Oxford Industries, Inc. — Fiscal 2012 Second-Quarter Form 10-Q
Reporting period: The filing covers the 13 weeks ended July 28, 2012, and the 26-week first half of fiscal 2012. Fiscal 2012 is a 53-week year ending February 2, 2013. The request metadata labels the period “2011 Q2,” but the filing itself is for fiscal 2012 Q2.
Financial performance
| Metric | Second quarter FY2012 | Second quarter FY2011 | First half FY2012 | First half FY2011 |
|---|---|---|---|---|
| Net sales | $206.9 million | $180.6 million | $437.9 million | $389.0 million |
| Gross margin | 57.2% | 57.0% | 56.5% | 56.7% |
| Operating income | $20.3 million | $17.7 million | $53.1 million | $48.4 million |
| Continuing-operations earnings | $5.0 million | $3.5 million | $23.0 million | $20.6 million |
| Diluted continuing-operations EPS | $0.30 | $0.21 | $1.39 | $1.25 |
Second-quarter sales rose 14.5%; operating income increased 14.7%, with operating margin steady at 9.8%. First-half sales rose 12.6%; operating income increased 9.7%, while operating margin declined to 12.1% from 12.4%. First-half SG&A was $201.5 million, or 46.0% of sales, versus $179.8 million, or 46.2%.
Cash flow and liquidity: First-half operating cash flow was $40.0 million, versus $33.7 million a year earlier. Investing used $31.4 million, including $27.3 million of capital expenditures; financing used $17.4 million. Cash was $4.6 million at July 28, 2012. Working capital was $92.9 million and the current ratio was 1.91. Total debt was $101.0 million, down from $112.5 million at July 30, 2011; debt to total capital was 31%, versus 36%. The filing reports unused availability of approximately $95.1 million under the U.S. revolver and $1.8 million under the U.K. facility, after applicable limitations.
Material changes and business drivers
- Tommy Bahama sales increased 16.8% in the quarter and 15.8% in the first half; Lilly Pulitzer sales rose 24.5% and 21.6%, respectively. Growth reflected direct-to-consumer, e-commerce and wholesale sales, as well as additional stores.
- Ben Sherman sales fell 3.8% for the quarter and 7.1% for the half, amid weak U.K. and European conditions and the exit from certain wholesale accounts. Its first-half operating loss widened to $4.2 million from $2.6 million.
- Lanier Clothes sales increased, but first-half operating income declined 7.8% to $6.4 million amid product-cost and competitive gross-margin pressures.
- On July 16, 2012, the company redeemed the remaining $105 million of 11.375% senior secured notes, funded with revolver borrowings and cash. The transaction generated a $9.1 million loss, including the redemption premium and write-off of financing costs and discount. First-half interest expense fell 23.8% to $6.9 million.
- Property and equipment increased to $109.5 million from $86.9 million at July 30, 2011, primarily due to capital spending. Inventory was $88.4 million, up from $77.7 million a year earlier, to support expected growth and store expansion.
Outlook, risks and other notable items
- Management expected fiscal 2012 capital expenditures of approximately $60 million, mainly for new stores, technology, remodeling and distribution-center enhancements.
- Management anticipated quarterly interest expense of approximately $1.1 million in each of fiscal Q3 and Q4 following the note redemption. It expected some product-cost pressure to moderate in the second half, but said competitive pressures at Lanier Clothes and Ben Sherman could continue.
- Tommy Bahama’s international expansion and its planned New York store opening in November 2012 generated approximately $5.9 million of first-half operating losses; the quarter included about $3.5 million. Management identified the higher-margin Tommy Bahama and Lilly Pulitzer mix and direct-to-consumer growth as potential supports to consolidated margins.
- Management cited economic uncertainty, promotional retail conditions, discretionary-spending sensitivity, product and labor costs, foreign currency, fashion trends, shipment timing and competition as risks. Ben Sherman is particularly exposed to weak U.K. and European conditions. Results are seasonal and interim results are not necessarily indicative of the full year.
- The Lilly Pulitzer acquisition’s contingent consideration had a recorded non-current liability of $11.8 million; maximum remaining payments were $17.5 million, contingent on performance criteria. Management estimated a $2.4 million full-year fiscal 2012 fair-value charge, subject to reassessment.
- As of July 28, the company reported compliance with credit-facility covenants and no material litigation expected to adversely affect its financial position, results or cash flows. On August 28, 2012, the board authorized up to $50 million of common-stock repurchases.
Important facts for investors to verify
- Whether sales and margins at Tommy Bahama and Lilly Pulitzer sustain growth, and whether store expansion and e-commerce translate into operating profits.
- Whether product-cost pressures moderate as management expected, and whether competition continues to weigh on Lanier Clothes and Ben Sherman.
- Actual borrowing costs and liquidity under the asset-based revolver, including the effect of variable rates, borrowing-base limits and the U.K. facility’s on-demand repayment terms.
- Realized capital spending versus the approximately $60 million fiscal-year estimate, and the costs and results of international expansion and the planned New York store.
- Future contingent-consideration payments, the associated fair-value charge, and the execution of the newly authorized share-repurchase program.