Oxford Industries Inc Q4 FY2020 Earnings Call

Greetings and welcome to the Oxford Industries, Inc. Fourth Quarter Fiscal 2020 Earnings Conference Call. I would now like to turn the conference over to your host, Anne Shoemaker, Treasurer of Oxford. Please proceed.

Thank you, and good afternoon. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or our financial condition to differ are discussed in our press release issued earlier today and in the documents filed by us with the SEC, including the risk factors contained in our Form 10-K and first and third quarter 10-Qs. We undertake no duty to update any forward-looking statements.

Pardon the interruption. Anne Shoemaker, I believe you are muted. Please unmute your line. Pardon the interruption, we seem to have lost the presenters. Please stay on the line as we attempt to retrieve them.

Due to restrictions, the need to change operational procedures to ensure the health and safety of our people and customers, and remote work.

Pardon the interruption, please stay on the line as we retrieve the presenters. Thank you for your patience. We are having technical difficulties. The conference will proceed momentarily. Again, thank you for your patience. Ladies and gentlemen, we thank you for your patience. The conference will now resume.

Thank you, and good afternoon. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or our financial condition to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC, including the risk factors contained in our Form 10-K and the first and third quarter 10-Qs. 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. And now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO; and Scott Grassmyer, CFO. Thank you for your attention and patience. And now I'd like to turn the call over to Tom Chubb.

