Oxford Industries Inc (OXM) Q1 2024 Earnings Call Transcript

Greetings. Welcome to Oxford Industries, Inc. First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I will now turn the conference over to your host, Brian Smith of Oxford Industries, Inc. 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 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. 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. Now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO, and Scott Grassmyer, CFO and COO. Thank you for your attention. And now I'd like to turn the call over to Tom Chubb.

Thank you, Brian. Good afternoon, and thank you for joining us. I'm going to start with an update on the execution of our plan for the first quarter of fiscal 2024 and our current expectations for the balance of the year. Our strong brands and our excellent team focused on executing our strategy allowed us to deliver sales and adjusted EPS within our guidance ranges for the first quarter despite continued macroeconomic headwinds and lower levels of consumer sentiment. While most economic indicators remain fairly positive, consumer sentiment has dropped meaningfully from levels at the start of this year and has driven the consumer to become more cautious than originally anticipated in our spending on discretionary items such as fashion resort apparel, which is the core of our business. Net sales were down $22 million or 5% as compared to the first quarter of fiscal 2023. The majority of the decline in net sales is attributable to a $17 million year-over-year decline in wholesale sales for the first quarter, which we anticipated as we lapped a very robust first quarter of fiscal 2023. Our position with our key retail partners remains very strong, and our sell-through performance remains excellent. However, most of them, in response to muted consumer sentiment and the attendant lackluster demand, were very cautious in their inventory purchases for spring and summer of this year, and that shows up in our first quarter sales numbers. Looking forward, thanks to our continued strong performance with our key partners, our forward order book is solid, and we expect to make up about half of the first quarter shortfall in the wholesale over the remaining three quarters of the year. The second factor in our sales decline was the change in promotional cadence and events in our Lilly Pulitzer brand that we outlined in March. The net effect of these changes is that while first quarter sales for Lilly were down on a year-over-year basis, we expect second quarter sales to be significantly higher than last year for Lilly Pulitzer. The third factor contributing to our year-over-year sales decline was a 7% negative comp in our direct-to-consumer businesses as we continue to see a consumer that is more cautious in their spending than she was 18 to 24 months ago. Recall that in last year's first quarter, we posted a double-digit positive comp. Interest in our brands remains high, with double-digit growth in traffic, offset by a decline in conversion, resulting in negative comps reflective of consumer caution. As we look forward to the balance of the year, encouragingly, our second quarter-to-date comps have rebounded compared to the first quarter; are positive to last year and have sequentially improved. While this gives us reason to be optimistic, based on the dipping consumer sentiment and continued choppy market, we are moderating our comp assumption for the balance of the year. Despite these challenges, we still expect top-line growth in all our brands, growth in all direct-to-consumer channels and distribution, and positive comps for the full year. We also expect a strong 2024 from a cash flow perspective, and we'll continue to execute on the fundamentals of our long-term strategy, including investing in the future of our business. These investments will provide the ability to continue to deliver profitable growth and strong cash flow on a sustained basis. Compelling, differentiated product is always at the forefront of our strategy. We continue to evoke happiness in our customers with beautiful and unique products like our Artist Series items in Tommy Bahama. Each year, we celebrate a new group of artists with a limited collection that honors all the island life has to offer. For our 2024 Artist Series, we selected seven artists from across the globe and asked them to create custom artwork that shows what Tommy Bahama is all about. The resulting shirts, dresses and other pieces delight tried and true Tommy Bahama aficionados by giving them truly special pieces and also bring new customers into the brand by captivating them with the artistry of the pieces and the amazing stories of the artist behind them. Another great example is the very elevated 65th anniversary Lilly Pulitzer capsule collection that we offered earlier in the year. This capsule was a massive hit with our customers, and the commercial success that we had has opened the door to additional opportunities for us to grow the business by expanding our line in the future to include a range of more elevated products that command higher prices. Investing in future growth is also critical to our long-term strategy, and we are continuing with our plans to open stores in Marlin Bars this year. During the quarter, we opened seven new stores, including two at Tommy Bahama, one of which is a new Marlin Bar, three at Johnny Was, and one each at Southern Tide and The Beaufort Bonnet Company. These new locations extend our reach and allow us to serve more customers with our beautiful stores and our exceptional in-store experience. For the balance of the year, we expect to open four more Tommy Bahama Marlin Bars and 15 to 20 more stores spread across the brands. These openings set us up well for top-line growth in 2025 and beyond. In addition, we are making excellent progress on rebalancing our distribution capacity between the Eastern Seaboard and the West Coast. Going into the year, we had excess West Coast capacity and insufficient East Coast capacity to serve all the current and future needs that we have on the Eastern Seaboard. We have exited some West Coast capacity, which will save us money, and are hard at work on building our new distribution facility in Georgia, which will allow us to better serve and grow a very robust base of business that we serve in the Eastern and Southeastern part of the country. Upon completion, we will be in much better position to serve current needs and support future growth all at a highly competitive distribution cost. While we navigate a less robust consumer market, we remain focused on the long term and ensuring that we are in a position to drive sustained profitable growth. As always, we are incredibly grateful to our amazing people for all that they do to help us succeed. Thanks for your attention. Now I will turn the call over to Scott for additional detail.

