Oxford Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012. The quarter ended October 27, 2012; the nine-month period covered 39 weeks. Comparisons are with the corresponding fiscal 2011 periods. Amounts below are in millions of dollars unless stated otherwise.
Business context and results
Oxford designs, sources, markets and distributes apparel through Tommy Bahama, Lilly Pulitzer, Ben Sherman and Lanier Clothes, alongside licensing and other businesses. Sales are seasonal, and the third quarter is typically the company’s weakest sales quarter.
| Metric | Third quarter 2012 | Third quarter 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Net sales | $181.4 | $170.3 | $619.3 | $559.2 |
| Gross profit / margin | $96.8 / 53.4% | $88.7 / 52.1% | $344.3 / 55.6% | $309.3 / 55.3% |
| Operating income / margin | $5.9 / 3.3% | $6.8 / 4.0% | $59.0 / 9.5% | $55.2 / 9.9% |
| Continuing-operations earnings | $3.0 | $1.6 | $26.0 | $22.2 |
| Diluted continuing-operations EPS | $0.18 | $0.10 | $1.57 | $1.34 |
| Net interest expense | $1.0 | $3.7 | $7.9 | $12.8 |
Nine-month sales rose 10.7% and continuing-operations earnings rose 17.3%. Sales and operating results improved at Lilly Pulitzer and sales grew at Tommy Bahama; Ben Sherman and Lanier Clothes weakened. In the quarter, sales increased 6.5%, but operating income declined 13.1%, as higher SG&A and weaker results at Ben Sherman and Lanier more than offset sales growth. Gross margin improved, helped by brand and channel mix, easing product-cost pressure and favorable LIFO adjustments. Nine-month operating margin was lower despite higher operating income.
Operating group developments
- Tommy Bahama: Third-quarter sales rose 11.6% to $103.2 million; nine-month sales rose 14.6% to $371.8 million. Growth reflected stores, e-commerce, comparable-store sales and wholesale. Operating income fell 27.2% in the quarter to $3.4 million and was nearly flat for nine months at $45.5 million, amid expansion costs.
- Lilly Pulitzer: Third-quarter sales increased 61.6% to $26.9 million; nine-month sales rose 31.0% to $93.5 million. Operating income was $3.5 million in the quarter, versus a loss of $0.4 million, and reached $21.9 million for nine months. E-commerce flash-sale revenue was $6.1 million in the quarter, versus $2.0 million a year earlier; product mix and sale pricing reduced average selling price.
- Ben Sherman: Sales declined 21.5% in the quarter and 12.6% for nine months. The company cited assortment-planning missteps, weak U.K. and European economies and withdrawal from some moderate wholesale accounts. Nine-month operating loss widened to $6.4 million.
- Lanier Clothes: Sales fell 17.8% in the quarter and 4.5% for nine months. Lower volume, customer replenishment timing, competitive pressure and product costs contributed to weaker operating income.
Cash flow, debt and liquidity
- Cash from operations: $34.7 million for the first nine months, versus $19.4 million. Receivables and lower current liabilities were significant uses of operating cash in 2012.
- Investing cash flow: $52.0 million used, including $47.7 million of capital expenditures and $4.3 million of acquisitions and contingent-consideration payments. Capital expenditures were primarily for stores, technology, remodeling and distribution facilities.
- Financing and cash: Financing provided $9.4 million; cash declined $7.9 million to $5.6 million. The company paid $7.4 million in dividends during the nine-month period.
- Debt: Total debt was $130.3 million at October 27, 2012, versus $106.6 million at October 29, 2011. Debt to total capital was 36%, versus 35%. The company redeemed its $105 million 11.375% senior secured notes in July, principally using borrowings under its new revolving facility and cash.
- Liquidity: Working capital was $107.6 million and the current ratio was 1.98. Reported unused availability was approximately $90.0 million under the U.S. revolver and $1.4 million under the U.K. facility, subject to borrowing-base and agreement limits. The company reported covenant compliance and no required financial-covenant testing during the period.
Outlook, risks and unusual items
- Management expects fiscal 2012 capital expenditures to approach $60 million, including $47.7 million incurred in the first nine months. It anticipated fourth-quarter interest expense of approximately $1.0 million and full-year contingent-consideration fair-value expense of approximately $2.4 million; the latter could change with estimates and assumptions. No full-year revenue or earnings guidance is stated in the provided filing text.
- Management said product-cost pressures began moderating in the third quarter, but competitive pressures could continue to weigh on Ben Sherman and Lanier margins. It described growth opportunities for Tommy Bahama and Lilly Pulitzer, while noting Ben Sherman’s brand-positioning and economic challenges.
- Key risks include uncertain consumer spending, promotional retail conditions, fashion and assortment execution, shipment timing, competition, sourcing costs, foreign currency, interest rates, and access to credit. Most sourcing is from manufacturers outside the United States and United Kingdom.
- The note redemption generated a $9.1 million loss in the first nine months, including a $6.0 million premium and write-offs of financing costs and bond discount. Tommy Bahama international expansion and the New York store contributed $9.8 million of operating losses in the nine months, including pre-opening and infrastructure costs. Lilly Pulitzer contingent consideration generated a $1.8 million nine-month expense.
- The company reported no litigation or regulatory matter it believed would reasonably be expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Tommy Bahama and Lilly Pulitzer growth and comparable-store/e-commerce trends persist after accounting for store expansion costs and Lilly’s promotional flash sales.
- Whether Ben Sherman can correct merchandise assortment issues and stabilize sales and operating losses, and whether Lanier’s volume and margins recover.
- How planned capital spending, seasonal working-capital needs and debt usage affect liquidity, revolver availability and covenant headroom.
- Whether easing product-cost pressures continue, and how foreign losses, jurisdictional mix and discrete tax items affect the effective tax rate.
- Whether the stated fiscal 2012 capex, fourth-quarter interest and contingent-consideration expectations remain current; these are estimates, not comprehensive earnings guidance.