Oxford Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first half of Fiscal 2017, ended July 29, 2017. The filing covers Fiscal 2017 Q2, notwithstanding the request metadata referring to 2016 Q2. Fiscal 2017 is a 53-week year. Financial amounts below are in millions except per-share data.
Business context and results
Oxford designs, sources, markets and distributes apparel and related products through Tommy Bahama, Lilly Pulitzer, Southern Tide, Lanier Apparel and other businesses. Its lifestyle brands sell through retail stores, e-commerce, restaurants, wholesale and licensing.
| Metric | Q2 FY2017 | Q2 FY2016 | First half FY2017 | First half FY2016 |
|---|---|---|---|---|
| Net sales | $284.7 | $283.0 | $557.1 | $539.2 |
| Gross profit / margin | $166.0 / 58.3% | $164.8 / 58.2% | $325.4 / 58.4% | $316.3 / 58.7% |
| SG&A / % of sales | $132.9 / 46.7% | $129.4 / 45.7% | $266.1 / 47.8% | $252.9 / 46.9% |
| Operating income / margin | $36.4 / 12.8% | $38.7 / 13.7% | $66.4 / 11.9% | $70.7 / 13.1% |
| Net earnings | $22.7 | $23.9 | $39.9 | $44.1 |
| Diluted EPS | $1.36 | $1.44 | $2.39 | $2.65 |
| Net interest expense | $0.7 | $1.2 | $1.7 | $1.8 |
Cash flow, debt and liquidity
- First-half operating cash flow was $83.1 million, versus $72.9 million a year earlier. The company attributed the improvement partly to favorable working-capital changes, including a $23.7 million inventory-related cash benefit.
- First-half investing cash outflow was $19.1 million, including $18.5 million of capital expenditures. Financing cash outflow was $64.5 million, mainly reflecting net repayment of revolving borrowings and $9.1 million of dividends paid.
- Cash was $6.0 million at July 29, 2017. Revolver borrowings were $37.6 million, with $215.3 million of reported unused availability under the $325 million facility. The company reported compliance with its covenants; no financial covenant testing was required during the quarter.
- Debt to total capital was 8%, compared with 22% at July 30, 2016. Working capital was $82.6 million and the current ratio was 1.68 at July 29, 2017.
- Quarterly dividends declared were $0.27 per share, unchanged from the prior-year quarter.
Material changes versus prior periods
- First-half sales increased 3.3%, but operating income fell 6.1% and net earnings fell 9.5%. Higher SG&A and a less favorable LIFO impact contributed to reduced operating profitability; the effective tax rate also rose to 38.3% from 36.1%.
- Q2 sales were nearly flat, up 0.6%, while operating income declined 5.9%. Higher SG&A and a $1.6 million LIFO charge, compared with a $1.0 million LIFO credit in the prior-year quarter, weighed on results.
- First-half sales growth included a full six months of Southern Tide operations, additional stores and higher Tommy Bahama sales. Lilly Pulitzer and Lanier Apparel sales declined. In Q2, Tommy Bahama sales rose 1.9%, while Lilly Pulitzer and Lanier Apparel sales fell 0.4% and 8.7%, respectively.
- Comparable store sales increased 1% in Q2 and 1% in the first half. Tommy Bahama comparable sales rose 4% in Q2 and 5% in the first half; Lilly Pulitzer comparable sales fell 6% in both periods, with retail weakness partly offset by e-commerce.
- First-half LIFO accounting was unfavorable by $4.5 million year over year: a $3.3 million charge in FY2017 versus a $1.3 million credit in FY2016. The prior-year comparison also included Southern Tide acquisition-related inventory step-up costs.
Outlook, management commentary and risks
- Management expects Fiscal 2017 capital expenditures of approximately $50 million, primarily for technology and e-commerce, store and restaurant projects, and facilities. It expects full-year interest expense of approximately $3.4 million and an effective tax rate approaching 39%.
- Management estimated Southern Tide FY2017 sales would exceed $40 million, approximately 80% wholesale. It expected Lanier Apparel FY2017 sales to modestly exceed FY2016 sales of $101 million, with sales more heavily weighted to Q3.
- Tommy Bahama priorities include improving gross and operating margins through product cost reductions, selective pricing, lower inventory purchases, revised clearance practices, expense controls, measured store expansion and reducing Asia-Pacific operating losses. Management reported initial progress and expected further progress in the second half.
- Management described apparel retail as highly competitive and changing rapidly, citing weak store traffic, department-store challenges, promotional pressure, off-price growth and consumers’ increasing use of digital channels. Results are seasonal; Q3 has historically been the smallest sales and operating-income quarter.
- Other risks include consumer demand and economic conditions, fashion and product-cost trends, wholesale shipment timing, weather, international operations and currency, access to credit, execution of growth initiatives, and legal or regulatory matters. The filing reported no pending legal matter expected to have a material impact, but noted uncertainty in estimating retained lease obligations from discontinued operations.
- Accounting changes to monitor: the company anticipated adopting the new revenue standard in FY2018 using the modified retrospective method and was assessing potential effects, including wholesale allowances and returns. It expected the new lease standard, effective FY2019, to significantly increase recognized balance-sheet lease assets and liabilities.
Investor verification checklist
- Confirm the period is FY2017 Q2 ended July 29, 2017, rather than FY2016 Q2.
- Assess whether Tommy Bahama margin initiatives and Lilly Pulitzer’s weaker comparable retail sales affect second-half performance; review inventory levels and the August 2017 Lilly Pulitzer clearance sale.
- Separate recurring operating trends from the unusual LIFO charge/credit comparisons, prior-year Southern Tide acquisition costs, and the current-year stock-award tax impact.
- Verify the assumptions behind management’s Southern Tide and Lanier Apparel sales estimates, FY2017 capital-spending plan, tax-rate outlook and liquidity expectations.
- Monitor revolver availability and covenant headroom, seasonally higher working-capital needs, and the uncertain future cost of retained discontinued-operation lease obligations.