Oxford Industries Inc Q1 FY2021 Earnings Call

Greetings, and welcome to the Oxford Industries, Inc., First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Anne Shoemaker, Treasurer. Thank you. You may begin.

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 with the meaning of 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. 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. Due to the material impact of COVID-19 on our business in fiscal 2020, we will also include comparisons to our fiscal 2019 results. 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 now I'd like to turn the call over to Tom Chubb.

Thank you, Anne, and thank you all for being here this afternoon. We are very happy to report a robust start to fiscal 2021. At the beginning of the pandemic, we took significant steps to safeguard our staff, our brands, and our finances. This, along with our commitment over the past year to bring joy to our customers and invest in better digital marketing and store experiences, as well as our bars and restaurants, has solidified our base for profitable growth. As customers have felt more comfortable shopping in person again, our overall engagement has surged, leading to strong progress across all our brands. Given last year’s circumstances, it’s not surprising that we achieved significant sales increases across all brands and distribution channels in the first quarter of fiscal 2021 compared to the same period in fiscal 2020. What stands out more about our first quarter results is the comparison with the first quarter of 2019, as we believe this gives a clearer picture than a comparison to 2020. Therefore, in today’s discussion, we will concentrate on the positive progress we have made towards returning to and even surpassing our 2019 performance levels. First quarter sales reached $266 million compared to $282 million in fiscal 2019, which is above our guidance of $220 million to $240 million. It’s important to note that $14 million of the $16 million sales decline from the first quarter of fiscal 2019 was attributed to lower sales in Lanier Apparel, which we are in the process of exiting. Adjusted earnings per share rose to $1.89, up from $1.30 in the first quarter of fiscal 2019. Scott will provide further details shortly, but these results were driven by exceptional performance in our e-commerce ventures and strong gross margins. Our bar and restaurant operations also performed admirably this quarter. In our physical stores, we generally observed a sequential improvement in traffic and sales, with regions in Florida, the Southeast, and Texas showing the most strength, while the Mid-Atlantic, Northeast, and Midwest are recovering at a slower pace. We are undoubtedly benefiting from pent-up demand this spring and summer, as our brands align with consumers’ desires for travel, vacation, and social engagement. We expect this trend to continue as more regions normalize. Nevertheless, we believe that the results we have seen so far this year, as well as our projections for the remainder of the year, highlight the importance of remaining true to our brands during last year’s challenges. Our commitment to the positive and optimistic messages of our brands, along with delivering those messages through our products and services, is proving to be very rewarding as the world reopens. Additionally, we are seeing positive returns on our investments in enhancing our brand content, improving our omni-channel customer service, and refining our digital marketing capabilities in our stores, bars, and restaurants. Our largest brand, Tommy Bahama, is rooted in the relaxed island lifestyle. We convey this lifestyle to our guests through our fantastic products, our wonderful stores, and e-commerce, and importantly, through our bars and restaurants. By remaining committed to our Live the Island Life brand message and making strategic investments, we achieved impressive first quarter results. Sales neared 2019 levels, propelled by strong growth in e-commerce and restaurants while brick-and-mortar stores continued to improve. Importantly, increased full price selling, robust initial merchandise unit sales, and excellent expense management contributed to a significant improvement in gross and operating margins, resulting in a 36% increase in operating income compared to the first quarter of 2019. We