Good day, welcome to the Oxford Industries, Inc. first quarter fiscal 2012 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Anne Shoemaker, Treasurer. Please go ahead, ma'am.
Thank you, Melanie, 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 our operations or our financial condition to differ are discussed in the documents filed by us with the SEC. We undertake no duty to update any forward-looking statements. Also, during this call, we will be discussing certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our press release issued earlier today, which is posted under the Newsroom tab of our website at oxfordinc.com. Now I'd like to introduce today's call participants.
With me today are Hicks Lanier, Chairman and CEO, Tom Chubb, President, Scott Grassmyer, CFO, Terry Pillow, CEO of Tommy Bahama, Doug Wood, President of Tommy Bahama. Thank you for your attention, now I'd like to turn the call over to Hicks Lanier.
Good afternoon, thank you for joining us to discuss our first quarter results. We have begun fiscal 2012 on a strong note, with an 11% increase in sales and with adjusted DPS ahead of our guidance at $1.12. These results were fueled by strength at both Tommy Bahama and Lilly Pulitzer, particularly in the direct-to-consumer businesses. At Lilly Pulitzer, we have begun our store rollout. Our new right-sized stores in Charlotte and Atlanta have been met with a great deal of excitement, their performances are exceeding our expectations. We now have a lease signed at Towson Town Center outside of Baltimore and are actively working on securing additional leases. Tommy Bahama's global expansion is underway, with stores now open in Macau and Singapore, additional stores slated for Hong Kong and Tokyo.
In addition to Tommy Bahama's international expansion, we will operate approximately 11 additional stores in the U.S. by the end of 2012. The build-out of the New York Fifth Avenue location with two bars, a restaurant, and a store is in progress, and this and our Michigan Avenue store will open later this year. We continue to believe that our emphasis and investment in our direct-to-consumer businesses and international expansion is critical to driving long-term profitable growth. As always, we are mindful of the challenging economic environment, but to date, we are pleased with the way that we have positioned our company to navigate those challenges. I'd now like to turn the call over to Terry Pillow to discuss Tommy Bahama's results for the quarter. Terry?
Thank you, Hicks. We couldn't be more pleased with our first quarter results. Tommy Bahama reported a 15% increase in net sales to $141.1 million for the first quarter of fiscal 2012. High single-digit comp store sales increases in our full-price stores, the contribution from new stores, significantly higher e-commerce sales, and increases in our wholesale business drove the increase. Our operating income rose 8% to $25.6 million, driven by higher sales, but also reflecting the planned increase in SG&A from expenses associated with our international rollout and pre-opening costs for the New York store and costs associated with operating additional retail stores. Our first quarter saw strength in all categories of our business, and our performance in non-resort regions of the country, such as the Midwest and West Coast, was very strong. Women's performed exceptionally well this spring, with a nice run-up through May, reflecting significant Mother's Day sales.
In the first quarter, our direct-to-consumer women's business grew 25% over last year. This performance further validates our strategy to continue to develop and grow Tommy Bahama women's. To further enhance our women's business, we brought on a small development and sourcing team last year for women's accessories and have seen a positive result in scarves, handbags, beach bags, jewelry, and footwear. Our creative services team has been working to align our message in our stores, e-commerce site, and our advertising mailers. This team has focused our look and feel to reflect a more aspirational and forward view of the brand. 250,000 Father's Day mailers were sent to targeted customers the last week in May, and another 250,000 are being mailed this week.
The early read is that we have very positive momentum leading to Father's Day, as we are seeing a direct and immediate effect on traffic and sales, boding well for our second quarter. As Hicks mentioned, our international expansion is well underway, and we are very pleased with our management team's execution. Both Macau, which opened in March, and Singapore, which has been open about two weeks, are reporting solid sales. These customers are embracing the island lifestyle message, which is a fresh new look at retail in these markets. Hong Kong and Tokyo are next. Our plans for international expansion have a long-term horizon, and we expect this to be another sales growth engine in the years to come. Now I'll turn the call over to Tom Chubb to discuss results for the rest of our operating groups.
Thanks, Terry. Good afternoon, everyone, and thank you for joining us. I'll start with Lilly Pulitzer. While the spring selling season is traditionally the biggest of the year for Lilly, their results for the first quarter of 2012 were nonetheless nothing short of remarkable. Sales in the first quarter of fiscal 2012 rose 19% to $35.6 million. This growth was achieved with increases in comp store sales in the upper teens, the addition of the Charlotte retail store, and continued dramatic growth in e-commerce sales. Lilly also saw a meaningful increase in its wholesale business year-over-year. With a healthy sales increase and higher gross margins, Lilly reported a stellar 35% increase in adjusted operating income to $11.6 million for the first quarter of fiscal 2012. On the product front, Lilly continues to be fueled by strength in dresses.
