Earnings Call: Q2 2019

Sep 12, 2018

Good day, everyone. Welcome to today's Oxford Industries Incorporated Second 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, Stephanie, and good afternoon, everyone. 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 law. 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. 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 atoxfordinc.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 exclude sales associated with outlet stores and e commerce clearance sales. Because fiscal 2017 had 53 weeks, each fiscal week in fiscal 2018 starts and ends 1 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 Q2 of fiscal 2018 compare sales in the 13 week period ended August 4, 2018 to the 13 week period ending August 5, 2017. And now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO and Scott Graf Speyer, 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. We are quite pleased with our 2nd quarter results, which reflect sales increases in all operating groups, highlighted by a solid 7% comp store sales increase. At our 2 largest brands, Tommy Bahama and Lilly Pulitzer, we saw low single digit comps in our retail stores and double digit comps in our e commerce business. At the same time, our overall gross margin expanded as our sales mix continues to shift towards a greater proportion of DTC business. By brand, Tommy Bahama's adjusted gross margin expanded 176 basis points and Lilly Pulitzer's expanded 139 basis points. Our recent performance underscores economy and a healthy consumer. The combination of a high single digit consolidated comp gain and robust gross margin improvement is a great indication that our brands are truly resonating with our customers through innovative differentiated product, controlled distribution and compelling communication. Creating this emotional connection between our brands and our customers is critical to driving sustainable growth and increased shareholder value over the long term. To support our direct to consumer businesses, we continue to make significant investments to ensure we effectively reach and delight our consumers. Our multiyear IT infrastructure projects are proceeding well. These initiatives are supporting our businesses with fantastic digital presentations of our brands and improvements designed to create a more seamless omnichannel experience. One of the key benefits of these initiatives is the ability to better leverage inventory across the system to satisfy demand regardless of where it originates. Another benefit is the enhanced ability to aggregate and analyze data in ways that will allow us to better serve the wants and needs of our customers on a more individual personalized basis. Investments in marketing are also a priority for 2018, particularly in the first half. Across the enterprise, marketing to acquire and retain customers is a major focal point and includes the addition of staff, increased spending levels and experimenting with some new and different marketing techniques. While the return on these programs will vary in terms of attracting and retaining customers, the learnings from these investments are important to our brands and their ability to continue to drive profitable growth. Lastly, we are investing in our stores and restaurants, which generate almost half of our consolidated revenue and do a magnificent job presenting our brands to our guests. An exciting example of this is the Lilly Pulitzer store that we opened in Wailers Village on Maui. During the planning phase, we believe that this location would be an excellent opportunity to introduce the Lilly brand to new customers. To date, the results are proving that belief to be well founded. An exceptionally high percentage of the customers who have shot Lilly Pulitzer in Whalers Village are new to the brand. And even more exciting to us is that a high percentage of the new customers are from California. Currently, we have no Lilly stores in California and this is still a largely untapped market for the brand. We are looking forward to opening our new Lilly location in Newport Beach, California in early 2019. At Tommy Bahama, we remain very excited about the Marlin Bar concept. We have seen strong results so far in the 2 we have opened at Coconut Point and Palm Springs. We are working hard on finding additional locations and landlords are sharing our enthusiasm for the concept. We believe we will open 2 or 3 additional Marlin Bar locations in the back half of fiscal twenty nineteen and we'll have more to say about this in subsequent quarters. Now a bit about the back half of the year. Our 3rd quarter is quite small because of the seasonality of our brands, but the quarter does include the highly anticipated Lilly Pulitzer end of season clearance event. The after party sale as it's known began in stores last Saturday and online on Monday of this week. Here's a quick update. This is going to be the largest, most successful event ever. There has been tremendous customer enthusiasm with lines outside the stores over the weekend and our guests queuing up to shop online. This amazing event will end this evening at midnight Easter. Looking further ahead, we believe that the consumer in our