Thank you, Tom. We closed the first quarter of fiscal 2024 with top and bottom line results within our guidance range. Despite the uncertain macro environment affecting all channels of distribution as referenced by Tom, and going against wholesale growth and direct-to-consumer comps of 10% in the first quarter of 2023, our team is focused on executing against our strategies and delivering for our shareholders. In the first quarter of fiscal 2024, consolidated net sales decreased 5% to $398 million. The first quarter 2024 net sales includes decreases in most of our full-price channels, with decreases of $17 million or 16% in an especially difficult wholesale channel, $6 million or 5% in e-commerce sales, $3 million or 2% in full-price bricks and mortar retail. A bright spot continues to be our food and beverage business that delivered strong growth of 8%. Additionally, we had increased sales in our outlets of 6% that benefited from consumers looking for deals and promotions. In connection with consumers looking for deals and promotions, adjusted gross margin contracted 40 basis points to 65.4%, driven by a higher proportion of net sales occurring during promotional events across Tommy Bahama, Lilly Pulitzer, and Johnny Was. The decrease in adjusted gross margin caused by the promotional environment was partially offset by lower inventory markdowns in our emerging brands group and a change in sales mix with wholesale sales representing a lower proportion of total sales during the first quarter of '24. Adjusted SG&A expenses increased 5% to $210 million compared to $200 million last year. During the first quarter of '24, we incurred higher expenses related to recent and ongoing investments in our business, primarily from the addition of 27 new brick-and-mortar locations opened since the first quarter of last year and the addition of the Jack Rogers brand acquired in the fourth quarter of fiscal 2023. We have also begun to incur costs on several of the approximate 15 to 20 additional brick-and-mortar locations, including four Marlin Bar locations that we expect to open during the remainder of the fiscal year. We also saw a modest increase in adjusted royalty income from the Tommy Bahama Miramonte Resort and Spa. The result of this yielded $57 million of adjusted operating income or a 14.4% operating margin, compared to $83 million or 19.8% in the prior year. The decrease in adjusted operating margin reflects the SG&A investments amidst a challenging consumer environment for sales and gross margins. Moving beyond operating income, we also saw a modest increase in our effective tax rate, which was offset by lower interest expense from our continued payment down of debt. With all of this, we achieved $2.60 of adjusted earnings per share. I'll now move on to our balance sheet, beginning with inventory. During the first quarter of fiscal '24, we were able to decrease inventory by 10% or $26 million year-over-year on a FIFO basis. The decrease in inventories resulted from our continued inventory discipline as well as the reduction of incremental inventory previously built into our supply chains to mitigate potential disruptions that have largely abated. From a liquidity standpoint, we continue to use our robust cash flows to repay our outstanding debt. We finished the first quarter of fiscal '24, with $19 million of borrowings under our revolving credit facility, down $10 million from $29 million of borrowings at the end of fiscal '23 and a $76 million reduction versus the first quarter of 2023. Our $33 million of cash flow from operations in the first quarter of fiscal '24 allowed us to reduce outstanding debt, also funding $12 million of capital expenditures and $11 million of dividends. I'll now spend some time on our outlook for 2024. After negative comps of 7% for the first quarter of 2024, our comp sales figures for the second quarter to date are positive as we start to anniversary the more cautious consumer environment that we began to experience midway through the first quarter of the prior year. We believe the positive comp trend will continue throughout the remainder of the year and will result in positive comps for the full year including comps in the mid-single-digit range for the second quarter and back half of the year as we enter a period of going against negative comps in the prior year. Assumptions are more modest than our original expectations from March, and we have