are thrilled with the margins we achieved this quarter. Lastly, we were pleased to find that while our men’s business performed well, our women’s business at Tommy Bahama was even stronger. We feel privileged to have the dedicated community of Tommy Bahama fans who make up our loyal customer base. That said, we believe there is potential to attract even more customers. Through our investments and established priorities, we aim to broaden our customer reach while continuing to cater to our loyal guests. Staying true to its resort chic lifestyle has served Lilly Pulitzer well during the first quarter. Lilly's focus for spring ’21 was on feel-good fashion emphasizing happy colors and prints, comfortable pieces, and a resort mindset. This focus, along with our investments in brand creativity and digital capabilities, led to strong first quarter results. We continue to see substantial growth from e-commerce while our physical stores and wholesale business improved as consumers grew more comfortable engaging in-person. Overall, first quarter ’21 sales surpassed those of first quarter 2019, and our operating margin reached an impressive 27%, compared to 21% in 2019. Our Luxletic and lounge offerings fueled growth, and we saw a significant rebound in our dress segment as social calendars filled up. Simultaneously, our golf and tennis collections also performed well, and there has been renewed consumer interest in swimwear as thoughts of summer travel and vacations increase. Our recent results confirm that we have the products that resonate with consumers, and our brand messaging is connecting with them. We look forward to continuing to drive strong business performance for the remainder of the year. Our smaller brands, including Southern Tide, The Beaufort Bonnet Company, and Duck Head, also had a fantastic first quarter, posting significant sales increases above first quarter 2019 levels. All three are positioned to contribute positively to our profitability this year. We are pleased with our first quarter results and excited about the rest of the year. Scott will share more details in a moment, but I want to express our expectation for a strong year, particularly regarding profitability. Our optimism is based on both external circumstances and the internal priorities we’ve been focusing on over the past year. Regarding external factors, as summer advances, we anticipate the slower-recovering regions, particularly the Mid-Atlantic, Northeast, and Midwest, to gain momentum. We also expect consumers to maintain a high interest in travel, vacations, and social events throughout the year. Finally, after a long pandemic, consumers increasingly appreciate the vibrant, joyful, and colorful nature of our brands and products. These external factors suggest a promising 2021. Internally, we are excited about the benefits resulting from our focused priorities. I’ll highlight five key areas. First, in our brand messaging, we ensure our message remains true to our core values and relevant to today’s consumers. Second, we have realigned our creative teams to enhance our content, ensuring it powerfully communicates our core brand messages. Third, as part of enhancing our digital capabilities, we’re improving how we capture and analyze customer data while respecting privacy, enabling us to better serve our customers. It also helps us identify and engage new potential customer audiences. Fourth, we’re refining our methods for measuring the effectiveness of various digital media channels that we use to connect with both existing and potential new customers. Fifth, we continue to enhance our in-store order fulfillment capabilities, allowing us to fulfill demand from any inventory location within our footprint. This significantly impacts our inventory efficiency, sell-through rates, and ultimately, gross margins. We believe that the combination of positive external conditions and the benefits from our internal efforts gives us good reason to be optimistic about 2021. In closing, I want to extend my heartfelt gratitude to our loyal customers and to our dedicated employees, an extraordinary team who have worked tirelessly over the last 1.5 years to bring happiness to our customers. Thank you for all your efforts. Now, I will turn the call over to Scott for further details on our results and our outlook for the rest of the year.