Good afternoon, and thank you for joining us again. We apologize for the technical difficulties that we experienced and would like to assure you that they are not COVID-related. Like most, we are delighted to have 2020 behind us and are excited about the possibilities that lie ahead in 2021 and beyond. Before I start the discussion of what we learned from 2020 and what we have planned for 2021, I would like to take just a moment to thank our incredible team of people. 2020, of course, presented enormous business challenges as we faced a myriad of shutdowns, restrictions, the need to change operational procedures to protect the health and safety of our people and customers, remote work, and the list goes on and on. In addition, we know that our people faced tremendous personal challenges, both known to us and not known to us. These challenges included personal concerns about COVID amongst their family and friends, homeschooling children, concerns about their own or a spouse's job, and many others. While we will never know the full extent of the personal challenges that our people were facing, we do know that they were substantial. And we appreciate our people rising to the occasion and continuing to deliver positive, upbeat brand messaging, products, and experiences to our customers. We are extremely grateful for all that our people did and were able to accomplish during the most challenging year that any of us remember. I'd like to now briefly recap 2020 and some of the key lessons we learned that are informing our plans for 2021 and beyond. You may recall that we were off to a terrific start in 2020 with outstanding results in February and the first couple of weeks of March. Then the pandemic hit. And on March 17, we temporarily shut down all our stores nationwide. At that point, we realized the wonderful plans that we had for 2020 were simply not going to be achievable and we pivoted towards our three defensive priorities: People, brands, and liquidity. With respect to people, we worked hard to follow all the applicable guidelines to protect the health and safety of our own people, our customers, and the communities in which we work. This was a significant effort and very difficult, but we were pleased to do our part to help battle the pandemic. With respect to our brands, we were focused on preserving the integrity of our brands during the pandemic year. Through excellent inventory management and outside-the-box merchandising and planning, we were able to keep inventories in good shape. Without an overhang of excess inventory, we were able to avoid the type of excessive promotion that can damage brand integrity. 2020 also reinforced how much our guests love the happy, optimistic messages, products, and experiences that we provide. Put simply, when we deliver happiness to our customers, we succeed. Finally, on the liquidity front, we finished fiscal 2020 in a strong position, with cash increasing to $66 million from $52 million at the end of fiscal 2019 and no borrowings outstanding at the end of either year. The improvement in our liquidity position was attributable to $84 million of cash flow from operations, which funded capital expenditure investments in data, digital marketing, and omni-channel technologies, share repurchases, dividends, and minority investments in smaller branded businesses. Our strong cash flow and liquidity puts us in an excellent position to invest in our business and execute our strategy going forward. Given the circumstances of 2020, Lilly Pulitzer once again delivered an outstanding year. In the several years prior to 2020, we had invested in enhancing and developing Lilly's digital commerce and marketing capabilities. In particular, we were focused on having a beautiful and easy-to-shop website as well as being able to simulate, analyze and use customer data to better serve existing customers and target new customers. As a result of these investments and the work the Lilly team has done to capitalize on them, we went into 2020 with a direct-to-consumer business that was balanced in revenue between e-commerce and bricks-and-mortar retail. In addition, we were acquiring new customers through digital means at about twice the rate that we were acquiring them through our bricks-and-mortar retail stores. This set Lilly up very well when the world shifted to digital commerce during the pandemic. Our digital prowess, combined with our happy brand message and comfortable casual cheerful products drove terrific results. Lilly finished the year with 63% growth in full-price e-commerce, which helped drive a 12% operating margin. As we progressed through 2021, and more and more customers are increasingly feeling safe to come back into stores, we are delighted to be able to provide the outstanding Lilly Pulitzer experience. This experience will be enhanced by many of the innovations that we delivered during 2020 that more tightly integrate the in-store and digital experiences. In addition, we are continuing to invest in projects that will enhance our ability to integrate first, second, and third-party data, providing insights to help us develop segments that better understand and target customers and track engagement to inform future enhancements. We are also moving forward with projects that will enhance our customer service by providing more complete information on an automated basis. These are just some of the many projects that are underway that will help us better serve our customers. Tommy Bahama also has an upbeat positive brand message and easy-to-wear, easy-care products that customers love. That said, going into 2020, Tommy Bahama was much more dependent on bricks-and-mortar for both revenue and new customer acquisition. Tommy's pre-pandemic direct-to-consumer business was split roughly 75% stores, outlets, and restaurants and 25% e-commerce. In addition, it was acquiring customers in bricks-and-mortar at more than twice the rate that it was through digital. While Tommy Bahama's e-commerce business grew significantly during 2020, and we believe there is substantial opportunity for additional growth, Tommy Bahama's reliance on bricks-and-mortar retail pre-pandemic for both revenue and customer acquisition meant that the challenges posed by the shutdowns and other restrictions were more difficult to overcome in the short term. As we move into 2021, Tommy is investing in the people, processes, and systems that it needs to better compete and win with the consumer of the digital world. These investments will help enhance our ability to build and better develop customer segments and create customer journeys tailored to those segments and to particular use occasions. During 2020, our Tommy Bahama restaurant business was challenged by shutdowns and multiple operating restrictions implemented by state and local government. Given these headwinds, we were very pleased with the results that we were able to achieve, particularly with our Marlin Bars, the fast casual concept that we initiated at Coconut Point, Florida several years ago. With their emphasis on outdoor dining, cocktails, and smaller, lighter food items, the Marlin Bar has resonated strongly with guests during the pandemic. More importantly, leveraging its 25 years of expertise in food and beverage, we believe that the concept delivers our wonderful brand in a way that is highly relevant to today's guests. To that end, we opened four Marlin Bars during fiscal 2020, and with our recently opened location at Fashion Valley in San Diego, we now have seven in total. We believe that the concept provides an excellent avenue for future growth and investment. Not only can we do business on the food and beverage side, but the Marlin Bars had outstanding results alongside our retail store. In particular, the hospitality offered by our Marlin Bars creates an environment that is really helping to grow our women's business. Amongst our three smaller brands, Southern Tide, The Beaufort Bonnet Company, and Duck Head, The Beaufort Bonnet Company was a standout, delivering both top and bottom-line growth in fiscal 2020 and operating margin expansion, finishing the year at almost $21 million in sales, with two-thirds coming from e-commerce. All three brands, like their larger siblings, are focused on enhancing their digital e-commerce and marketing skills in 2021, with projects that are similar to those at Tommy Bahama and Lilly Pulitzer but scaled appropriately for the smaller businesses. In addition, Southern Tide is continuing to learn from its three recently opened stores and refined its retail concept while The Beaufort Bonnet Company's third signature store recently opened. We are very excited about what lies ahead in 2021. Since late February, we have seen a marked improvement in business in our bricks-and-mortar, particularly in warm weather, off-mall locations, and at the same time, our e-commerce business remains very strong. Thank you for your time, and I will now turn it over to Scott for additional detail on 2020 results as well as our plans for 2021.

