Oxford Industries, Inc. — Form 10-Q Summary
Period: The filing covers the 13 weeks ended July 30, 2011 and the 26 weeks ended July 30, 2011 (fiscal 2011 second quarter and first half). The request metadata says “2010 Q2,” but the filing itself is for fiscal 2011 Q2.
Business context and reporting period
Oxford designs, sources, sells and licenses branded apparel, primarily through Tommy Bahama, Lilly Pulitzer, Ben Sherman and Lanier Clothes. Results are from continuing operations unless noted. Lilly Pulitzer was acquired on December 21, 2010; Oxford Apparel was sold in January 2011 and is reported as discontinued operations.
Key financial metrics
| Metric | Q2 FY2011 | Q2 FY2010 | First half FY2011 | First half FY2010 |
|---|---|---|---|---|
| Net sales | $180.6 million | $143.0 million | $389.0 million | $306.6 million |
| Gross profit / margin | $102.9 million / 57.0% | $79.0 million / 55.3% | $220.6 million / 56.7% | $168.7 million / 55.0% |
| Operating income | $17.7 million | $11.2 million | $48.4 million | $26.2 million |
| Continuing-operations earnings | $3.5 million | $4.7 million | $20.6 million | $13.2 million |
| Net earnings | $2.6 million | $7.2 million | $20.7 million | $19.7 million |
| Diluted EPS, continuing operations | $0.21 | $0.28 | $1.25 | $0.80 |
- First-half operating cash flow was $33.7 million, versus $18.0 million a year earlier. Investing used $13.1 million, including $12.7 million of property and equipment purchases. Financing used $45.1 million; cash declined $6.5 million to $37.8 million. Discontinued operations provided $18.1 million of cash.
- At July 30, 2011, total debt was $112.5 million, including $110.0 million principal on 11.375% senior secured notes and $4.4 million of U.K. revolving borrowings, net of $1.9 million unamortized discount. Cash was $37.8 million. Working capital was $101.1 million and the current ratio was 1.99; debt to total capital was 36%.
- Unused availability was approximately $134.4 million under the U.S. revolving facility and $3.0 million under the U.K. facility, subject to borrowing-base and contractual limits. Oxford reported compliance with debt covenants.
Material changes versus comparable periods
- Q2 sales rose 26.3%; first-half sales rose 26.9%. Growth primarily reflected Lilly Pulitzer, absent from the prior-year consolidated results, and stronger Tommy Bahama direct-to-consumer sales.
- First-half gross margin improved 1.7 percentage points. Management cited product and channel mix, Lilly Pulitzer, and a more favorable LIFO impact; these benefits were partly offset by Ben Sherman sourcing-cost pressure and a $1.0 million acquired-inventory write-up charge.
- First-half operating income increased 85.2%, while continuing-operations earnings rose 55.9%. Q2 continuing-operations earnings fell 24.8%, mainly because of an $8.2 million loss on repurchasing notes.
- Net earnings comparisons also reflect the Oxford Apparel sale: discontinued operations contributed $6.5 million in first-half FY2010 versus $0.1 million in first-half FY2011. Q2 FY2011 discontinued operations recorded a $0.9 million loss, including a $1.0 million after-tax reduction to the previously recorded sale gain after finalizing a working-capital adjustment.
- Tommy Bahama first-half sales increased 11.3% and operating income increased 27.2%. Lilly Pulitzer contributed $54.7 million of first-half sales and $12.6 million of operating income. Ben Sherman reported a $2.6 million first-half operating loss, versus a $0.1 million loss, due to sourcing costs and higher SG&A. Lanier Clothes operating income declined 2.5%.
Outlook, commentary, risks and unusual items
- No full-year earnings or sales guidance is provided. Management expected to meet fiscal 2011 cash requirements using cash, operating cash flow and credit facilities as needed; anticipated continuing-operations capital expenditures were approximately $35 million for the year, including $12.7 million incurred in the first half.
- Management described consumer demand and retail traffic as weak, with a highly promotional environment. It was monitoring conditions and said it could moderate inventory purchases if conditions worsened. Raw-material, fuel and transportation cost pressures were expected to affect the remainder of fiscal 2011, particularly Ben Sherman and Lanier Clothes.
- Management expected approximately $2.4 million of full-year FY2011 contingent-consideration fair-value expense from the Lilly Pulitzer acquisition due to the passage of time; changes in assumptions could materially alter the charge. It did not expect further acquired-inventory write-up charges.
- Oxford repurchased $40.0 million principal amount of 11.375% notes for $46.6 million plus accrued interest, using cash on hand. The transaction produced an $8.2 million accounting loss; $110.0 million principal remained outstanding. The company noted prepayment penalties on certain early note redemptions.
- Key risks discussed include economic and discretionary-spending weakness, promotional pressure, sourcing and input-cost inflation, foreign exchange, shipment timing, access to credit, litigation and execution of acquisitions and brand strategy. Management reported no material change to the annual-report risk factors and no litigation expected to have a material adverse effect.
- The board authorized up to $50 million of additional share and/or note repurchases; none had been made under that authorization by July 30, 2011. A later committee-approved $480,190 cash award to a retired executive was disclosed as a subsequent event.
Important facts for investors to verify
- Separate organic growth from the acquisition-related contribution of Lilly Pulitzer and account for the disposal of Oxford Apparel when comparing periods.
- Assess whether Tommy Bahama’s direct-to-consumer growth and margin gains can continue, and whether Ben Sherman can recover from sourcing-cost pressure.
- Review the note repurchase economics, remaining high-coupon debt, covenant terms, revolving-facility availability and seasonal working-capital needs.
- Track inventory levels, promotional activity, input costs, contingent-consideration estimates and the timing and returns of planned capital spending.
- Confirm subsequent results against management’s cash-flow and fiscal 2011 liquidity expectations; interim results are not necessarily indicative of the full year.