Thank you, Tom. As Tom just mentioned, fiscal 2021 is off to a great start with record earnings in the first quarter. I'll walk you through how we got there. Sales were stronger than expected, and excluding the impact of the exit of the Lanier Apparel business were comparable to 2019 levels. Our full-price e-commerce channel was 55% higher than in 2019, with significant growth over 2019 in all of our branded businesses. Our retail store performance reflects the significant regional differences in the pace of recovery. We saw real strength in the Southeast and Southwest, particularly in Florida, where retail sales achieved 2019 levels. However, we are experiencing a much slower recovery in other parts of the country where sales levels in the Northeast, Mid-Atlantic, and Midwest, while improving versus Q4, were still over 30% lower than in 2019. Overall, our retail sales were 16% lower than in 2019. We continue to see improvements so far in the second quarter and expect that improvement to continue as restrictions lift and summer arrives in these areas. Our restaurants benefited from the addition of five Marlin Bars and the strong recovery in certain regions, with a sales increase of 7% compared to 2019. All restaurants are now open except for New York, which we plan to reopen this fall. We are particularly proud of the work we have done to improve our gross margin, which, on an adjusted basis, expanded 520 basis points over 2019 to 64%. As demand remained high, more of our sales in the first quarter were at full price than in the first quarter of 2019. Gross margin also benefited from our focus and investments in our direct-to-consumer businesses and lower sales in Lanier Apparel, which has resulted in a meaningful shift in our sales mix to these higher-margin channels of distribution. In the first quarter of 2021, our direct business was 72% of revenue compared to 64% in the first quarter of 2019. We have also increased our IMUs by reducing product cost and selectively increasing prices. SG&A decreased modestly from 2019 levels with lower employment costs, occupancy costs, variable expenses, and travel costs, partially offset by increased performance-based incentive compensation. Putting it all together, in the first quarter, our consolidated adjusted operating margin expanded 410 basis points over 2019 to 15%, with operating margin expansion in all operating groups. Our business is supported by our strong balance sheet and cash flow from operations. Here are some highlights: on a FIFO basis, inventory decreased 29% compared to the end of the first quarter of 2020. Excluding Lanier Apparel, which we are exiting, FIFO inventory decreased 22% compared to the first quarter of 2020. Tommy Bahama, Lilly Pulitzer, and Southern Tide each decreased inventory level significantly year-over-year, with conservative purchases of seasonal inventory and higher-than-expected first quarter sales. Ongoing enhancements to enterprise order management systems are also contributing to a more efficient use of inventory. On a LIFO basis, inventory decreased 36% compared to the end of the first quarter of 2020. Supply chain challenges, including higher transit costs and production and transit delays, are ongoing. However, our emphasis on direct-to-consumer channels gives us more flexibility on product release dates. Our liquidity position is strong with $92 million of cash and no debt at the end of the first quarter. In the first quarter of 2021, cash provided by operating activities was $41 million compared to cash used in operating activities of $46 million in the first quarter of 2020. Turning to our outlook. The positive momentum we experienced in the first quarter has continued, and we expect to deliver strong revenue and earnings in the second quarter. Sales in the second quarter are expected to be in a range of $300 million to $310 million compared to $302 million in the second quarter of 2019. Impacting sales in the second quarter is the wind down of our Lanier Apparel business. We estimate Lanier Apparel revenue to decline to approximately $5 million in the second quarter of fiscal 2021 compared to $20 million in the second quarter of fiscal 2019. Strong full-price sales, a shift of our sales mix towards our brands and our direct-to-consumer channels and higher IMUs in the second quarter are expected to contribute to a meaningful increase in consolidated gross margin over 2019. On an adjusted basis, earnings per share for the second quarter of 2021 are expected to be in the range of $2.15 to $2.35 compared to $1.84 per share in the second quarter of 2019. Our third quarter is historically our smallest sales and earnings quarter due to the seasonality of our brands. We also put end-of-season inventory in both the third and fourth quarters with the highly profitable Lilly Pulitzer after-party sales as the most notable of our events. High sell-throughs in the first quarter and elevated sales levels planned in the second quarter are expected to reduce the availability of excess inventory for these clearance events. As a result of lower planned revenue from clearance events in the third quarter and the impact of the Lanier Apparel exit, we're projecting an adjusted loss in the quarter in a range of $0.20 to $0.35 per share compared to adjusted earnings of $0.10 per share in the third quarter of 2019. With our better-than-expected first quarter results, combined with our projection for a strong finish to the year, driven by continued strength planned in our full-price e-commerce channel, retail and restaurant channels of distribution, we are raising our previously issued guidance for 2021. We now expect sales in the range of $1.015 billion to $1.05 billion compared to net sales of $1.12 billion in 2019. For the full year, Lanier Apparel sales are expected to be approximately $20 million or $75 million lower than 2019, with no Lanier Apparel sales planned in the fourth quarter. Adjusted earnings per share for 2021 are expected to exceed 2019 levels, benefiting from meaningful gross margin expansion. SG&A for the full year is expected to be comparable with 2019, with lower employment costs, occupancy costs and travel costs, partially offset by increased performance-based incentive compensation and investments in marketing, including top-of-the-funnel expenditures. We now expect adjusted earnings in a range of $4.85 to $5.15 per share compared to $4.32 per share in 2019. We plan to continue investing in our growth opportunities, primarily in information technology initiatives, such as the redesign and relaunch of the Lilly Pulitzer mobile app and additional development of digital marketing and customer service enhancements. We also plan to open new retail stores and a new Marlin Bar at Town Square in Las Vegas, which will replace our full-service restaurant in the center. In 2021, capital expenditures for the full year are expected to be approximately $35 million comparable to 2019 levels. We appreciate your time today and will now turn over the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question is from Edward Yruma of KeyBanc Capital Markets. Please state your question.

