Business context and reporting period
Oxford Industries, Inc. is a branded apparel company whose principal operating groups are Tommy Bahama, Lilly Pulitzer, Lanier Apparel and Southern Tide. This Form 10-Q covers the 13 weeks ended May 5, 2018, the first quarter of Fiscal 2018. The request metadata says “2017 Q1,” but the filing itself reports Fiscal 2018 Q1; the comparable Fiscal 2017 quarter ended April 29, 2017. Fiscal 2017 had 53 weeks, so the company calendar-adjusted comparable-store comparisons for Fiscal 2018.
Financial results and key metrics
Amounts below are in millions except per-share data and ratios.
| Metric | Fiscal 2018 Q1 | Fiscal 2017 Q1 | Change |
|---|---|---|---|
| Net sales | $272.6 | $272.4 | +0.1% |
| Gross profit / margin | $164.1 / 60.2% | $159.4 / 58.5% | Margin +1.7 pts |
| Operating income / margin | $28.4 / 10.4% | $30.0 / 11.0% | -5.3% |
| Net earnings | $20.6 | $17.2 | +19.6% |
| Diluted EPS | $1.23 | $1.03 | +$0.20 |
| Operating cash flow | $(7.1) | $13.6 | Down $20.8 |
| Capital expenditures | $12.8 | $8.5 | Up $4.3 |
Gross-margin improvement reflected a greater direct-to-consumer sales mix, stronger Tommy Bahama margin and a favorable LIFO comparison. SG&A rose 4.9% to $139.7 million, or 51.2% of sales, primarily due to higher advertising, additional stores and restaurants, and TBBC costs. Operating income fell despite the higher gross profit. Net earnings increased mainly because the effective tax rate fell to 25.5% from 40.8%, alongside improved results in Corporate and Other and Southern Tide. Net interest expense was $0.8 million, down from $0.9 million. Dividends declared were $0.34 per share, versus $0.27.
Sales by group: Tommy Bahama $167.1 million, down 3.1%; Lilly Pulitzer $68.6 million, up 8.3%; Lanier Apparel $19.9 million, down 14.8%; Southern Tide $13.5 million, up 6.6%; and Corporate and Other $3.5 million, primarily reflecting acquired TBBC. Wholesale sales declined $15 million overall, while direct-to-consumer channels increased as a share of sales. Calendar-adjusted comparable-store sales increased 1% overall; on a fiscal-period comparison, they increased 8%, a comparison affected by the one-week calendar shift.
Cash, debt and liquidity
At May 5, 2018, cash was $4.7 million, total debt was $72.2 million, working capital was $139.1 million and the current ratio was 2.25. The debt-to-total-capital ratio was 14%. The company had $211 million of unused availability under its $325 million revolving credit agreement, after considering borrowing-base limitations and $5 million of letters of credit. The agreement matures in May 2021; the weighted-average borrowing rate was 3.5%. Oxford reported compliance with its covenants and said no financial-covenant testing was required during the quarter.
Quarterly operating cash use reflected seasonal working-capital needs, including increases in receivables and inventory and lower current liabilities. Investing activities used $13.1 million; financing activities provided $18.7 million, including $90.7 million of revolving-credit proceeds and $64.3 million of repayments. Cash declined by $1.6 million during the quarter.
Material changes, outlook and risks
- Management expected Fiscal 2018 capital expenditures to approach $60 million, compared with $39 million in Fiscal 2017, primarily for technology and e-commerce, stores and restaurants, and facilities.
- Management expected a Fiscal 2018 effective tax rate of approximately 26%, subject to finalization of provisional U.S. Tax Reform accounting. Oxford had not finalized all tax-reform calculations; it recognized an $11.5 million tax-expense reduction in Fiscal 2017 and recorded no measurement-period adjustment in this quarter.
- Management anticipated lower near-term wholesale sales for its lifestyle brands as it reduced exposure to department stores and other accounts that did not fit its brand strategy. It described longer-term opportunities in e-commerce, selective store growth and carefully selected wholesale accounts, while noting continued investment in advertising and the brands.
- Management said inventory levels were appropriate for anticipated second-quarter sales. It emphasized that results are seasonal and that a quarter’s results are not necessarily indicative of the full year; historically, the third quarter is the smallest sales and operating-income quarter.
- Key risks include changing consumer spending and shopping patterns, competition and promotional activity, weather, wholesale shipment timing, product and labor costs, execution of growth initiatives, and uncertainty in tax-reform impacts. The company reported no legal proceeding it believed would have a material financial impact. It anticipated a significant balance-sheet effect from adopting new lease accounting in Fiscal 2019, but did not expect a material effect on the statements of operations or cash flows.
Important facts for investors to verify
- Whether the lower tax rate and favorable LIFO comparison explain a substantial part of the EPS increase, and how results trend excluding those effects.
- Whether direct-to-consumer growth and comparable-store performance can offset continuing wholesale declines, particularly at Tommy Bahama, Lilly Pulitzer and Lanier Apparel.
- Whether planned Fiscal 2018 capital spending near $60 million, dividends and seasonal working-capital demands remain supportable by operating cash flow and available credit.
- How final U.S. Tax Reform accounting changes the expected approximately 26% full-year tax rate.
- Whether inventory, margins and sales meet management’s second-quarter expectations, considering weather, seasonality and the shifted fiscal calendar.