Thank you, Tom. Our operating groups did a good job navigating the pandemic and managing the significant changes that impacted our business in 2020. For fiscal 2020, sales decreased 33% to $749 million, with a meaningful shift in the composition of our revenue. Our e-commerce business grew significantly with double-digit increases in each of our brands. Some of this growth is certainly attributable to store closures, but we also believe this growth represents a permanent shift in how our guests shop. In fiscal 2020, e-commerce sales were $324 million, growing 24% and making up 43% of our total sales compared to 23% in fiscal 2019. On the bricks-and-mortar front, our retail stores and restaurant businesses were impacted by temporary closures and continue to operate under restrictions. We're particularly hard hit in California and Hawaii, where we have a large presence with 34 stores and seven restaurants. The good news is that as restrictions are being lifted, we're seeing improved traffic and sales. In fiscal 2020, our adjusted gross margin was 55.1% compared to 57.6% for fiscal 2019. In 2020, we offered deeper discounts in our off-price channels, took inventory markdown charges, and a higher proportion of our revenue was generated during promotional and clearance events. At the same time, our gross margin benefited from higher IMUs as we shifted production out of China and designed products where we can demand a higher retail selling price, such as our performance apparel. As we move through fiscal 2020, we took actions to reduce SG&A. In total, adjusted SG&A was $93 million lower than in fiscal 2019, and cost-saving measures included a $63 million reduction in employment costs, a $10 million reduction in occupancy costs, and reductions in variable and other expenses. As we look to 2021, our business has continued to strengthen. Our e-commerce business continues to expand, and traffic and conversion rates are improving in our stores, restaurants, and Marlin Bars. We have also seen a recent uptick in our wholesale businesses and are encouraged by our forward order book. With higher IMUs and the exit of the lower-margin Lanier Apparel business, we expect gross margin expansion in fiscal 2021. We expect SG&A to be approximately 5% lower in fiscal 2021 than in fiscal 2019, as reductions in employment and variable expenses were partially offset with increased investments in marketing. Putting together these dynamics, we expect to deliver a solid top and bottom line improvement in fiscal 2021. First-quarter sales are expected to increase from $160 million in fiscal 2020 to a range of $220 million to $240 million in fiscal 2021, with full-year sales increasing from $749 million in fiscal 2020 to a range of $940 million to $980 million in fiscal 2021. Our fiscal 2021 effective tax rate for the first quarter is expected to be approximately 15%, and for the full year is expected to be approximately 20%. The tax rate for both the quarter and year are expected to benefit from certain discrete items. On an adjusted basis, we returned to profitability in the fourth quarter of fiscal 2020 and expect adjusted EPS in a range of $0.95 to $1.15 in the first quarter of fiscal 2021 and $2.80 to $3.20 in the full fiscal year. Our business is supported by our strong balance sheet. Here are some highlights. We ended fiscal 2020 with inventory in excellent shape. Inventory decreased 19% to $124 million at the end of the fourth quarter compared to $152 million in the prior year, with double-digit percentage decreases in each operating group. We achieved this reduction by taking a number of onetime actions in 2020, including reducing and canceling orders and shifting goods into different selling seasons. More importantly, our enterprise order management systems will allow us to do more business with lower inventory levels. Our liquidity position is strong with no debt and $66 million of cash at the end of fiscal 2020. Capital expenditures in 2020 were $29 million and we expect capital expenditures to be approximately $35 million in fiscal 2021. Our Board of Directors increased our quarterly dividend payout from $0.25 per share to $0.37 per share, returning us to our pre-COVID level.

The first question comes from Paul Lejuez with Citi.

