for the fourth quarter and going into 2019, how do you think about inventory levels, where they are now, how you're thinking about planning them for 2019, what are you seeing on supply chain? Lastly, with the operating margin at Tommy Bahama and the focus on supply chain initiatives, flow of goods moving through the outlet channel, and optimizing expense management with the current state of where Tommy is and Lilly is, how do you see the opportunity for margin improvement go forward? Thank you.
Yeah. Dana, on inventory, sure, we're a little higher year-over-year. Some of that is some of the Lanier shift where Lanier should have a bigger quarter in the fourth quarter than in the third. Also, we would expect to have a bigger Lilly flash clearance sale in January. We have two of them a year, and one was in September and the other one's in January, and we'd expect that to be bigger year-over-year. We think by the time we get to the end of the year, we think our inventories will be more comparable year-over-year than they are right now.
Do you want to talk about the gross margin expansion?
Yeah. Tommy, we've had some nice progress on gross margins this year. We had a lot of initiatives. Some was around some selective price increases and some were around some negotiations with vendors and getting some input costs down. We also did, I think, a good job cleaning up that clearance channel where our outlets are performing at a higher gross margin. We think all that can carry over into next year. We think we're set up well. The tariff cloud's still out there, but our categories have not been named yet. Hopefully, this thing settles, and if that comes, we have plans to shift some production to offset it. We expect the factories to work with us, and we might have to take some select price increases. We don't see a long-term negative impact.
There might be a little short-term, but we think we can mitigate most of that. We think we're set up very well in Tommy to continue to work on gross margin expansion.
Thank you.
Thanks, Dana.
Thank you. That will conclude our question and answer session for today. I'd now like to turn the call back to you, Mr. Tom Chubb, for any additional or closing comments.
We have worked hard to differentiate Oxford Industries with some of the most distinctive brands in the marketplace. Tommy Bahama, Lilly Pulitzer, and Southern Tide are premium brands that build long-term relationships with their consumers based on the strength of their brand message and product. Our superior brand positioning, coupled with strong teams running the businesses, gives us confidence in our ability to deliver long-term growth and compelling shareholder value. Thank you again for your time this afternoon, and we wish you and your families a very happy holiday season.