We have also been delighted to see some very good selling results in bottoms, particularly our elegant white bi-stretch twill trouser, colored denim, a 100% linen beach pant, and the Pippa Pant, a printed drapey rayon pant that epitomizes Lilly's resort chic positioning. Lilly also recently launched the Island Polo, a cotton spandex performance PK that comes in eight optimistic colors and has been well-received by the consumer. At the end of May, we opened a Lilly store at Phipps Plaza in Atlanta. At 2,600 sq ft, it is similar in size and design concept to the store we opened in February in Charlotte. Like Charlotte, the Atlanta store is off to a terrific start. We are delighted with the store and believe it is a highly scalable retail model that will provide excellent prospects for continued growth.
Never comfortable resting on their laurels, the Lilly management team also continues to strengthen its already deep talent pool by adding key positions that should help drive future growth. Ben Sherman continues to be impacted by the very difficult economic conditions in the U.K. and Europe, where it operates approximately 70% of its business. Traffic year-over-year in our retail stores in these markets was down markedly, with the resulting downward sales pressure being partially offset by significantly higher average unit retail prices. The higher retail prices are the result of our strategy to sell more elevated, special, and a higher priced product. Reduced traffic in these markets has also created a highly promotional environment, which together with higher input costs, put pressure on gross margins for the quarter.
For the first quarter, Ben Sherman reported net sales of $17.4 million compared to $19.4 million in the first quarter last year due to expected reductions in its U.K. and European wholesale business. The operating loss for the first quarter was $2.7 million compared to an operating loss of $800,000 in the first quarter of fiscal 2011, primarily due to gross margin erosion and lower wholesale sales. The impact of higher product costs on gross margin should abate in the second half of 2012. We have seen modest improvements in traffic early in the second quarter, we remain very cautious and will continue to manage this business closely. Lanier Clothes reported sales at $33 million in the first quarter, flat with last year. Operating income declined to $4 million in the quarter from $4.7 million in the first quarter of fiscal 2011, primarily due to continued gross margin pressures.
The team continues to execute very well, delivering a respectable 12% operating margin. The corporate and other operating loss for the first quarter of fiscal 2012 was $5.1 million compared to an operating loss of $4 million in the first quarter last year. The difference was primarily due to the impact of LIFO accounting, where we had a $600,000 LIFO credit in the first quarter last year and a $200,000 LIFO charge in the first quarter this year. I'll now hand the call over to Scott Grassmyer.
Thank you, Tom. I'll walk through our consolidated results. As Hicks mentioned, we reported a strong first quarter. Our consolidated net sales rose 11% to $231 million, and on an adjusted basis, earnings per diluted share from continuing operations increased 5% to $1.12.
2012. As we anticipated, there were some gross margin pressures in the first quarter, particularly at Ben Sherman when they are closed. Higher cost goods compared to last year flowing through cost of sales. Ben Sherman's gross margins were also impacted by the depressed economic conditions affecting its U.K. and European businesses. Consolidated gross margins for the first quarter of fiscal 2012 decreased slightly to 55.9% from 56.5% in the first quarter of fiscal 2011. We expect these gross margin pressures to begin to ease in the second half of fiscal 2012. This, along with the anticipated increasing proportion of the higher gross margin Tommy Bahama and Lilly Pulitzer businesses relative to the prior year, is expected to result in consolidated gross margin expansion for the year.
SG&A for the first quarter of fiscal 2012 was $100.8 million or 43.6% of net sales, compared to $91.1 million or 43.8% of net sales in the first quarter of fiscal 2011. Some leveraging of SG&A was achieved despite the $2.4 million of cost in the first quarter associated with the Tommy Bahama International rollout and the New York store. Our New York location will have an unusually long build-out period. We took possession of our New York location earlier in the year and plan to open the store late this year. As a result, we will have rent expense flowing through our P&L for most of the year without the benefit of meaningful revenue. Interest expense for the first quarter of fiscal 2012 decreased 25% to $3.6 million as a result of our repurchase of $45 million of our 11.375% senior secured notes in fiscal 2011.
As we have previously announced, we intend to redeem the remaining $105 million of notes in July of 2012. To refinance the redemption of the notes and ensure adequate liquidity, we expect to amend and restate our existing $175 million U.S. revolving credit facility to, among other things, increase the size of the facility and extend the maturity date. This is anticipated to reduce interest expense for 2012 to approximately $9.5 million, which is lower than our previous estimate of $11 million. In the second half of fiscal 2012, interest expense is expected to be approximately $2.6 million. The effective tax rate for the first quarter of fiscal 2012 was significantly higher than last year, at 38.3% compared to 34.2%.