businesses are ready and excited for a robust holiday and resort season. We have compelling, well planned offerings for our guests with beautiful product and marketing campaigns that are engineered to drive strong sales throughout the Q4. This afternoon, I've spent quite a bit of time discussing our larger brands, Tommy Baham and Lilly Pulitzer. So now I want to take just a minute to bring you up to date on Southern Tide. We have gained a lot of traction so far in 2018. We're doing a better job than ever articulating what this brand represents. It is authentic coastal southern. With the idea of southern style being not about geography, but rather a state of mind, Southern Tide has broadened its reach and 13 signatures stores now pepper the Eastern U. S, including locations as far north as Massachusetts and Connecticut with plans to add 2 more stores in Florida before the end of the year. Southern Tide's e commerce business, which is about 20% of the brand sales, is an increasingly important channel of distribution and one in which we are investing. Southern Tide is now operating on a new e commerce platform and we have beefed up our digital and e commerce teams. We entered 2018 with a plan for Southern Tide to deliver a low solid double digit sales increase and a low double digit operating margin, and we are on track to achieve those objectives. Across Oxford, our people are talented and focused, and our brands are very well positioned in the marketplace. We remain confident in our ability to achieve our full year financial, operational and strategic objectives, while making significant investments in our businesses for the long term. I'll now turn the call over to Scott Grassmeier for a bit more on our Q2 results and more details on our guidance for the back half of the year. Scott? Thanks, Tom. Before I cover our consolidated results and our outlook, I want to take a minute to discuss actions we have taken related to our Tommy Bahama business in Japan. In the Q2, we incurred $3,700,000 of charges associated with the restructuring and downsizing of this business, including the forthcoming closure of the flagship retail restaurant location in Ginza. As a reminder, in fiscal 2017, we lost $5,400,000 in our Asian Pacific operations. Because of these restructuring actions and other cost reductions and improvements after fiscal 2018, we expect only a negligible impact to our profitability from the Tommy Bahama APAC operations. Now I'll move on to our Q2 results. On a consolidated basis, net sales increased 6% with strong comp store sales increases to each of our branded businesses. In the Q2 of fiscal 2018, SG and A as a percentage of net sales increased to 48% compared to 47% last year. Approximately $5,000,000 of the increase was marketing. We had $3,200,000 of SG and A related to charges associated with the Tommy Bahama Japan restructuring, as well as costs associated with the operation of additional Lilly Pulitzer retail stores. U. S. Tax reform had a positive effect on our earnings in the 2nd quarter, with a tax rate of 24% compared to 36% last year. Our adjusted EPS was $1.83 in the Q2 of 2018 versus $1.44 last year and close to the top of our guidance range of $1.75 to $1.85 Our balance sheet and capital structure remain very strong in support of growth initiatives and investments. We saw our inventory balance increase about $4,000,000 or 3 percent over last year to $124,000,000 This increase is to support planned sales increases and the operation of additional retail stores. We also ended the quarter with $228,000,000 of unused availability under our revolving credit facility. Our guidance for the Q3 of fiscal 2018 includes net sales in a range of 235 $1,000,000 to $245,000,000 and adjusted earnings per share to be between $0.10 $0.20 This compares with sales of $236,000,000 in the Q3 of fiscal 2017 and adjusted earnings per share of 0.17 dollars Our 3rd quarter remains our smallest sales and earnings quarter due to the seasonality of our Tommy Bahama and Lilly Pulitzer to direct consumer operations. Lanier Apparel had a very strong Q3 in fiscal 2017. This year Lanier has had some major program shift from the Q3 into the Q4, putting some downward pressure on our Q3 results. For the full fiscal year, we have affirmed our guidance and expect sales to be between $1,125,000,000 $1,145,000,000 and adjusted earnings in a range of $4.45 to $4.65 per share. This compares to net sales of $1,086,000,000 in fiscal 2017 and adjusted earnings of $3.66 per share. Our interest expense is expected to be less than $3,000,000 and our effective tax rate for fiscal 2018 is expected to be approximately 26%. Capital expenditures, including $22,000,000 in the first half of fiscal twenty eighteen, are expected to be approximately $50,000,000 in fiscal 2018. This will primarily consist of investments in information technology initiatives, new retail stores and restaurants and investments to remodel existing retail stores and restaurants. Free cash flow for fiscal 2018 is expected to be approximately 50,000,000 dollars 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. And Stephanie, with that, we are ready for questions. Thank you. And we'll take our first question from Edward Yruma