revised our sales forecast accordingly. For the full year, we now expect net sales to be between $1.59 billion and $1.63 billion, growth of 1% to 4% compared to sales of $1.57 billion in 2023. Our updated sales plan for 2024 still includes growth in all brands with new stores and full year positive comps offsetting the modest full year decline in wholesale. We also expect growth in all direct-to-consumer channels, including full-price brick-and-mortar, e-commerce, food and beverage, and outlets. We expect wholesale sales, which were down significantly as we expected in the first quarter, to achieve modest growth during the remainder of the year compared to the prior year, with approximately $10 million in lower wholesale sales during the full fiscal year '24. While still open, our fall order books are trending higher than in the prior years, inventory levels at major department stores have improved. We now anticipate gross margins will be relatively flat in 2024 compared to the prior year. As expected, increased activity during promotional events across our brands will offset the gross margin benefit from proportionately lower wholesale sales. The higher sales and relatively flat gross margins are expected to be offset by increased SG&A, which is expected to grow at a rate higher than sales in 2024, primarily due to the investments in our business, including expanding our store count by a net of approximately 25 locations, the five new Tommy Bahama Marlin Bars, continued IT investments, and the addition of Jack Rogers. Additionally, as discussed during the last call, we expect the Jack Rogers brand acquired in the fourth quarter of fiscal 2023 to generate an operating loss of approximately $2 million in 2024 as we reset and refocus the business. We also anticipate lower interest expense of $2 million for the year compared to $6 million in 2023 and higher royalty and other income, primarily from the full year of the Tommy Bahama Miramonte resort. We also expect a higher adjusted effective tax rate of approximately 25% compared to 23% in 2023, which benefited from certain favorable items that are not expected to recur in 2024. Considering all these items, we expect the operating margin to decrease modestly from 2023 levels and now expect 2024 adjusted EPS to be between $8.60 and $9 versus adjusted EPS of $10.15 last year, with decreases in our businesses and a higher tax rate, being partially offset by the lower interest expense and higher adjusted royalties and other income. In the second quarter of 2024, we expect sales of $430 million to $450 million compared to sales of $420 million in the second quarter of 2023. We also expect an approximate 50 basis point contraction in gross margin with the trend of increased sales during promotional events expected to continue. SG&A deleveraging, $1 million of lower interest expense, an effective tax rate of approximately 24%, and flat royalty and other income. We expect this to result in second quarter adjusted EPS of between $2.95 and $3.15 compared to $3.45 in the second quarter of 2023. Expanding on the investments we're making in 2024, I'd like to briefly discuss our updated CapEx outlook for the remainder of the year. Due to refined cash flow and timing projections for our aligned shortage distribution center project and adjustments to other capital projects, capital expenditures in fiscal 2024 have been moderated and are now expected to be approximately $170 million compared to $74 million in fiscal 2023, with approximately $90 million related to the significant multiyear project to build a new distribution center in Lyons, Georgia that will enhance the direct consumer throughput capabilities of our brands. Remaining capital expenditures relate to the execution of our pipeline of Marlin Bars, increases in store count across Tommy Bahama, Lilly Pulitzer, Johnny Was, Southern Tide, and The Beaufort Bonnet Company, and increased investment in our various direct-to-consumer technology systems initiatives. We expect this elevated capital expenditure level to moderate in 2025 and further moderate in 2026 and beyond after the completion of the Lyons, Georgia project. We also have a positive outlook on our cash and liquidity position as well. Cash flows from operations are expected to be very strong, giving us ample room to fund the previously mentioned investments, our quarterly dividend, and repay the remainder of our outstanding debt.

