Oxford Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2013, the 13 weeks ended August 3, 2013; fiscal 2013 ends February 1, 2014. The filing compares the quarter with the 13 weeks ended July 28, 2012. Although the request metadata says “2012 Q2,” the filing covers 2013 Q2.
Business context
Oxford designs, sources, markets and distributes branded apparel through direct-to-consumer channels (stores, e-commerce and restaurants), wholesale and licensing. Its operating groups are Tommy Bahama, Lilly Pulitzer, Lanier Clothes and Ben Sherman. More than 90% of fiscal 2012 sales were to U.S. customers; substantially all products are sourced from third-party manufacturers outside the United States.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | First half FY2013 | First half FY2012 |
|---|---|---|---|---|
| Net sales | $235.0 million | $206.9 million | $469.2 million | $437.9 million |
| Gross profit / margin | $136.8 million / 58.2% | $118.3 million / 57.2% | $270.9 million / 57.7% | $247.5 million / 56.5% |
| Operating income / margin | $27.7 million / 11.8% | $20.3 million / 9.8% | $53.8 million / 11.5% | $53.1 million / 12.1% |
| Net earnings | $15.8 million | $5.0 million | $29.4 million | $23.0 million |
| Diluted EPS | $0.96 | $0.30 | $1.78 | $1.39 |
| Net cash from operating activities | Not presented by quarter | $49.2 million | $40.0 million |
Quarterly change: Sales rose 13.6%, gross margin increased 1.0 percentage point and operating income increased 36.4%. Net earnings more than tripled, in part because the prior-year quarter included a $9.1 million loss on repurchase of senior notes and higher interest expense. First-half sales grew 7.2%, but operating income increased only 1.3%; net earnings rose 27.8%, also benefiting from the absence of that prior-year debt-redemption loss and lower interest expense.
Segment trends: Q2 Tommy Bahama sales rose 20.2% and operating income 43.8%; Lilly Pulitzer sales rose 23.5% and operating income 29.0%. Lanier Clothes sales fell 10.0% and operating income fell 15.5%. Ben Sherman sales declined 19.0%, and its operating loss widened to $3.8 million from $1.5 million. In the first half, Ben Sherman’s operating loss widened to $8.7 million from $4.2 million, while Lanier Clothes operating income declined 30.4%.
Liquidity, debt and investment
- At August 3, 2013, cash was $9.7 million; total debt was $125.4 million ($119.5 million long-term and $5.9 million short-term). The company reported $86.4 million of unused availability across its U.S. and U.K. revolving facilities.
- Working capital was $107.2 million and the current ratio was 1.98. Debt-to-total-capital was 34%.
- First-half investing cash outflow was $43.9 million, including $17.9 million for the Tommy Bahama Canada acquisition and $26.0 million of capital expenditures. Financing cash outflow was $3.0 million; cash increased $2.2 million from fiscal-year-end.
- Oxford acquired its former licensee’s Tommy Bahama operations in Canada on May 6, 2013, including nine retail stores and a wholesale business. The purchase-price allocation was not final. The U.S. facility matures in June 2017; the company reported compliance with facility covenants and no required financial covenant testing during the first half.
Outlook, management commentary and risks
- Management expects fiscal 2013 interest expense to be slightly above $4.0 million and the full-year effective tax rate to be approximately 42%. The third-quarter tax rate is expected to be higher than the second-quarter rate and the fourth-quarter rate lower.
- Management anticipates an approximately $12 million fiscal 2013 operating loss from Tommy Bahama Asia-Pacific operations. It expects about $0.4 million of additional inventory step-up charges in Q3 relating to the Canada acquisition, with none expected thereafter, and approximately $1.8 million of fiscal 2013 intangible amortization.
- Fiscal 2013 capital expenditures are expected to be approximately $45 million, including $26.0 million incurred in the first half, mainly for stores, restaurant/store remodels and information technology. No consolidated sales or earnings guidance is provided in the supplied filing text.
- Management cites a promotional retail environment, economic uncertainty and higher raw-material, fuel, transportation and labor costs. It expects continued challenges in tailored clothing. Ben Sherman faces weak U.K./European conditions, reduced wholesale accounts and merchandising-assortment issues that have driven promotions and off-price sales. Lilly Pulitzer gross margin was also pressured by promotions, warehouse sales and more frequent free shipping.
- Direct-to-consumer sales grew as a share of consolidated sales: 64% in Q2 versus 58% a year earlier, reflecting stores, e-commerce and restaurants. Management notes the business is seasonal, with Q3 typically the lowest sales and operating-income quarter.
- The filing reports no litigation or regulatory action believed likely to have a material adverse effect, and no significant change in market-risk exposure. Forward-looking results remain subject to consumer demand, shipment timing, competition, costs, foreign exchange, litigation and access to credit, among other risks.
Key facts investors should verify
- Whether Tommy Bahama and Lilly Pulitzer growth and direct-to-consumer expansion sustain margins as store-related SG&A increases.
- Whether Ben Sherman’s sales decline, promotional activity and operating losses improve, and whether Lanier Clothes stabilizes.
- Post-acquisition performance and the final purchase-price allocation for Tommy Bahama Canada, including anticipated integration costs.
- Debt and borrowing availability after planned capital spending, dividends and seasonal working-capital needs; confirm covenant headroom.
- Whether the projected tax rate and Asia-Pacific operating-loss estimates track management’s expectations.