Curious how you're thinking about each of your brand's ability to achieve sales levels back at the fiscal 2019 levels. Curious if you would expect that to occur at some point this year? And if so, what quarter might you see that for each of the brands, if at all? And I'm also curious how you're thinking about the gross margin rate in fiscal 2021 for each of the major brands. And even just thinking beyond this year, how are you thinking about the potential upside from there?

Sure, Paul, and thank you for the question. I would say that with each of our brands, we're probably not going to quite get back to 2019 levels for the full year. It will likely be a bit short of that. With a bit of luck, we can get close to those levels but probably not all the way back. As we mentioned in the call, the first quarter has shown that the initial weeks were really a continuation of what we observed in Q3 and Q4. However, since mid-February, we've seen significant improvement in our brick-and-mortar locations, and e-commerce has also remained strong. This is quite encouraging and suggests there is considerable pent-up demand, with people eager to go out and start thinking about traveling and vacations, which benefits us greatly. Therefore, we are optimistic. I don't believe we will fully return to 2019 levels this year, but I certainly expect that we will aim for that as we move into 2022. Scott, do you want to add anything to that?

On the gross margin question, we certainly expect expansion in every operating group over fiscal 2020, hopefully, at least 250 to 300 basis points in each.

Scott, how about versus fiscal 2019? Sorry.

Fiscal 2019, we expect some expansion, especially we think Lilly certainly has an opportunity. They really did a lot of good IMU work in getting better initial gross margins and a lot of that work within '20, it just kind of got masked with some of the extra promotional activity. I believe Tommy's will probably be somewhat flattish to '19, maybe a little bit up. And I think Lilly has some gross margin expansion opportunity in 2021 versus '19.

Got it. And then just last, you mentioned, I think, being encouraged by some of your order books. Any quantification? Anything further that you could share in terms of what you're seeing?

It's very uncertain right now as much depends on replenishment. We hesitate to provide a specific number, but we have been optimistic.

And Paul, I would say, I don't think it will quite get back in the fall season to 2019 levels. But beyond that, as we get into resort and spring, the early part of which will sit within this fiscal year, I don't know. It will depend on how the double sale accounts are performing, and some of them, like we are starting to see a meaningful uptick in their business. And Scott said it's still a fluid situation.

Our next question comes from Matthew Degulis with KeyBanc.

So with inventory being down by 19%, I'm wondering how much of that is planned versus how much is due to any impact from the supply chain disruptions? And similarly, how are you thinking about inventory orders and levels through 2021?

We've had very little interruption. I know there's been a lot of things going on in the supply chain out there, but we've had very minor delays. A lot of Lilly's product comes to the East Coast, which has been less impacted. And Tommy actually did some shifting of products, and we were really bringing a lot less for spring. So that really has not been a major issue for us, so far, and we're watching that situation. We believe with our enterprise order management systems and some really more disciplined inventory management that we can operate during the year at lower inventories than we have in the past and still generate healthy sales. So I think we just expect to be more efficient on inventory going forward.

Got it. That's helpful. And can you update us on how you're feeling about the women's business for Tommy in 2021? And if you could provide any year-to-date or maybe early spring color?

I don't think we can give you year-to-date stats, but we can give you some year-to-date color, and it's quite good, really. We've been encouraged by what we've seen in women's during the fourth quarter when we launched our new IslandZone performance product. We had the second holiday season both in 2019 and 2020 where we had our Island Soft product. Both of those are women's products that have performed really well for us. And it really put us into some new lanes of business in women's, and I think it helped us find a zone that we can own around. Then another factor that's helping women's is the sort of basic fundamental category-type business and bottoms and bits and key item type categories like that, where over the last couple of years, really, we built the business that we never had before, and that's more of an annuity-type business that we can continue to build on. And then this spring, we're actually seeing our fashion product in women's move well too. And then the last comment, Matthew, that I would make on women's is, as we mentioned, in our Marlin Bar locations, those tend to be our very best women's locations. We really believe that the Marlin Bars are going to help us build the women's business. We've seen it directly there, and I think we'll start to see it indirectly elsewhere.