from KeyBanc. Please go ahead. Hey, good evening, guys. Thanks for taking the questions. Hey, how are you? Hey, how are you? I guess first on Tommy Bahama, I know you highlighted some of the marketing step up in the first half of twenty eighteen. I know you tried different things. You blanketed an airport, did more social media. I guess if you had to kind of rank what you did, maybe some of the returns or benefits you saw, I mean, what was successful and what was least successful? And then I guess second, good to hear the reduction in Asia losses going forward. Just for clarification, so does that does that minimal losses really is that for all of fiscal 2019 or is that it's going to start to trend that way once the store is closed? Thanks. Okay. First, with respect to the marketing in Tommy Bahama and this would be in Lilly Pulitzer too, we really spent more this year, significantly more than we had in the past. We tried a lot of different things. I'm not sure that we're prepared to actually rank them, but we will talk about some of the things that we really liked a lot. One of them is the thing that you called out, the sort of blanketing in airport, where we blanketed Fort Myers Airport with advertising in an airport that serves the West Coast of Florida. And as you know, that's a very, very important market for us and we like the way that worked. We think it had a positive impact on our business. We also like getting the video assets out in a very variety of formats. And I think we like the way that, that presented the brand to our guests. And in some ways, I think change the perception of the breadth and the depth of the brand and enhance the guest view of it. And then I think one of the things that's been particularly exciting that we've liked watching a lot is the combination of some very targeted television advertising using those video assets and then some terrific PR that's coupled with that, that gets us placed on the local morning shows. So in a given locality after the Today show, they may have the local version of the Today show. And we would be featured on there, some of our people and they would be perhaps talking about the food and drinks at our restaurant and some of the clothes or maybe they're talking about how to host a backyard barbecue or a tailgate party. And again, they sort of integrate into those discussions, not only the clothes, but other items that we sell in all aspects of the Tommy Bahama lifestyle. And some of these segments go on for 6, 7 or even more minutes. And we're sort of throughout those segments, there are references, both visual and otherwise, to Tommy Bahama. And it's just a great way to get the brand out there. So that PR activity in combination with the television advertising is proving to be a very powerful combination. And we've had a lot of that. We'll have a lot more through the back half of the year. Then with regard to the other question, I'll let Scott. Yes. On the Ginza flagship, the restaurant will close later this month and then we'll go through sometime in January closing the retail side and liquidating the inventory and having those sales. So we'll be out of Ginza by the end of the year. So 2019, our complete Asia Pacific operations, we should be somewhere close to breakeven. So there won't be any kind of material impact from those operations for 2019. Great. Thanks so much. Thanks, Ed. We'll move on to Rick Patel with Needham and Company. Hey, good afternoon, guys, and congrats on the strong execution once again. Obviously, we wish the people in the Carolinas all the best as they prepare for Hurricane Florence. As we think about the exposure the storm could have to Oxford, can you remind us how many stores or sales you have in the region by brand? Yes. Well, Rick, to start with, I would echo your comments in these kinds of situations. Obviously, our first concern and priority is the health and safety and well-being of our customers, our employees and everybody else that's living in the affected regions. But in terms of our exposure, we've got a total of 12 stores in North Carolina and South Carolina, which seems a little more where it's headed, at least at the moment. And that would be about 5 percent of our total store count, also about 5% of the total retail sales. And that's the way that we're sort of looking at it right now. I mean, that is again, we're most concerned about the health and safety of the people. But that's a relatively small part of the store portfolio in terms of impact on the business. And I think we've already got some of those stores closed and would expect to experience a few more days' worth of at least a few stores being closed. But in terms of the time of year it's happening, this is, as you know, a very small business time of year for us. I mean, we don't know sales numbers tend to be pretty small during the middle to latter part of September. So if you're going to lose some sales days, this is probably a pretty good time to do it. And then a question on Lilly Pulitzer, great performance there. As we think about the back half, you're up against some tougher comparisons. Do you still expect to generate positive comps in both 3Q and 4Q? Or should we be taking a more conservative