Oxford Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the 13 weeks ended April 28, 2012; comparative period was the 13 weeks ended April 30, 2011. The request metadata says “2011 Q1,” but the filing identifies this as fiscal 2012 Q1. Amounts below are in U.S. dollars.
Business context and results
Oxford designs, sources, markets and distributes branded and private-label apparel through wholesale and direct-to-consumer channels, including retail stores, e-commerce and restaurants. Its four operating groups are Tommy Bahama, Lilly Pulitzer, Ben Sherman and Lanier Clothes.
| Metric | Fiscal 2012 Q1 | Fiscal 2011 Q1 | Change |
|---|---|---|---|
| Net sales | $231.0 million | $208.3 million | Up 10.9% |
| Gross profit / margin | $129.2 million / 55.9% | $117.7 million / 56.5% | Profit up 9.8%; margin down 0.6 percentage points |
| Operating income / margin | $32.8 million / 14.2% | $30.7 million / 14.7% | Income up 6.8% |
| Continuing-operations earnings | $18.0 million | $17.1 million | Up 5.5% |
| Net earnings | $18.0 million | $18.1 million | Down $0.1 million |
| Diluted EPS | $1.09 | $1.10 | Down $0.01 |
| Operating cash flow | $(3.1) million | $17.2 million | Declined $20.3 million |
| Capital expenditures | $9.6 million | $3.6 million | Up $6.0 million |
Continuing-operations earnings improved, but net earnings were slightly lower because the prior-year quarter included $1.0 million of earnings from discontinued operations. Interest expense declined 25% to $3.6 million, while the effective tax rate rose to 38.3% from 34.2%.
Segments and material changes
- Tommy Bahama: Sales rose 14.8% to $141.1 million; operating income increased 7.5% to $25.6 million. Growth came from direct-to-consumer and wholesale sales, including store and e-commerce growth. Operating margin declined to 18.1% from 19.3%, partly reflecting expansion costs.
- Lilly Pulitzer: Sales rose 19.3% to $35.6 million; operating income increased 57.0% to $11.0 million. The prior-year comparison included a $1.0 million acquired-inventory accounting charge.
- Ben Sherman: Sales fell 10.7% to $17.4 million and operating loss widened to $2.7 million. Management cited weak U.K. and European conditions, lower unit volume, higher product costs and promotional competition.
- Lanier Clothes: Sales were essentially flat at $33.0 million; operating income declined 14.4% to $4.0 million amid cost and competitive pressures.
Consolidated gross margin declined despite higher sales, reflecting product-cost pressures, competition and less favorable LIFO accounting compared with the prior-year credit. Higher sales mix from Tommy Bahama, Lilly Pulitzer and direct-to-consumer channels partly offset these pressures. SG&A increased 10.6% to $100.8 million, including approximately $2.4 million of costs related to the Tommy Bahama New York location and Asia expansion.
Financial position, debt and liquidity
- At April 28, 2012, cash was $5.7 million, working capital was $112.8 million and the current ratio was 2.11. Cash was $13.4 million at fiscal year-end and $47.0 million a year earlier.
- Total debt was $113.0 million, including $105.0 million principal on 11.375% senior secured notes and borrowings under U.S. and U.K. revolving facilities. Debt-to-total-capital was 34%, versus 43% a year earlier.
- Unused availability was approximately $159.0 million under the U.S. revolver and $1.7 million under the U.K. facility, subject to borrowing-base and other restrictions. The company reported compliance with applicable covenants and that no U.S. revolver financial-covenant test was required during the quarter.
- Operating cash use reflected working-capital needs, including higher receivables and lower current liabilities. Financing activities provided $5.0 million, including a net increase in borrowings; dividends paid were $2.5 million.
Outlook, risks and unusual items
- Management expected product-cost pressures to moderate in the second half of fiscal 2012 and anticipated potential gross-margin improvement compared with the second half of fiscal 2011. Competitive pressures at Ben Sherman and Lanier Clothes could persist.
- Management expected fiscal 2012 capital expenditures to approach $60 million, mainly for new stores, technology, remodeling and distribution-center enhancements.
- The company said it was likely to redeem all outstanding 11.375% notes in July 2012, when the notes became callable at 105.688% of principal, and intended to amend and restate its U.S. revolving facility to increase capacity and extend its August 2013 maturity. No refinancing arrangements had been entered into as of the report date. Management anticipated substantial interest savings, but greater exposure to variable rates.
- Management said it expected to meet cash requirements through operating cash flow, cash on hand and available credit, while noting seasonal working-capital needs and uncertainty around consumer demand, economic conditions, product costs, shipping timing and access to credit.
- Other notable items included a $0.6 million quarterly charge for changes in the fair value of Lilly Pulitzer contingent consideration and a $0.2 million LIFO charge, versus a $0.6 million LIFO credit in the prior-year quarter. Management estimated the fiscal 2012 contingent-consideration charge at approximately $2.4 million, subject to change.
- The filing reported no litigation or regulatory matter expected to have a material adverse effect, no material changes to previously disclosed risk factors, and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether the planned July 2012 note redemption and revolving-credit refinancing were completed, on what terms, and with what effect on debt, interest expense and variable-rate exposure.
- Whether negative operating cash flow and increased working-capital requirements persisted beyond this seasonally affected quarter.
- Whether the expected moderation in product costs translated into improved gross margins, especially at Ben Sherman and Lanier Clothes.
- Whether planned capital expenditures near $60 million were funded within available liquidity and produced expected store and sales growth.
- How contingent consideration, LIFO adjustments and Tommy Bahama expansion costs affected subsequent-period earnings and cash flow.