Our next question comes from Susan Anderson with B. Riley FBR.

Great job on the quarter. I'm curious about the first quarter and if it seems like things are improving. Are all regions experiencing this strength, or is it driven by specific areas like Hawaii that have reopened and might be seeing some traffic? Also, are the trends consistent across all brands?

The trends are consistent across all brands. Overall, businesses are performing well or are on a positive trajectory, which is encouraging. However, geographical performance varies. The strongest results are coming from warm weather and off-mall locations, such as outdoor malls, street locations, or resorts in warmer markets. Areas like the Northeast, Midwest, and parts of the Pacific Northwest have seen some improvement, but they still lag behind. In Hawaii, we are witnessing a nice rebound; Doug Wood from our Tommy Bahama business, who is currently in Maui, reported that tourism is starting to recover there. Domestic travel, especially to the big island and Maui, is picking up. However, Waikiki is not performing as well yet because it relies more on international visitors, who have not fully returned. We are excited about the positive trends we're observing, and we believe they are driven by growing consumer confidence and increasing vaccination rates, which encourages people to travel and visit stores.

Great. That's good to hear. And then I'm curious just your thoughts around acquisitions and kind of what you're seeing out there. Have you seen valuations come down at all? And then I think you noted in the press release that you invested $6 million in minority interest in some smaller branded apparel businesses. I'm curious what those are and could that investment be larger one day?

Well, as you know, Susan, we have this model that we like a lot that we did with The Beaufort Bonnet Company where we injected some capital into them, I guess, about four, four and a half years ago, and that ended up with us buying them. And since the time that we bought them, they've grown very significantly and they still have a lot of growth left in them. So we like that model a lot. And that's the idea behind those minority investments is that hopefully, some of them will turn out to be Beaufort Bonnet-type opportunities. I don't think all of them will. Besides Beaufort Bonnet, we've got three right now, two of which we've done in the last year. I think some of them will end up being things where we take a controlling interest, and some of them may not. But that's okay; they don't all have to end up as part of our company to be successful. So we like that strategy, and we're continuing with that. And then on the larger acquisition front, we remain very interested in doing larger acquisitions. It's something that's a more fully developed business like Lilly was when we bought it 10 years ago. But the valuations are still pretty high there. There's a lot of competition for those assets. You've got stacked money and private equity money. There are a lot of bidders out there bidding for a limited number of assets. So we're very interested in that and are looking all the time, but we're going to stay disciplined on valuation there. And as the main sort of the dollar investment, it's not really appropriate for us to talk about those right now. We're sort of at a 10% stake, and we're really just a quiet investor. So we'll leave it at that for now.

Got it. Okay. And then just really quick on the SG&A. I think there was a $10 million reduction in the occupancy cost. Is this going to be ongoing, or was that one-time in the fourth quarter?

It's a combination of ongoing elements. We added some Marlin Bars that will have a full year of effect. Total abatements vary; some are recognized in the P&L immediately, while others are spread out over the lease term. In 2020, we recorded approximately $4 million in abatements in the P&L, and a similar amount is expected to be recognized in future years due to the nature of the deals.

Our next question comes from Steve Marotta with CL King.

Tom, I'm curious about any significant differences in traffic between the bars and brick-and-mortar locations in the first quarter. Are the restaurants still operating on limited hours and facing capacity constraints? How close are they to being fully open? I have a quick follow-up as well.