The effective tax rate for the first quarter of fiscal 2012 is more indicative of the anticipated effective rate for the future periods, as last year's rate benefited from certain favorable permanent differences and discrete items. Inventory increased to $86 million at the end of the first quarter from $62.8 million at the end of the first quarter last year. The increase will support our anticipated sales growth across all channels of distribution and the operation of additional stores. Our inventory levels were also impacted by increased product cost and early receipts from vendors. At the end of the first quarter, we had very good liquidity, with approximately $159 million available under our U.S. revolving credit facility. In the quarter, we had $9.6 million in capital expenditures and continue to expect capital expenditures to approach $60 million for the year.
For our outlook for fiscal 2012, we are pleased to raise our full year guidance for adjusted earnings per share to a range of $2.85-$2.95, compared to $2.41 per share in fiscal 2011. The increase is supported by the continued positive momentum in Tommy and Lilly, as well as the impact on interest expense from the refinancing of the senior secured notes, partially offset by the higher anticipated tax rate. We also increased our full year outlook for sales to a range of $850 million-$865 million, compared to sales of $759 million in fiscal 2011. The adjusted earnings per share excludes the impact of approximately $9 million in charges associated with the expected refinancing of the senior secured notes and approximately $2.4 million associated with a change in fair value of contingent consideration. On a U.S.
GAAP basis, earnings per diluted share from continuing operations for fiscal 2012 are now expected to be between $2.40 and $2.50, compared to $1.77 in 2011. For the second quarter ending on July 28, 2012, the company anticipates net sales in the range of $200 million-$210 million, compared to net sales of $180.6 million in the second quarter of fiscal 2011. Adjusted earnings per share are expected to be between $0.60-$0.65, compared to adjusted earnings per diluted share of $0.57 in the second quarter of fiscal 2011. On a U.S. GAAP basis, earnings per diluted share for the second quarter are expected to be between $0.23 and $0.28, which includes the impact of approximately $9 million in charges associated with the expected refinancing of the senior secured notes in July 2012 and a $600,000 charge associated with the fair value of contingent consideration.
The earnings estimates for the year include the impact of approximately $12 million of expenses associated with the Tommy Bahama International rollout in the New York store, with approximately $3.1 million of these costs expected to occur in the second quarter.
Just now, if there are any.
Thank you. If you'd like to ask a question, please signal by pressing the star key followed by the digit one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will go first to Edward Yruma with KeyBanc.
Hi, thanks so much for taking my question. Given the success that you reported with these new format Lilly Pulitzer stores, I believe you indicated you signed one additional lease. How does this success make you think about the longer-term square footage opportunity at Lilly, particularly as it relates to store count?
Well, it definitely has us pretty excited about direct-to-consumer and bricks and mortar retail in this 2,500 square foot or so format that we've settled into. We think we've really hit the right size for Lilly Pulitzer, and what we've found with early results in Charlotte and Phipps is that when we're in the right locations in that size box, it works really well. As we've told you on several occasions before, Ed, the Lilly team had not really opened any new stores for several years before we bought them. Charlotte, at the beginning of the quarter, was the first that they'd opened. Now they've opened Phipps. We've got one more lease signed. We're going to be very disciplined in site selection and size. There's also some infrastructure building that needs to be done in terms of the team to support new store openings.
For right now, I think that number we've given you of sort of three to four a year is the right number to be thinking about. Although our enthusiasm for retail is definitely increasing.
Great. I know you called out some success with Lilly Pulitzer at wholesale as well. Can you give us an update as to whether that's existing doors and if there is an incremental wholesale door opportunity?
I don't think there was any meaningful increase in distribution, Ed, and our distribution strategy for Lilly Pulitzer is the same as it's been, which is that we are delighted when we can find customers that have the same idea about how to present the brand and how to manage the brand, and where we find those, we will, of course, be delighted to sell those accounts. Where we can't do that, we will stay focused really on just growing the direct-to-consumer business. Direct-to-consumer is really where we're focused on growth.
Great. The final question, I know that you've taken a lot of steps to stabilize and improve the underlying Ben Sherman business, but given the macro weakness in Europe, does it give you any more thought about strategic alternatives for the business? Thanks.