Hey, good afternoon, guys. Thanks for taking the question. Congrats on a great quarter. I guess, first, I want to focus on our gross margin a little bit, obviously, an incredibly powerful performance there. In terms of last year, I know you had inventory that you packed away. Was there a benefit from a cost basis when you kind of brought that inventory back into flow this year? And then as a follow-up, as you think longer-term about the DTC penetration, particularly in the Tommy brand, do you think you kind of hit a peak or do you think that the direct business can continue to grow as a percent of overall sales? Thank you.

I'll take the second question and then turn it over to Scott to discuss any effect on gross margin. I believe that direct-to-consumer sales as a percentage of our total will continue to increase. It will certainly make up a larger share this year compared to 2019 as our wholesale business recovers. Our wholesale segment is performing very well across all our key customers, which is encouraging. However, we anticipate that direct-to-consumer will be the main driver of growth in the long run. Scott, would you like to address the gross margin?

Yes, there was really no significant cost difference from what we carried over. What has that allowed us to do was really not have a lot of excess inventory last year that we are flooding the market with. I think it really helped with our brand health. Our merchandising teams did a great job of really taking what we could merchandise well into that spring line, and it just allowed us not to have to buy a bunch of inventory for early spring, and we already had it. It also helped with some of the transit delays because that inventory was already here. So, we really had no delays there.

Got it. And one other follow-up. I know you guys mentioned you were taking some tactical price increases. I know historically, you've done that as you've introduced new products or rolled out some new functionality. Are the price increases on kind of a similar basis as you bring out new products, or are you taking a more wholesale approach to some of the price increases? Thanks.

It's more selective, Ed, than it is across-the-board type of pricing increases.

Yes, and then also as we get into more performance-type products, where new products that we introduced in the performance area tend to have a higher gross margin also.

Our next question is from Paul Lejuez with Citigroup. Please state your question.

It's Tracy Kogan filling in for Paul. I had two questions. I guess the first is on the supply chain. I'm wondering, if the delays you're seeing there are contributing to what you expect to be having a lack of clearance inventory in the third quarter? Is that really just more related to your sell-throughs? And then my second question was, I was just wondering in the Tommy business, how much your outlet business was hurt by lack of international tourism? If you could maybe give some color on the difference in performance in your outlet versus your full-price stores, are those in tourist regions versus those that are not? Thanks a lot.

Okay. On the supply chain question and any impact that may be having on the Lilly Pulitzer after-party sale later in the year, the way that I would answer that, Tracy, is the primary driver or the root cause, if you will, of not having as much inventory is the higher sell-through that we've had year-to-date. However, the supply chain issues make it harder for us to chase inventory really for full-price business as well as, as for that would ultimately end up leaving us possibly with more inventory for the after-party sale. So, we are having some challenges with delays in shipping as well as some delays in production at the factory end due to the COVID pandemic. As much as possible, we've obviously tried to factor all of that into our forecast and think we've sort of captured that, but the real cause is the higher-than-anticipated full-price selling during the early part of the year.

