Earnings Call: Q1 2013

Jun 5, 2012

Earnings release

Good day, and welcome to the Oxford Industries Incorporated First Quarter Fiscal twenty twelve Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Ms. Anne Shoemaker, Treasurer. Please go ahead, ma'am. Thank you, Melanie, 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 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 our operations or our financial condition to differ materially from 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. And now I'd like to introduce today's call participants. With me today are Hicks Lanier, Chairman and CEO Tom Chubb, President Scott Grassmeier, CFO Kerry Pillow, CEO of Tommy Bahama and Doug Wood, President of Tommy Bahama. Thank you for your attention. And now I'd like to turn the call over to Hicks Lanier. Good afternoon and 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 EPS 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 and their performances are exceeding our expectations. We now have a lease signed at Towson 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 in Singapore and additional store 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 5th Avenue location with 2 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 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 Q1 results. Tommy Bahama reported a 15% increase in net sales to $141,100,000 for the Q1 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 $600,000 driven by higher sales, but also reflecting the planned increase in SG and A from expenses associated with our international rollout and pre opening costs for the New York stores store and costs associated with operating additional retail stores. Our Q1 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 Q1, 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. 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 Q2. As Hix 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 2 weeks, were 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 Q1 of 2012 were nonetheless nothing short of remarkable. Sales in the Q1 of fiscal 2012 rose 19% to $35,600,000 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 sale 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 point $6,000,000 for the Q1 of fiscal 2012. On the product front, Lilly continues to be fueled by strength in dresses. We have also been delighted 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 rayon pant that epitomizes Lilly's resort chic positioning. Lilly also recently launched the Island Polo, a cotton spandex performance PK that comes in 8 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 Square Feet, 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. Help drive future growth. Ben Sherman continues to be impacted by the very difficult economic conditions in the UK 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 Q1, Ben Sherman reported net sales of 17,400,000 compared to $19,400,000 in the Q1 last year due to expected reductions in its UK and European wholesale business. The operating loss for the Q1 was $2,700,000 compared to an operating loss of $800,000 in the Q1 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 twenty twelve. We have seen modest improvements in traffic early in the second quarter, but we remain very cautious and will continue to manage this business closely. Lanier Close reported sales at $33,000,000 in the 1st quarter, flat with last year. Operating income declined to $4,000,000 in the quarter from $4,700,000 in the Q1 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 Q1 of fiscal 2012 was $5,100,000 compared to an operating loss of $4,000,000 in the Q1 last year. The difference was primarily due to the impact of LIFO accounting, where we had a $600,000 LIFO credit in the Q1 last year and a $200,000 LIFO charge in the Q1 this year. I'll now hand the call over to Scott Grassmayer. Thank you, Tom. I'll walk through our consolidated results. As Vic mentioned, we reported a strong Q1. Our consolidated net sales rose 11% to 231 dollars and on an adjusted basis, earnings per diluted share from continuing operations increased 5% to $1.12 On a U. S. GAAP basis, earnings per diluted share from continuing operations rose 0.06 dollars to $1.09 in the Q1 of fiscal 2012. As we anticipated, there were some gross margin pressures in the Q1, particularly at Ben Sherman Lanier close, 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 UK and European businesses. Consolidated gross margins for the Q1 of fiscal 2012 decreased slightly to 55.9% from 56.5% in the Q1 of fiscal 2011. We expect these gross margin pressures to begin to ease in the second half of fiscal twenty twelve. 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 and A for the Q1 of fiscal 2012 was $100,800,000 or 43.6 percent of net sales compared to 91 point $1,000,000 or 43.8 percent of net sales in the Q1 of fiscal 2011. Some leveraging of SG and A was achieved despite the $2,400,000 of cost in the Q1 associated with the Tommy Bahama international rollout in 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 and L for most of the year without the benefit of meaningful revenue. Interest expense for the Q1 of fiscal 2012 decreased 25 percent to $3,600,000 as a result of our repurchase of $45,000,000 of our 11.38 percent senior secured notes in fiscal 20 11. As we have previously announced, we intend to redeem the remaining $105,000,000 of notes in July 2012. To refinance the redemption of the notes and ensure adequate liquidity, we expect to amend and restate our existing $175,000,000 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 $9,500,000 which is lower than our previous estimate of $11,000,000 In the second half of fiscal twenty