Obviously, the results in Ben Sherman were not good. We expected to have a tough first quarter this year, it didn't disappoint at all. The macro conditions over there made it extremely tough, I think if we didn't believe that the macro conditions were making it so hard for us, we would probably be thinking more quickly about what our alternatives might be. We do think that the strategy that Ben Sherman has settled on is the correct strategy for them. It's really just become quite difficult to get the results as the result of the macro conditions.
Great. Thank you.
Just as an add-on to that, Ed. We spent a good deal of time in the U.K. on the continent, we would compare the current conditions. They are very similar to what we had in 2008 and 2009 here. If you can turn the clock back and remember what that was like, it was pretty tough. We're hoping we're going to see improvement there. If not, we'll do what we have to do.
We'll go next to Eric Beder with Brean Murray.
Uh-oh.
Good afternoon. Congratulations on a great quarter.
Thanks.
I'm sorry, I missed it. What is driving the interest expense reduction for the back half? Is that just lower cost of debt for the replacement?
Yeah. We're a more favorable structure of replacing the debt. We are looking at amending our existing revolver, and so we will anticipate borrowing more at revolver rates, which are materially lower.
Okay. You've had some great brands here. In terms of being essential to, what are you thinking about with pricing here over this year? I know last year you raised prices in both Ben Sherman and Lilly. What's the thought process in those brands for this year in terms of pricing?
Well, please.
For price increases. The prices at Ben Sherman are up materially this year, as I mentioned in my comments. That's not like-for-like product necessarily, but as you know, Eric, we tried to really.
The whole brand. I think elsewhere within the business, the other three operating groups, it was really more selected price increases where we thought there was room to do that.
Great. In terms of Tommy Bahama women's, I see it's doing great. What categories are really driving that and where? I think you mentioned accessories. Are there other alternative or other opportunities to drive it even higher?
Great. In terms of the category, you've talked before about 30% at the stores. Is it still about that level? How much is it increasing, I guess, as a percentage in the own stores?
It's increasing as a percentage of our total direct-to-consumer business in our stores and on the e-commerce business. It's still growing consistently with where we said, and as you said, it's running approximately 30% of our total business. The problem with that, Eric, is that as a percentage, we would love for it to be higher, but our men's business is growing fast too, so it's kind of hard to outpace that, which is.
Yeah. That's a good problem.
high-quality problem.
That's a very high-quality problem. Just last question on e-commerce. E-commerce has been a big push for you. Where do you see that going? I know that you do only Big and Tall on the Tommy Bahama site. Are there opportunities like that to create niches in e-commerce that you don't see at the store? Thank you.
Doug, take that.
Yeah. E-commerce has so many different facets. Big and Tall gives us a business that we don't have in stores. Just last week, we tested a product with Major League Baseball where basically put a shirt out there and pick your team, and we embroidered it here. It's almost made to order for whatever team you want to have. Immediately, that was our number one item on the site that day. There's certain business opportunities you can do online you just can't do in the store. It's just a pretty amazing channel.
Great. Again, congrats on a great start to the year. Looking really good. Thank you.
Thanks, Eric.
Yeah.
We'll go next to Robin Murchison with SunTrust.
Hi, thanks. Hello, everyone.
Hey, Robin.
I want to ask you, let me start with Tommy. The comps were mentioned in the full price stores. Is there anything to say about the comps in the outlet stores?
Yes, Robin. Our outlet stores comp sales, we're very pleased with them. Consistent with Actually, slightly better than we're reporting in full price stores. It's a significantly less number of doors that we have out there in outlets, but we're very pleased with the comp increase. As you know, we use that as a disposition channel to make sure that we maintain a full price strategy in our full price stores. It's always nice to see when they're working and also the gross margin. Not only are the comp sales increase in those stores significant, but also our gross margin in the outlet stores improved greatly. We couldn't be more pleased with the performance of both full price and outlet retail.
Sounds good. I just wondered if I needed to be worried about the omission of comps referenced in outlet stores.
No.
Okay.
Don't worry.
All right. Let me move on to Lilly. It's interesting, two natural markets, Charlotte and Atlanta, for Lilly Pulitzer, and undoubtedly some interesting competition, or at least you got to have competition with some signature stores or product placement. That's commendable that you're doing as well in your own stores that get the fuller breadth of assortment with those two new Lilly stores. Can you give us an update about West Coast Lilly, West Coast demand, since that seems to be such a wide open space for you guys in terms of signature and company-owned stores?
Well, as the two guys that run Lilly Pulitzer for us, Scott Beaumont and Jim Bradbeer say, anything west of the Mississippi is international for them.
Yeah.