Yes. Our outlet sales are down, similar to our total retail performance. Unlike some brands, we don't gain much from international travel in our outlet stores. Although sales are down, our gross margins in the outlet remain very strong, and we have a leaner inventory that is of high quality. This allows us to achieve slightly better pricing by needing to discount less than in previous years. Overall, while sales in our outlet are down, margins are up, which indicates a healthy situation.

Our next question is from Susan Anderson of B. Riley. Please state your question.

Hi, good evening, nice to see the improvement in the quarter. I'm curious, I think you mentioned that you expect the Northern states to pick up as they've started to open. I'm curious if you've seen that penetrate or seeing them start to pick up just yet? And then also, if the South has continued to perform well, and then also curious what you're seeing in Hawaii as that's opened up now?

Yes. So as to the Mid-Atlantic, Northeast, and Midwest, which were the three sort of lagging regions that we called out, they are improving. If you look at the more recent performance versus the performance earlier in the year, the general trend there is good. I think it's as you would expect, as people start to get out more, feeling more comfortable as some of the restrictions start to get lifted and more people are vaccinated, people want to be out shopping and buying stuff, and we think that actually plays out for us really well. In those states, summertime is a really good time to have people out shopping for our brands, which are all about warm weather and sunshine and all those types of things. And in the South, I'd say that relative to any other year, the performance continues to be very good. We're pleased with what we're seeing there. I will point out that Florida always slows down for us during the summertime a bit versus other times of the year, and I think you have that. It won't be a relative slowdown as compared to other years, but it will be less of our overall sales picture during the summer months. And then as to Hawaii, it's a bit of a mixed bag there. The places that rely heavily on international tourists, especially people coming in from Japan or Australia, and that would be the island of Oahu because there's still issues with travel from those places. They've not recovered as fast as some of the locations like Maui and the Big Island that are more driven by U.S. tourists. And there are still restrictions in place, but we are seeing a nice recovery, and I think that will continue as the year progresses. I think all of Hawaii will continue to get better, which is a positive for us. We're thrilled with the results that we saw in the first quarter. But again, that was with certain regions still depressed from where they were in 2019. And as they come back online, we think that bodes well for us.

Great. That's very helpful. And then I'm just curious, are you seeing new customers come into all of the brands or the existing customers that are coming back now that maybe shopping the brands pre-COVID, but hadn't shopped them because maybe they hadn't gone on vacation or something? And now they're coming back, or if you're also capturing new customers and if that's in-store or online or both?

The answer is yes, yes, and yes. Customer counts are increasing. We're seeing past customers return while also adding new customers both online and in stores across all brands. Some of that growth was affected during the pandemic, as it was difficult to attract new customers when stores were closed. There was a surge in online activity, but all customer metrics look promising for the first quarter of the year, and we believe we can maintain that positive trend. This is an area we are very focused on as well.

Your next question is from Dana Telsey of Telsey Advisory Group. Please state your question.

Hi, good afternoon and congratulations on the terrific results. As you think about e-commerce, and I believe last year, e-commerce reached nearly 43% of sales, and you had a 55% increase in full price now. How are you thinking about percentage of total sales that comes from e-commerce and the margin accretion relative to that for each of the brands?

Yes, Lilly has a higher penetration of e-commerce compared to Tommy. Both brands made significant progress last year, which was quite unusual. This year, as a percentage of total sales, e-commerce will be somewhat smaller than last year, but it will still be notably higher than in 2019. Overall, we estimate total enterprise e-commerce to be around 33% for 2021, showing significant growth since 2019. I believe that 2022 will be the first year where we can establish a clearer baseline for e-commerce, especially since wholesale stores are still recovering this year. From 2022 onward, I expect e-commerce to continue being the fastest-growing segment of the business and it's very profitable for us. I'll let Scott provide more details on the margin impact of the e-commerce business.