view in light of your very strong holiday last year? No, really, with respect to both Tommy and Lilly, we expect sort of the momentum that we saw in the second quarter to continue really for the back half of the year and have good solid upper single digit sort of comps across the company for the back half of the year. And it's based on the product offerings we have and the marketing initiatives we have combined with what we view as a very healthy economy in consumer market. And as proud as we are of our execution, I think to be fair, we also have to acknowledge that it's a pretty good consumer market right now as well. And you throw all that in the mix together and we're expecting to have good back half, particularly Q4. And just a quick one on Lanier, if I may. Can you provide some context on how much sales will move from 3Q to 4Q as we think about that decline in the Q3? And do you still expect to generate mid single digit growth for Lanier as a whole for the year? It's going to be about $7,000,000 for the shift from Q3 to Q4 is about $7,000,000 And in terms of the total growth for the year, I think it would be Kind of low singles. Low singles more than mid singles. I think we ended up a little softer in Q2 than we might have liked to have been or thought that we might have been. And so when you add all that up, you're going to end up probably closer to low singles than mid. Great. Thank you very much. Thanks a lot, Rick. Up next is Susan Anderson with B. Riley FBR. Hi, good evening. Congrats on a really nice quarter. Hi, Susan. Hi. Hi, Susan. I was wondering if you could talk a little bit about the wholesale business. It looks like DTC continues to be very strong for both of your brands. I guess, how did wholesale perform versus your expectations? And when should we expect can you just remind us when we should expect the pressure to abate there? I think for the quarter, we were down in the wholesale about $10,000,000 in Q2, I believe. No, I'm sorry. That was yes, you're not in total, but the Lanier was Yes. But up less than we planned. And you said when are we going to start to see the pressure in the wholesale? Yes. Would you have paid it. I think Yes, I know you're about to buy some of the doors. Yes. Sorry, go ahead. Yes. So I think that we've hit a point in the wholesale where I believe that we're starting to stabilize a bit. As you know, it hasn't been a huge growth priority for us and we've been mindful of protecting our brands and where that meant rationalizing some doors, we've done that. But I think we've gotten to a point where we're going to start to stabilize and perhaps even have some growth opportunities in the wholesale. Still not our major focus of growth, but I think we can start to grow a bit in wholesale. And we're seeing some very healthy performances from most of our major wholesale partners are doing quite well with our product right now, which is good to see. Great. And then on Lilly, you talked about the after party sale. I think you mentioned potentially being the biggest sale ever. Maybe if you could talk about what's driving it bigger? Is it just the higher DTC penetration? Well, I think that there are a couple of things that are driving it. First of all, there's the overall enthusiasm for the brand. Secondly, I think it's the extremely clean distribution that we're running in Lilly Pulitzer. So it's very controlled. We're very careful about the wholesale partners we select and how they run their businesses. And then in our own stores, we do very limited markdowns other than during the after party sale. And then on our e commerce website, we never have any markdowns except during the after party sale. So the consumers really starved for sort of reduced price opportunities in Lilly. They know that we're going to have it and they anxiously await the arrival of the after party sale. This year, we did it a couple of weeks later than we have historically. And we thought that could better synchronize the sale with when we want to be on sale and when the consumer is ready to buy. And it seems to have worked really well. So we had an absolutely outstanding sale last August, but this one is going to end up being even bigger than that. Great. That sounds good. And then one more on the Marlin bars. So it sounds like they continue to go pretty well. Are you still seeing outsized productivity in the stores next to the Marlin Bar versus kind of just the original stores? I guess, has that continued as now they've been open for the ones been open for a longer period of time? Yes. So we've got 2. We've got the one in Coconut Point, Florida, which we opened in the latter part of 2016. So we've got a full year plus of data on that and it has continued to comp quite nicely and better than the fleet average, if you will. So we got a huge growth there the 1st year and continuing to have strong comps this year in the retail part of it. So very, very pleased with the way that's worked. Palm Springs opened in May. And as you know, if you've ever been to Palm Springs, it's already about 108 degrees in May and getting hotter by the day. So we've been thrilled with what we've seen there so far, but we won't really get into the season in Palm Springs