I think that's still very much the case. It's very much an East Coast brand at this point. They're really focused on the East Coast, as they say they want to sort of color in the map on a contiguous basis. They feel like there's a lot of white space still on the East Coast, and that's where they're going to focus first and foremost. Longer term, we certainly believe that there's an opportunity to move west. There is some wholesale business that's done out on the West Coast. It's not huge at all. There is some that's done out there.
E-commerce.
I'm sorry, go ahead.
As Hicks points out, e-commerce, we also see demand from there. California is typically one of our top states in e-commerce. Of course, it's a big state with a lot of population. Nonetheless, we do generate a lot of e-commerce business from there.
Okay. Just in terms of keeping up with sort of watching Lilly on the web and watching the emails and so forth, so on. It seems to me, you talk about new categories in Tommy Bahama, but it seems like you've expanded the assortment in shoes and maybe some other non-apparel categories. Even in apparel, am I right in thinking that you guys are adding a number of new prints and silhouettes and just upping the ante in terms of the SKU count?
I'm not sure that the SKU count really moved all that much year to year. It was probably a little bit bigger this spring, summer. I think we actually want to manage the SKU count, not let it get too big. They are trying to develop in some sportswear categories that they haven't been as strong in before. The sportswear portion of the business is growing at a pretty rapid rate at this point. Of course, dresses are growing, too. It's sort of like Terry's analysis of men's and women's in Tommy Bahama. We're sort of growing in all parts, which is a good thing.
Is there anything, Tom, to talk about in terms of additional opportunity for Lilly in the second half of the year, which is traditionally not seasonally strong for Lilly and maybe some initiatives?
Well, they've definitely done some things in fall and resort, which are their weakest seasons. The third and fourth quarter really for them are the weak part of the year, they've definitely done some things to try to capture some of the fall type business where, for example, the seven 25 delivery is heavy on knit dresses in Lilly colors, but fall-friendly colors. That's a good sort of transitional fabric for a lot of their markets, the knits are, that they hope to build on the fall business. It still will not be their strong season, but they're doing some things there. Then as you get into resort and holiday time, they're trying to make sure they have plenty of giftable type items, as well as some sort of unique items. They have a puffer vest that they've done for this resort season.
It comes in several Lilly colors, then a print version as well. The solid colors have print lining, then there's one that's print on the outside. They've also done a very plush, sort of polar fleece type jacket, again in Lilly colors that's quite nice looking. Both of those have booked quite well. They're definitely doing some things to try to enhance the second half business.
Good. Thank you. Good luck.
Thank you.
As a reminder, it is star one to signal for a question at this time. We'll go next to Susan Sansbury with Miller Tabak.
Great. Thanks so much. Sticking with Lilly, Tom, you mentioned that there are going to be some talent pool additions. Can you elaborate on that? Is this part of this infrastructure build in front of rolling out more than three to four stores a year?
Well, it is. It's part of that, although it's not limited to that. Lilly's experienced some pretty significant growth over the last couple of years, going from somewhere in the mid-70s two years ago to 110-ish this year. That's a lot of growth to sustain in what was a fairly small business. They're adding people in the design area. They're adding people in the marketing area, in the e-commerce area, which continues to grow very rapidly in information technology, places like that. Retail, of course, all areas where we need capable people to help us capture the growth opportunities. Some of that's already happened, and some of it's yet to come.
Good. Sticking with Lilly and e-commerce, in the press release or the prepared remarks, I don't remember which, you used the word or adjective, dramatic increase in e-commerce for Lilly. How big is dramatic?
Well, it's-
Is there a number associated with that?
Well, it's more than the comp store sales increase that we saw in our retail stores, which I think we said was in the upper teens. It's more than that.
The penetration rate has moved up to, I think it was high teens at year-end. Is it 20% now?
You mean at what percentage of the total business it is?
Right.
I think we reported at that at the end of each of the previous two years, and we'll probably do that again this year.
Okay.
We're getting great growth in e-commerce.
Okay. Switching to Ben Sherman. Hate to bring it up, but given the macro environment in Europe, presumably the plan for Ben Sherman has come down. Can you share with us what the outlook for Ben Sherman is for the year at this point? Tom, is there a plan B? Are you prepared if Europe gets into a real tizzy, are you prepared to cut costs or do something a little bit more dramatic than just plan conservatively?
Yeah, I think at the beginning of the year, we said that we expected Ben Sherman sales to be roughly flat with last year and that we thought they would make a little bit of money this year. The way that the Ben Sherman business flows, it was always the case that the first half was not going to make money, it was going to lose money, and then we'd make some in the second half. With the economy there being worse than we anticipated, I think we now expect sales to actually be down a bit to last year, sort of mid-single digits percentage-wise down to last year. I think Ben