Yes. Yes. Our e-com is a very profitable business. Even though you have some extra cost around it, you do have a high ticket, which is growing. Our average ticket has been growing, and our initial gross margins are higher. So, we are able to easily fund the extra cost with that margin. So we really do like the e-commerce business, and we have been investing in it, and those investments have been paying off, and we'll continue to invest in that business.

Got it. And then just two more follow-ups. One of the things that sounded like you had learned coming out of COVID is how to run the stores more efficiently regarding store labor. As stores have reopened, is this part of the flow-through beyond the gross margin of what's leading to the operating margin increases? And how do you think about labor going forward?

Yes, it is part of the flow-through. We have learned to operate more efficiently, and we are currently benefiting from that. Some of this improvement is intentional, but there is also an element related to the difficulties many employers are facing in filling open positions. We are running with fewer staff than we would prefer, which is likely costing us some sales. While this may not negatively impact labor costs as a percentage of sales, in absolute terms, we are spending less because we are unable to hire more people.

Got it. And then as you think about inventory going through the balance of the year, how do you think about inventory as approaching the fourth quarter? And how long this congestion lasts? Everything we hear, it seems like it continues to be extended?

Yes, it does. We have recently made changes in our merchandising calendars to place orders earlier, allowing for more time to account for any transit delays, particularly in the fourth quarter and during early spring deliveries that start in the first quarter. Our goal is to order and manage inventory ahead of time, so we can absorb any potential delays. We are also operating more efficiently with our inventory levels. We expect to remain below 20% for the entire year, although we're unsure if the percentage will vary significantly. Overall, we anticipate being able to manage the business with less inventory thanks to some recent investments.

Our final question is from Steve Marotta of CL King. Please state your question.

Tom, could you talk about how this year is progressing? The reopening seems to be performing remarkably well. While I understand you can't share specific guidance for next year, could you provide a high-level overview of what you believe the optimal operating margin is for the business in the long term? I'm curious how you anticipate handling comparisons next year, but that may involve too much specific guidance. Could you clarify where you currently stand and how you envision building from this point? Are there concerns that the margins may currently be higher than sustainable, considering the industry dynamics?

Thank you for the question, Steve. I'll have my partner Scott provide some additional insights on the long-term operating margin soon. At a high level, I want to emphasize that during the early months of the pandemic, our primary goal was ensuring our financial survival, which we accomplished successfully. About this time last year, we shifted our focus toward strengthening our position as we emerged from the pandemic. This includes taking actions across all our brands, and we’re beginning to see positive results from those efforts. We believe we have come out of this period with our brands in a stronger position, which is contributing to increased sales. While the reopening plays a role, we also attribute our success to the strength of our brands and our ongoing initiatives to enhance them, all of which have led to higher gross margins. Additionally, we've honed our skills to operate more efficiently in terms of operating expenses and inventory management. We remain committed to our wholesale business but are also prioritizing the growth of our direct-to-consumer segment. While it's challenging to predict next year's performance, I am confident that over the long term, we will be able to expand our enterprise-wide operating margin. Scott, do you want to add anything?

Yes. We expect to maintain a low double-digit operating margin for the company and believe we can reach that this year. At Tommy Bahama, there is significant potential for improving operating margins, and we anticipate making considerable progress, possibly reaching double digits this year. Additionally, we aim to achieve a 12% margin in the North, although that may not occur this year; we are optimistic about reaching that in the near future. Lilly has consistently demonstrated strong operating margins, and we think there is potential for slight expansion above 2019 levels. Overall, we see our margin profile improving and believe this trend can continue.

We have reached the end of the question-and-answer session. I will now turn the call over to Tom Chubb for closing remarks.

Thank you, Hillary, and thanks to all of you for your interest in our company and your support. And we look forward to talking to you again in September when we report second quarter results. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.