twelve, interest expense is expected to be approximately $2,600,000 The effective tax rate for the Q1 of fiscal 2012 was significantly higher than last year at 38.3% compared to 34.2%. The effective tax rate for the Q1 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 $86,000,000 at the end of the Q1 from $62,800,000 at the end of the Q1 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 Q1, we had very good liquidity with approximately $159,000,000 available under our U. S. Revolving credit facility. In the quarter, we had $9,600,000 of capital expenditures and continue to expect capital expenditures to approach $60,000,000 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 to 2 $0.95 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 $850,000,000 to 865,000,000 dollars compared to sales of $759,000,000 in fiscal 2011. Adjusted earnings per share excludes the impact of approximately $9,000,000 in charges associated with the expected refinancing of the senior secured notes and approximately $2,400,000 associated with a change in fair value of contingent consideration. On a U. S. GAAP basis, diluted earnings per diluted share from continuing operations for fiscal 2012 are now expected to be between $2.40 $2.50 compared to $1.77 in 2011. The 2nd quarter ending on July 28, 20 12, the company anticipates net sales in the range of $200,000,000 to $210,000,000 compared to net sales of $180,600,000 in the Q2 of fiscal 2011. Adjusted earnings per share are expected to be between $0.60 to $0.65 compared to adjusted earnings per diluted share of $0.57 in the Q2 of fiscal 2011. On a U. S. GAAP basis, earnings per diluted share for the second quarter are expected to be between $0.23 $0.28 which includes the impact of approximately $9,000,000 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 $12,000,000 of expenses associated with the Tommy Bahama International rollout in the New York store with approximately $3,100,000 of these costs expected to occur in the Q2. Thanks for your attention. And now I'll turn the call back over to Hicks Lanier for some closing comments. Thanks, Scott. Melanie, we're ready for questions now, if there are any. Thank you. We will go first to Edward Yruma with KeyBanc. Given the success that you reported with these new format Lilly Pulitzer stores, I believe you indicated you signed one additional lease. But how does this success make you think about the longer term square footage opportunity, Lily, 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 found with early results in Charlotte and Phipps is that we're in 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. So for right now, I think that number we've given you of sort of 3 to 4 a year is the right number to be thinking about, although we 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? There is 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 those opportunities, where we find those, we will, of course, be delighted to sell those accounts. But where we can't do that, we will stay focused really on just growing the direct to consumer business. And direct to consumer is really where we're focused on growth. Great. And the final question, I know that you've taken a lot of steps to stabilize and improve the underlying Lending 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 Q1 this year and it didn't disappoint at all. The macro conditions over there made it extremely tough. And 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. And it's really just become quite difficult to get the results as the right as the result of the macro conditions. Great. Thank you. Just an add on to that, Ed. We spent a good deal of time in the U. K. And on the continent, and we would compare the current conditions. They are very similarly to what we had in 'nine, 'eight and 'nine here. And if you can turn the clock back and remember what that was like, it was pretty tough. So we're hoping we're going to see improvement there. But if not, we'll do what we have to do. We'll go next to Eric Beder with Berenberg. Good afternoon. Congratulations on a great quarter. Hi, Eric. Could you what is driving I'm sorry, I missed this. What is driving the interest expense reduction for the back half? Is that just lower cost of debt for the replacement? Yes, yes. We're more favorable structure of replacing the debt. We are looking at amending our existing revolver. And so we will anticipate borrowing more on revolver rates, which are materially lower. In terms of you've had some great brands here. In terms of being essential to what are you thinking about pricing here over this year? I know last year you raised prices in both Benchmark and Lilly. What's the thought process in those brands for this year in terms of pricing? 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 elevate the whole brand. I think elsewhere within the business, the other 3 operating groups, it was really more selected price increases where we thought the there was room to do that. Great. And in terms of Tommy Bahama women's, I see it's been 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? Yes, Eric. This is Terry. The big category is not dissimilar to the Lilly's business. Dresses have been the big winner for us in Tommy Bahama, which is a good news story for us because it's the most feminine category and it's a category that we've seen rapid growth. There are as I mentioned, we're very excited about this accessory business for us to get into the bag business for women and shoes is a big opportunity for us. But just generally, we're seeing great business. You get these increases that we're seeing in women's just by one category. So it's being led by dresses, but overall, this acceptance to the product