Business context and reporting period
Oxford Industries, Inc. filed this Form 10-Q for the second quarter of Fiscal 2016, the 13 weeks ended July 30, 2016, and the first half of Fiscal 2016, the 26 weeks ended that date. The request metadata says “2015 Q2,” but the filing itself reports Fiscal 2016 Q2. Oxford operates Tommy Bahama, Lilly Pulitzer, Lanier Apparel and, following its April 19, 2016 acquisition, Southern Tide. Ben Sherman is reported as discontinued operations after its July 2015 sale.
Financial results and key metrics
| Metric | Q2 FY2016 | Q2 FY2015 | First half FY2016 | First half FY2015 |
|---|---|---|---|---|
| Net sales | $283.0m | $250.7m | $539.2m | $511.1m |
| Gross profit / margin | $165.7m / 58.6% | $151.1m / 60.3% | $317.8m / 58.9% | $305.5m / 59.8% |
| Operating income / margin | $38.7m / 13.7% | $34.7m / 13.9% | $70.7m / 13.1% | $70.2m / 13.7% |
| Continuing-operations net earnings | $23.9m | $21.1m | $44.1m | $42.4m |
| Diluted continuing-operations EPS | $1.44 | $1.27 | $2.65 | $2.56 |
| Interest expense, net | $1.2m | $0.7m | $1.8m | $1.5m |
Q2 sales rose 12.9%, while operating income increased 11.4%. First-half sales rose 5.5%, but operating income was nearly flat (+0.7%). First-half net earnings from continuing operations increased 4.0%; diluted EPS rose 3.5%. The prior-year total net loss reflected a $23.1m Q2 and $27.1m first-half discontinued-operations loss, including the Ben Sherman sale loss; current-period total net earnings were $23.9m and $44.1m, respectively.
Q2 comparable store sales, including full-price stores and e-commerce but excluding clearance and restaurant sales, increased 5% to $133.3m. First-half comparable sales declined 1% to $231.7m. In Q2, Tommy Bahama sales rose 11.0%, Lilly Pulitzer rose 7.8%, and Lanier Apparel declined 5.7%; Southern Tide contributed $9.2m after acquisition. First-half Tommy Bahama operating income fell 17.2% to $33.9m, while Lilly Pulitzer operating income increased 16.6% to $43.4m.
Cash provided by operating activities was $72.9m in the first half, broadly level with $72.7m a year earlier. Investing activities used $121.6m, including $92.0m for Southern Tide, $24.6m of capital expenditures, and $3.0m for a trademark and related inventory. Financing activities provided $50.3m. Cash at July 30 was $8.2m.
At July 30, 2016, working capital was $113.2m and the current ratio was 2.01. Long-term debt was $105.9m; debt to total capital was 22%, versus 12% at August 1, 2015. Shareholders’ equity was $373.4m. The company reported $157.2m of unused availability under its revolving credit facility, after borrowing-base and other limitations.
Material changes, outlook and commentary
- On April 19, Oxford acquired Southern Tide for $92.0m net of acquired cash, funded with revolving-credit borrowings. The preliminary purchase-price allocation included $40.9m of intangible assets and $33.6m of goodwill. The acquisition accounting remained subject to revision. Southern Tide generated $10.6m of sales from acquisition through quarter-end; management estimated approximately $30m of sales from acquisition through Fiscal 2016 year-end.
- On May 24, Oxford amended and restated its credit agreement, increasing facility capacity from $235m to $325m and extending maturity from November 2018 to May 2021. The weighted-average borrowing rate was 1.9% at quarter-end. Oxford was covenant-compliant and no financial covenant test was required during the quarter.
- Management expected Fiscal 2016 capital expenditures of approximately $55m, including $24.6m incurred in the first half, primarily for technology and e-commerce, stores, and restaurants. It anticipated Fiscal 2016 interest expense of approximately $3.5m and an effective tax rate of approximately 36%. The filing does not provide consolidated full-year revenue or earnings guidance.
- Q2 gross margin fell 1.7 percentage points. Management cited lower margins at Tommy Bahama and Lanier Apparel and Southern Tide purchase-accounting inventory step-up costs, partly offset by favorable LIFO accounting. First-half gross margin declined 0.9 percentage points. Southern Tide’s first-half gross profit included $1.1m of inventory step-up expense; management expected a total $3.0m of such expense during Fiscal 2016 and none thereafter.
- Management cited weak consumer traffic, reduced consumer focus on fashion apparel, and a highly promotional retail environment. It also noted continued disruption in traditional retail and department stores, and expects seasonality to affect quarterly results. Risks include consumer demand, competition, shipment timing, weather, product and labor costs, foreign operations and interest-rate exposure; higher debt increases sensitivity to interest rates.
- Oxford estimated a $3.5m liability for retained Ben Sherman lease obligations; the eventual loss depends partly on future sublease terms. Management reported no litigation or regulatory action expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for Q2 Fiscal 2016 ended July 30, 2016, not 2015 Q2.
- Track whether the Southern Tide acquisition delivers expected sales and synergies, and whether its preliminary purchase-price allocation or inventory step-up costs change materially.
- Monitor gross-margin trends, especially Tommy Bahama markdowns and Lanier Apparel performance, and separate underlying results from LIFO and acquisition-related effects.
- Review debt, borrowing availability, variable-rate exposure, covenant headroom and the funding of capital expenditures and dividends.
- Assess the final cost and timing of subleasing the retained Ben Sherman locations and any resulting change to the estimated lease liability.