Oxford Industries, Inc. — Form 10-Q Summary
Period: The filing covers the 13 weeks and 39 weeks ended October 29, 2011 (fiscal third quarter and first nine months of fiscal 2011). The request metadata says “2010 Q3,” but the filing itself is for fiscal 2011.
Business context
Oxford operates Tommy Bahama, Lilly Pulitzer, Ben Sherman and Lanier Clothes, selling apparel through wholesale, retail, e-commerce and licensing channels. Lilly Pulitzer was acquired in December 2010; the former Oxford Apparel group was sold in January 2011 and is reported as discontinued operations. Accordingly, prior-period comparisons are affected by both changes in the portfolio.
Key financial results
Amounts below are in millions, except per-share data. Continuing-operations results exclude discontinued operations.
| Metric | Q3 FY2011 | Q3 FY2010 | First 9 months FY2011 | First 9 months FY2010 |
|---|---|---|---|---|
| Net sales | $170.3 | $139.6 | $559.2 | $446.2 |
| Gross profit / margin | $88.7 / 52.1% | $73.7 / 52.8% | $309.3 / 55.3% | $242.4 / 54.3% |
| Operating income / margin | $6.8 / 4.0% | $6.4 / 4.6% | $55.2 / 9.9% | $32.6 / 7.3% |
| Continuing-operations earnings | $1.6 | $1.3 | $22.2 | $14.5 |
| Net earnings | $1.6 | $5.6 | $22.3 | $25.3 |
| Diluted EPS: continuing / total | $0.10 / $0.10 | $0.08 / $0.33 | $1.34 / $1.35 | $0.88 / $1.53 |
Q3 sales rose 22.0%; nine-month sales rose 25.3%. Nine-month operating income increased 69.5% and continuing earnings increased 52.8%. Total net earnings declined year over year for the nine months mainly because the prior-year period included substantially more earnings from the divested Oxford Apparel business. Q3 total earnings likewise compare against significant prior-year discontinued-operations earnings.
Cash flow, debt and liquidity
- First-nine-month operating cash flow was $19.4 million, versus $8.8 million a year earlier. Property and equipment purchases were $22.4 million; net investing cash outflow was $22.8 million.
- Cash declined to $5.0 million at October 29, 2011, from $44.1 million at fiscal year-end, reflecting, among other uses, debt repurchases, capital spending and dividends. Net financing cash outflow was $53.3 million.
- Total debt was $106.6 million, including $3.3 million current and $103.3 million long-term, compared with $167.8 million at October 30, 2010. Oxford repurchased $45.0 million face amount of 11.375% senior secured notes for $52.2 million plus accrued interest, recognizing a $9.0 million loss; $105.0 million face amount remained outstanding.
- Working capital was $94.1 million; the reported working-capital ratio was 1.91. Debt to total capital was 35%, versus 57% a year earlier. Revolving-facility availability was approximately $141.6 million in the U.S. and $5.0 million in the U.K., subject to borrowing-base and other restrictions. Oxford reported compliance with debt covenants.
- Quarterly dividends declared were $0.13 per share, compared with $0.11 in the prior-year quarter.
Material changes and operating drivers
- Lilly Pulitzer contributed $16.7 million of Q3 sales and $71.4 million for the first nine months; it was not included in Oxford’s comparable consolidated periods. Nine-month Lilly operating income was $12.3 million, while Q3 showed a $0.4 million operating loss, consistent with management’s description of Q3 as a seasonally weaker quarter.
- Tommy Bahama sales rose 14.0% in Q3 and 12.1% for the nine months, supported by direct-to-consumer growth, additional stores and higher average selling prices. Nine-month operating income increased 27.9%.
- Ben Sherman’s Q3 sales were approximately flat, but operating income fell to $0.3 million from $1.7 million; it recorded a $2.3 million operating loss for the nine months. Management cited product-cost pressure and a wholesale-channel repositioning that reduced sales to some retailers before targeted replacement sales materialized.
- Lanier Clothes Q3 sales increased 7.3%, while operating income fell 19.0%; nine-month operating income declined 9.5%. Management cited gross-margin pressure and higher selling, royalty and advertising costs.
- Q3 gross margin declined to 52.1% from 52.8%, chiefly from weaker Ben Sherman and Lanier margins and less favorable LIFO effects, partly offset by Lilly Pulitzer’s higher-margin mix. Nine-month margin improved to 55.3% from 54.3%, including favorable mix and lower LIFO charges.
Outlook, risks and unusual items
- Management expected fiscal 2011 capital expenditures of $30–$33 million, including $22.4 million incurred in the first nine months, primarily for stores, remodeling, technology and distribution-center improvements.
- Management anticipated approximately $1.2 million of intangible-asset amortization and a full-year $2.4 million charge from the passage of time on Lilly contingent consideration; the latter estimate could change with valuation assumptions.
- Management warned of fourth-quarter gross-margin pressure from raw materials, fuel, transportation and other sourcing costs, particularly at Ben Sherman and Lanier Clothes, which have less ability to pass costs through in pricing. It described consumer demand as uncertain, retail traffic as depressed and the market as promotional, and said it would moderate inventory purchases if conditions deteriorated.
- Other notable items were the $9.0 million debt-repurchase loss, $1.8 million nine-month charge for the change in fair value of Lilly contingent consideration, and approximately $1.0 million of purchase-accounting inventory charges. Oxford said it did not anticipate further inventory write-up charges of that type.
- Management expected to meet fiscal 2011 cash requirements using cash, operating cash flow and, if needed, revolving credit. It noted seasonal working-capital needs and that refinancing at facility maturities could be on less favorable terms. No material changes to previously disclosed risk factors were reported; no litigation or regulatory matter was identified as reasonably likely to have a material adverse effect.
Most important facts for investors to verify
- How much reported growth and earnings improvement reflects Lilly Pulitzer’s acquisition rather than comparable organic performance.
- Whether Ben Sherman and Lanier Clothes can recover margins as sourcing costs rise and channel strategies evolve.
- Actual cash generation after capital spending, seasonal inventory requirements and debt service, given the $5.0 million cash balance.
- Debt-repurchase economics and remaining liquidity, including borrowing-base limits, covenant compliance and refinancing assumptions.
- Actual Lilly contingent-consideration payments and fair-value changes, and whether management’s fiscal-year cost and capital-expenditure estimates were achieved.