Hi, good afternoon. Just wondering if you could provide a little bit of color on the trends by brand embedded in the second quarter guidance as well as any color by brand on the exit rate leaving the first quarter? And then I have a follow-up.

We're expecting that all of our brands will improve in the second quarter, and we are seeing positive comparisons so far this quarter. We anticipate mid-single digit growth, which has accelerated as the quarter has progressed, with June showing stronger performance than May.

And as Scott pointed out in his comments during the call, in the first quarter, we were up against a 10% positive comp last year, and in the second quarter, you had, I think, a negative 5% last year. So an easier comp or comparison, but we're delivering against that so far, and we're optimistic about what we can do.

Okay. Great. And then just quickly on the gross margins. You called out some contraction expected for 2Q, there is some in 1Q, but you're guiding to flat for the year. I think if we back into it, you're expecting to see some expansion in the back half. Maybe just help us a bit with the shaping there? And also any color on what's driving that? Thanks.

I believe much of this is related to the fact that many of our new stores will be operational especially in the fourth quarter. Therefore, I expect our direct business and the promotional levels to be more consistent compared to the first half, where they were slightly higher.

Thank you, Ashley.

Hi, good afternoon. I was hoping you could elaborate a little bit on the wholesale side of business. It sounds like it's relatively on plan with what happened in Q1, now expecting a return to growth for the remainder of the year. But I would just love to hear a bit more about what you're hearing from your wholesale partners? And then maybe with that, if you could elaborate a bit on where you see additional door opportunities, potential for new door growth for both Tommy and Lilly? Thank you.

Thank you, Janine. As we discussed in March, we had good visibility because most of our wholesale business is booked in advance. In the first quarter of last year, we experienced a very strong performance in wholesale, which wasn't the case for most of the market. This made our comparison more challenging. We believe retailers are being cautious due to softer consumer demand, leading them to limit forward orders, resulting in a $17 million decline year-over-year. However, our retail performance has been strong, and with inventories appearing healthy, our forward order book looks promising. We expect to recover about half of the first quarter shortfall throughout the rest of the year. Regarding door growth, we see potential in Lilly Pulitzer and believe we can expand our presence in that brand over the next couple of years. For Tommy Bahama, the focus will be on increasing sales in existing doors while also exploring some growth opportunities. The women’s wholesale segment in Tommy Bahama has shown considerable strength recently, and we still see further growth potential. While we aim to lead with direct-to-consumer initiatives, we recognize that wholesale remains a crucial component of a robust brand, and we are optimistic about our ability to grow in that area alongside our wholesale partners.

Great. And maybe then just one more. You talked about a bit about consumer cautiousness, and it sounds like that's only kind of gotten worse as we go through the year. I know your consumer is really gravitating towards newness, especially Tommy Bahama. Do you feel like you have the right assortment to deliver that newness, or is there anything we should expect in terms of how you might pivot the merchandise just to kind of cater to what they're looking for in this environment? Thank you.

Great question, Janine. Newness is continuing to resonate well with consumers, and we're hearing the same from many of our peers in the market. This is what customers are seeking. One significant opportunity for us lies in taking a more enterprise-wide perspective. We've successfully addressed the super casual segment of our offerings, particularly athleisure and lounge products, and we’re also doing well with occasion-based items. However, we see an opportunity in the everyday category, which includes items suitable for the office or outings with friends. We are currently somewhat underrepresented in that area. I believe we will improve as the year progresses, especially with some new offerings coming in. Overall, looking at our assortments on a broader scale, I feel confident about them as we move later into the year. While they were satisfactory in the spring, I anticipate they will improve significantly as the year continues.

Great. Thanks so much for the color and best of luck.

Okay. Thanks a lot, Janine.