that we're putting out there has been overwhelmingly positive. And in terms of the category, you've talked before about 30% at the stores, it's still about that level. How much is it increasing, I guess, as a percentage in the owned stores? It's increasing as a percentage of our total direct to consumer business in our stores and on the e commerce business and it's still growing consistently with where we said and as you said, it's running approximately 30% of our total business. But 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 a kind of a good problem. That's a good problem. That's a very high quality problem. Just last question on e commerce. E commerce is a big push for you. Where do you see that going? And I know that you do like 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. Yes. There's e commerce has so many different facets. Big and tall again is 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 picked your team and we embroidered it here. And so 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. So there's certain business opportunities you can do online, you just can't do in the store. So it's just a pretty amazing channel. Great. Again, congrats on a great We'll go next to Robin Murchison with SunTrust. Hi, thanks. Hello, everyone. 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. I mean our outlet stores comp sales are we're very pleased with them consistent with or actually slightly better than we're reporting in full price stores. So we're very we're it's a significantly less number of doors that we have out there and 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. However, 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. So 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 comp referenced in outlet stores. No worries. All right. Let me so let me move on to Lilly. It's interesting, 2 natural markets, Charlotte and Atlanta for Lilly Pulitzer and undoubtedly some interesting competition those 2 new Lilly stores. What about 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 2 guys that run Lilly Pulitzer for us, Scott Beaumont and Jim Bradbeer, say anything west of the Mississippi is international for them. And I think that's still very much the case. I mean, it's very much an East Coast brand at this point. They're really focused on the East Coast as they say they sort of color in the map on a contiguous basis. So they feel like there's a lot of white space still on the East Coast and that's where they're going to focus 1st and foremost. But longer term, we certainly believe that there's an opportunity to move west. And there is some wholesale business that's done out on the West Coast. It's not huge at all, but there is some that's done out there. And as Higgs points out, e commerce, we also see demand from there. And California is typically one of our top states in e commerce. Of course, it's a big state with a lot of population. But 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 and so on. It seems to me, I mean, 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. But even in apparel, am I right in thinking that you guys are adding a number of new prints in silhouettes and just upping the ante in terms of 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. But there is 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 they haven't been as strong in before. And 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 3rd Q4 really for them are the weak part of the year and they've definitely done some things to try to capture some of the fall type business where, for example, the 7/20 5 delivery is heavy on knit dresses in lily colors, but fall friendly colors. And 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. And then as you get into resort in the 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 that's it comes in several lily colors and then a print version as well. The solid colors have print lining and 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 lily colors that's quite nice looking. And both of those are booked quite well. So they're definitely doing some things to try to enhance the second half business. Good. Thank you. Good luck. Thank you. We'll go next to Susan Sandberry with Miller Tabak. Great. Sticking with Lilly, Tom, you mentioned that there are going to be some talent pool additions. Can you elaborate on that? And is this part of this infrastructure build in front of rolling out some pretty significant growth over the last couple of years going from somewhere in the mid-70s 2 years ago to 110 ish this year. So that's a lot of growth to sustain in what was a fairly small business. So 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. And some of that's already happened and some of it's yet to come. Sticking with Lilly, you said 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. What is how big is dramatic? Is there a number associated with that? 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. That's more than that. So the penetration rate has moved up to I think it was high teens at year end. So is it 20% now or? You mean what percentage of the total business it is? Correct. I think that we reported that at the end of each of the previous 2 years and we'll probably do that again this year. Okay. But we're getting great growth in e commerce. Okay. Switching to Ben Sherman, hate to bring it up, but I mean 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? And then Tom, is there a plan B? I mean are you prepared if Europe gets into a real tizzy, are you prepared to cut costs or do something more a little bit more dramatic than just plan conservatively? Yes. 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. And I think Ben