Oxford Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2015, the 13 weeks ended August 1, 2015; comparisons are with the 13 weeks ended August 2, 2014. First-half figures cover the 26 weeks ended August 1, 2015. The filing’s period is fiscal 2015, notwithstanding the request metadata indicating 2014 Q2. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
Oxford designs, sources, markets and distributes branded apparel through direct-to-consumer, wholesale and licensing channels. Its continuing operating groups are Tommy Bahama, Lilly Pulitzer and Lanier Clothes. Ben Sherman was sold on July 17, 2015 and is reported as discontinued operations; continuing-operations sales and results exclude it.
Financial results and liquidity
| Metric | Q2 FY2015 | Q2 FY2014 | First half FY2015 | First half FY2014 |
|---|---|---|---|---|
| Net sales, continuing operations | $250.7m | $227.6m | $511.1m | $470.1m |
| Gross profit / margin | $151.1m / 60.3% | $136.3m / 59.9% | $305.5m / 59.8% | $276.6m / 58.8% |
| Operating income / margin | $34.7m / 13.9% | $29.6m / 13.0% | $70.2m / 13.7% | $62.3m / 13.3% |
| Continuing net earnings | $21.1m | $17.3m | $42.4m | $36.3m |
| Diluted continuing EPS | $1.27 | $1.05 | $2.56 | $2.21 |
| Total net earnings (loss) | $(2.0)m | $15.1m | $15.2m | $30.0m |
Q2 sales grew 10.2%; continuing earnings increased 21.8%. For the first half, sales grew 8.7% and continuing earnings rose 16.6%. Total net results were reduced by Ben Sherman discontinued-operation losses, including an estimated $20.4m after-tax loss on sale. First-half interest expense was $1.5m, down from $1.9m; the effective tax rate was 38.3%, versus 39.9%.
Growth was led by Lilly Pulitzer: Q2 sales rose 38.9% and operating income 74.6%; comparable sales increased 41%. Tommy Bahama Q2 sales rose 5.1%, but operating income fell 7.4% as gross margin declined to 60.6% from 61.8%. Lanier Clothes sales declined 14.1%. For the first half, Lilly Pulitzer operating income increased 43.4%; Tommy Bahama operating income declined 1.7%, and Lanier Clothes declined 15.2%.
First-half cash provided by operating activities was $72.7m, compared with $59.9m. Investing activities provided $17.9m, including $59.3m in Ben Sherman sale proceeds, offset partly by $41.4m of capital expenditures. Financing activities used $82.8m, including net revolving-credit repayments, dividends and contingent-consideration payments. Cash ended the period at $13.7m.
At August 1, 2015, long-term debt was $45.0m; the company reported $182.1m of unused availability under its U.S. revolving facility, subject to borrowing-base and other limitations. Working capital was $107.5m, the current ratio was 1.91, and debt to total capital was 12%. The company reported compliance with credit-facility covenants and no required financial-covenant testing during the first half.
Material changes and unusual items
- Ben Sherman was sold for £40.8m; the final purchase price remains subject to adjustment, and the reported sale loss is an estimate. The sale proceeds helped reduce debt. The company retained certain lease exposure and is providing transitional services for up to 12 months.
- First-half capital expenditures increased to $41.4m from $19.6m in the prior-year period. The company expects approximately $70m for fiscal 2015, with about $13m expected to be funded by landlord tenant-improvement allowances.
- Foreign-currency translation gains, largely associated with the disposal and related reclassification, contributed $23.5m of Q2 other comprehensive income.
Outlook, management commentary and risks
Management expects to fund ongoing needs and brand investment principally through operating cash flow, supplemented as needed by its revolving facility. It sees long-term direct-to-consumer growth opportunities for Tommy Bahama and Lilly Pulitzer, but expects investment in stores, restaurants, technology and infrastructure to weigh on margins until sales can leverage added costs. Management describes the tailored-clothing environment as challenging and expects near-term pressure on Lanier Clothes. Fiscal 2015 amortization of intangible assets was estimated at approximately $2.0m; the full-year effective tax rate was expected to be generally comparable to the first-half rate. No full-year earnings or revenue forecast is provided.
Risks include discretionary consumer demand, promotional retail conditions, competition, fashion and weather variability, and costs of products, raw materials, transportation and labor. The Ben Sherman transaction carries potential purchase-price adjustments, warranty claims, retained lease liabilities and possible underutilization of retained resources. The business is seasonal; management cautions that interim results are not necessarily indicative of full-year performance. The company reported no litigation or regulatory matter expected to have a material adverse effect and no material changes to critical accounting policies.
Important facts for investors to verify
- Final Ben Sherman sale-price adjustments, actual disposal loss, warranty claims and retained lease obligations.
- Whether Lilly Pulitzer’s strong comparable-sales growth continues and whether Tommy Bahama can recover margin amid promotions and store investment.
- Execution and returns on the planned $70m fiscal 2015 capital program, including new stores, restaurants, technology and facilities.
- Cash generation, borrowing availability and covenant headroom as seasonal working-capital needs change.
- Potential effects of promotional activity, sourcing and input costs, foreign currency and consumer demand on margins and results.