Oxford Industries, Inc. — Form 10-Q Summary
Period: Second quarter and first half of Fiscal 2018. The quarter was the 13 weeks ended August 4, 2018; the first half was the 26 weeks ended August 4, 2018. The request metadata says “2017 Q2,” but the filing covers 2018 Q2. Comparative periods ended July 29, 2017; Fiscal 2017 had 53 weeks.
Business context and results
Oxford designs, sources, markets and distributes apparel and related products through Tommy Bahama, Lilly Pulitzer, Lanier Apparel and Southern Tide, as well as Corporate and Other, which includes acquired The Beaufort Bonnet Company (TBBC). Direct-to-consumer channels include stores, e-commerce and restaurants; wholesale is also significant.
| Metric | Q2 FY2018 | Q2 FY2017 | First half FY2018 | First half FY2017 |
|---|---|---|---|---|
| Net sales | $302.6m | $284.7m | $575.3m | $557.1m |
| Gross profit / margin | $179.3m / 59.2% | $166.0m / 58.3% | $343.4m / 59.7% | $325.4m / 58.4% |
| Operating income / margin | $36.5m / 12.1% | $36.4m / 12.8% | $64.9m / 11.3% | $66.4m / 11.9% |
| Net earnings | $27.2m | $22.7m | $47.8m | $39.9m |
| Diluted EPS | $1.61 | $1.36 | $2.84 | $2.39 |
| Interest expense, net | $0.6m | $0.7m | $1.4m | $1.7m |
In Q2, sales grew 6.3%, while operating income was nearly flat; net earnings rose 19.8%, principally reflecting lower taxes. First-half sales increased 3.3%, but operating income declined 2.2%; net earnings rose 19.7%, again largely due to the lower effective tax rate. Q2 effective tax rate was 24.3% versus 36.4%; first-half rate was 24.8% versus 38.3%.
Material changes and segment trends
- Q2 calendar-adjusted comparable store sales increased 7% overall; first-half calendar-adjusted comparable sales increased 4%. E-commerce was 21% of Q2 sales versus 20% a year earlier; wholesale was 27% versus 28%.
- Q2 sales rose at Tommy Bahama 2.7%, Lilly Pulitzer 3.1%, Lanier Apparel 33.7% and Southern Tide 25.4%. Lanier’s increase included timing-sensitive warehouse-club program shipments.
- Q2 operating income declined at Tommy Bahama to $20.6m from $21.9m and at Lilly Pulitzer to $18.4m from $21.0m. Southern Tide and Lanier Apparel improved to $1.4m and $0.8m, respectively. Corporate and Other’s operating loss narrowed to $4.8m from $7.3m.
- For the first half, Tommy Bahama sales were essentially flat and operating income fell 8.0%; Lilly Pulitzer sales grew 5.6% while operating income fell 11.4%. Southern Tide operating income rose 42.1%. Management attributed pressure at the first two brands partly to higher advertising and store costs and lower wholesale sales.
- Gross margin improvement reflected favorable brand mix and LIFO accounting, among other factors. Lanier Apparel margins remained pressured by lower-margin warehouse-club sales, pricing pressure and customer allowances.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $57.5m, down from $83.1m, primarily because working-capital changes were unfavorable versus favorable in the prior-year period. Investing used $22.7m, including $22.3m of capital expenditures; financing used $33.9m. Cash ended at $7.1m.
- At August 4, 2018, current assets were $230.1m and current liabilities $110.9m; working capital was $119.2m and the current ratio 2.07. Total assets were $693.4m and shareholders’ equity $467.1m.
- Long-term debt was $24.9m, down from $45.8m at February 3, 2018. The company had $25m outstanding under its $325m revolving credit agreement and $228m of unused availability, subject to borrowing-base limitations. It reported covenant compliance and no required financial covenant testing during the first half.
- First-half dividends paid were $11.5m; dividends declared were $0.34 per share in Q2 and $0.68 per share for the first half. Fiscal 2018 capital expenditures were expected to be approximately $50m, including $22m already incurred.
Outlook, commentary and notable items
- Management expected a full-year Fiscal 2018 effective tax rate of approximately 26%, subject to changes in provisional U.S. Tax Reform calculations and discrete items. The filing does not provide a clear consolidated sales or earnings forecast.
- Management said operating cash flow and available credit were expected to support ongoing needs and investment in brands. It considered inventory levels appropriate for Q3 and expected Q3 to remain the smallest quarter for sales and operating income, reflecting seasonality.
- The company recorded an estimated $4m of Tommy Bahama Japan restructuring charges in Q2: $2m for lease termination and premises reinstatement, $1m non-cash impairment, and $1m other charges, including inventory markdowns and severance. It planned to close the Ginza restaurant in Q3 and retail store in Q4, leaving a limited Japan presence.
- U.S. Tax Reform lowered the federal corporate rate and drove lower reported tax expense. Accounting for certain impacts remained provisional; the company had not selected an accounting policy for GILTI and maintained a provisional permanent-reinvestment assertion for substantially all foreign subsidiary earnings.
- Management cited apparel-industry risks including changing consumer behavior, weaker department-store channels, promotional competition, economic conditions, weather, product and labor costs, and wholesale shipment timing. It continued to reduce selected department-store exposure to protect brand positioning. No litigation or regulatory matter was identified as reasonably expected to have a material financial impact.
- Adoption of new lease accounting was expected to add significant lease-related assets and liabilities to the balance sheet, though management did not anticipate a material effect on the income statement or cash flows.
Important facts for investors to verify
- Whether sales and comparable-store momentum continued, particularly at Tommy Bahama and Lilly Pulitzer, and whether wholesale reductions affected growth.
- Whether higher advertising, store-related costs and Japan restructuring continue to weigh on operating margins; track the underlying performance of Lilly Pulitzer and Tommy Bahama.
- Whether Lanier’s warehouse-club shipments are sustainable and whether its gross-margin pressure persists.
- Whether operating cash flow rebounds from the first-half decline and funds planned capital expenditures, dividends and debt reduction.
- How final U.S. Tax Reform accounting affects the approximately 26% full-year tax-rate expectation, and the balance-sheet impact of lease-accounting adoption.