Restaurants have performed very well and are among our strongest locations, depending on the area. Within each area, restaurant locations have thrived. There is significant demand for outdoor dining at our store locations and for the experience we provide. In a year with few highlights, restaurants stand out for us, especially the Marlin Bars, which have been wonderful to observe. Most are still under some form of restrictions, typically at around 50% capacity. Currently, many locations are experiencing waits; some guests are willing to wait, while others choose to leave. We are currently limited by capacity in our restaurants, but we are maximizing the business we can accommodate given these constraints. It's encouraging to see this level of demand and interest in our brand and experiences. I should mention that New York remains completely closed at this time. Overall, restaurants have been a positive aspect for us. We believe we have strengthened our relationships with many long-time customers by providing good service during this challenging year and have also made new connections through our bars and restaurants. Even during complete shutdowns, such as in California in December and January when on-premise dining was prohibited, our teams adapted creatively. They offered not just typical takeout meals but complete takeout parties, ready to go with alcohol included. This approach not only allowed us to continue operations but also to support our guests during a particularly difficult time. We believe that the hospitality we provided will yield benefits for us in 2021 and beyond.

That is super helpful. And Scott, forgive me for asking, you answered the supply chain question there, and you mentioned New York City. You mentioned New York Port, East Coast Ports, the new issue in the Suez Canal, a potential bottleneck in coming weeks.

We estimate that around 7% to 10% of our products would pass through the canal, which represents a small portion of our sourcing mix. We do have some goods on containers and are considering contingency plans for items that will be leaving the factory soon, but it's not a significant part of our business.

We don't anticipate that to be a significant problem for us, Steve. It's an inconvenience, but I don't believe it's going to hinder our plans.

Our next question comes from Dana Telsey with Telsey Advisory Group.

It's great to see the advancements as we mark the anniversary of last year's shutdown. Regarding inventory levels, especially with Tommy Bahama, the new systems should enhance your inventory management. How are you approaching inventory as we progress through the year, and what do you envision it looking like? Additionally, as stores begin to reopen, what expenses do you anticipate coming back into the system, and how do you see managing that?

Our inventory was in excellent condition at the end of the year. We believe that with the new system initiatives, Tommy should be able to achieve year-over-year decreases throughout the year. The amount of business coming back late in the year will influence this, but generally, we expect to see lower inventory levels across all groups throughout the year.

Regarding SG&A, in 2020 we experienced significant disruptions and many furloughs. We noted in our prepared remarks that we expect to be about 5% lower than the SG&A in 2019. While some of this reduction can be attributed to variable costs, we have also removed a considerable amount of employment costs that we believe will be more permanent. However, we plan to increase our investment in marketing, as we believe this will allow us to attract more guests. For the year, our SG&A should be approximately 5% lower than it was in 2019. Looking ahead, we hope that as sales return to 2019 levels, our SG&A will still remain below those levels, but this will largely depend on our business mix.

Got it. And then I believe that in 2019, the Tommy operating margin was 8.3%. Lilly, I think, at 18.3%. Southern Tide just under 13%. Is there anything that prevents you from getting back to those levels?

No. We would certainly expect, particularly for Tommy and Southern Tide, to exceed those levels now, not in 2021. In 2021, the top line is not there yet for the brands. However, when the top line returns to 2019 levels, we would definitely anticipate higher operating margins, especially for both Tommy Bahama and Southern Tide. While it's not impossible for Lilly, Lilly's margins are already very high.

Got it. And just one last thing. Obviously, you've been focused over the last year or so on the big trend of athleisure, lounge and casual. As the reopening happens and social occasions come back, anything that we should be watching for in new product introductions, launches in Tommy or Lilly?

We are beginning to see some interest in product categories that were not as popular during the pandemic, particularly in dresses, especially woven social or cocktail dresses. Our woven business and men's line have also seen some improvement. In Lilly, the Elsa top, a loose-fitting silk top that flatters all body types, was our top-selling item last week, which is a change from the trend during the pandemic. Interestingly, last summer many people spent time by their own pools and did not feel the need to buy new swimwear. This year, however, they seem to be looking forward to events where they want to look their best, leading to a noticeable increase in swimwear sales. The trends we've discussed throughout the year—easy to wear, easy care, and comfort—are likely to remain strong. While silhouettes may become slightly more polished, I believe that the performance inspiration across all product categories will continue.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Tom Chubb, the CEO, for closing remarks.

Okay. Thank you, Anastasia, and thanks to all of you for your interest. Please stay safe, and we look forward to talking to you again in June.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.