until later in the calendar year. And then it will be a full year after that before you even start really comping in a way. But we're very pleased with the early signs and we're highly confident that it's going to be successful. We view it as a success so far and when we think we think when we get into the real season in Palm Springs, it's going to be something else. And then we've got like we said, a lot of discussions going and hoping to and believing that we'll get a few more open in the back half of twenty nineteen. Great. If I could just fit in one more on the resort stores. I know early in the year you said that they were doing very well. Just curious how if they continued that strength throughout the summer months and was there any change there, acceleration or deceleration, just I guess to kind of gauge the health of the consumer? No, I think we've been really pleased with the way we've performed pretty much across the board in resort markets. We had the New England stores with Lilly Pulitzer this summer. We really got those, I guess, at the end of the summer last year, but had them for the full summer this year. And that was pretty exciting to see some of the numbers that those small stores could put up even some of those are quite small in terms of their square footage, but some of the numbers they were putting up on days during the summer were very impressive. And I think really you look across the portfolio, there may be 1 or 2 exceptions, but the resort business has been quite strong. Great. That sounds good. Thanks so much. Good luck next quarter. Thanks a lot. We'll take our next question from Dana Telsey from Telsey Advisory Group. Good afternoon, Dana. Hi, Dana. Hi, and nice to see the progress. As you think of the same store sales, what was the levers that drove the same store sales? Was it traffic, transactions, conversion? What do you see on same store sales? And then I have a follow-up. Well, we would like to believe that our marketing activities helped with the comps, but in terms of the underlying KPIs that actually drove the results, in bricks and mortar, it's not really traffic. It's much more about conversion. And in the case of Lilly Pulitzer, both conversion and average ticket size. On e commerce, we are seeing some growth in conversion, but or excuse me, in traffic, but then we're also seeing up ticks in conversion and again in Lilly growth in the ticket size as well. So it's those things that are really driving the number. But we think that those are the result of having great differentiated innovative product and compelling marketing messages delivered through appropriate channels. And on the Tommy business, how is the improved data analytics and replenishment systems, how is that helping with its localization of product? What are you seeing there? And how is it impacting your margin expectations? Well, I think you can look at some of the numbers that we're putting out and we're doing more business on less inventory, which makes us really happy and the Tommy team really happy. That in and of itself should help improve margins. We're able to better satisfy demand from a customer wherever they are with inventory, wherever it may be located. Now we are still not we still have additional capabilities in those areas that will be rolling out over the next really year, but we've come a long way in that regard and it's showing up in the results. And then some of the back half stuff we're beginning to see benefits as well as you mentioned in the merchandising planning and allocation, but I don't think we've gotten the seen the full benefit of that yet either. So there's I think there's still more to be gained. But you saw the again, more business, less inventory, higher gross margins, those are all good things. And when you think about the Tommy business and the Lilly business, is the guidance still for Tommy sales for the year to be up modestly? And what about the operating margin? And is Lilly still expected to grow high single digits this year with an operating margin kind of flat with last year? Yes. I think that's right. So Tommy up modestly in top line and a modest uptick in And then the And then the operating margin should be maybe a hair lower than last year. Yes. That's still very strong. And what kind of comps do you need to leverage expenses? How do you think about it? We need a couple of points to kind of leverage some of the inflationary expense things. So yes, so and we if we can keep comping the way we did in Q2, I mean, we'll have some good leverage there, particularly in the Q4. Thank you. Thank you, Dana. It appears there are no further questions at this time. Mr. Chump, I'd like to turn the conference back to you for any additional or closing remarks. Thank you, Stephanie. Our focus on long term value has and will continue to drive our initiatives at Oxford. We believe the keys to our success have been our unwavering focus on long term shareholder value, having the very best people in the industry, which is the foundation of our business and our dynamic portfolio of sensational lifestyle brands. Thank you again for your time this afternoon. We appreciate your interest and look forward to talking to you again in December.