Great. Good afternoon and thanks for taking my questions. First one on the updated sales guidance. I just want to understand, I think you mentioned that you expect comp sales up mid-single-digits second quarter. And I think that's also the case for the rest of the year or the second half. I just want to understand like what was the prior outlook that you had contemplated given that you lowered the sales guidance? And maybe any distinctions that you would make on where you're seeing under or over-performance across the brand's portfolio? Thank you.

Yeah. It was a few points higher in our original guidance. And for the year, we're expecting to come out with a slightly positive comp. So we kind of overcome that negative in Q1, where before we were closer to mid-single for the year. We're now in the low single for the year.

Yeah. I think, Mauricio, what I would say is they all really from a demographic standpoint are kind of chasing a similar customer. So they're sort of seeing the same thing, and there are some differences between the brands and geographies. But the overall theme is really the same. It's that more cautious consumer that's still showing up and looking. And as I mentioned in my prepared remarks, traffic year-over-year was actually up pretty nicely during the first quarter, but the conversion is down. The one callout that I would really make is I think Johnny Was had a nice performance in e-commerce during the first quarter, which really was a bit of a standout both in our company and frankly, from what we've seen across a lot of the peer set as well. So that would be the bottom line, a pretty similar experience with some differences. But broadly, it's the same thing.

Got it. And then lastly, regarding the guidance, you mentioned that you expect operating margin to decrease slightly. If you look at the guidance, it's pretty much consistent with what you provided last quarter. I want to understand if you are also lowering the SG&A expectation due to the decrease in sales, or how should we approach the SG&A dollars? Thank you.

Yes, SG&A has been moderated somewhat, but it will still be higher compared to last year. For Q2 and Q3, it will likely be around $20 million higher. By Q4, with one less week, it's expected to be about half that amount. So while it has been moderated from our earlier forecast in terms of dollars, it will still represent a slightly higher percentage of sales than what we initially projected.

Got it. That $20 million, $30 million, is that for a specific quarter like one?

That is for Q2 and Q3, the 20-ish is in Qs 2 and 3 and about $20 million higher. And in Q4, about half of that, about $10 million higher, but Q4 has one less week because last year, I had that 53rd year; it was a 14-week quarter versus a 13-week quarter.

Yeah. Got it. Okay. Very helpful. Thank you.

Thank you. Our next question comes from the line of Paul Lejuez with Citi. Please proceed with your question.

Hey, it's Tracy Kogan filling in for Paul. I was hoping you could share your thoughts on what caused the change in comparable sales in the second quarter. I know you mentioned the easier comparison, so I’m curious if you believe that’s the main factor. Do you think the easier comparisons are why there was an improvement in June compared to May? Or is there a new product launch or perhaps some promotions contributing to this change? I also have a follow-up. Thanks.

Part of the improvement is due to a more favorable comparison to last year. Additionally, as we mentioned in March and again today, we have adjusted the way we run some events at Lilly, which is likely to lead to a strong performance in the second quarter and positively impact the entire enterprise. So far in the current quarter, the second quarter has appeared quite promising, showing positive sequential improvement.

Did you notice a similar positive trend at Tommy? My second question is whether you think there is any price resistance from consumers. Is your consumer research indicating anything about this, or is it simply that consumers are being more cautious?

Well, I think what we would say is, very clearly, when they like it, they're more than happy to pay whatever we've got it marked at. And the best example of that probably is the Lilly Pulitzer Capsule collection that they did, The 65th Anniversary Capsule, which was the average price on that was probably 2 times or 3 times what their normal price points are, and it sold out very, very quickly. So I don't think there's really price resistance, but as much as just the consumer is looking for deals. And when there's not a deal, you just being more selective about what she's really willing to buy.

Thank you. And then just back to the Tommy Bahama question about this quarter and whether you had seen that similar kind of inflection to at least positive comps, maybe not to 2% to 3%?

Yeah, I think it's fair to say that all the brands have seen a good start to the second quarter. Okay. Thank you very much for your interest today. We look forward to talking to you again in September and hope you have a great summer until then.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.