Oxford Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2014 third quarter, the 13 weeks ended November 1, 2014, and first nine months, the 39 weeks ended November 1, 2014. The filing’s period is 2014 Q3, notwithstanding the request metadata’s “2013 Q3.” The company operates Tommy Bahama, Lilly Pulitzer, Lanier Clothes and Ben Sherman.
Financial performance and liquidity
| Metric | Third quarter FY2014 | Third quarter FY2013 | First nine months FY2014 | First nine months FY2013 |
|---|---|---|---|---|
| Net sales | $219.5m | $197.5m | $723.4m | $666.7m |
| Gross profit; margin | $112.9m; 51.5% | $104.8m; 53.1% | $405.7m; 56.1% | $375.7m; 56.4% |
| Operating income; margin | $2.6m; 1.2% | $4.6m; 2.3% | $57.9m; 8.0% | $58.3m; 8.7% |
| Net earnings (loss) | $(0.1)m | $0.9m | $30.0m | $30.3m |
| Diluted EPS | $0.00 | $0.05 | $1.82 | $1.84 |
Third-quarter sales rose 11.1%, but gross margin fell 1.6 percentage points and operating income declined 42.7%. The quarterly net loss reflected low pretax earnings and a 104.1% effective tax rate, affected by foreign losses for which no tax benefit was recognized. For the first nine months, sales rose 8.5%, while operating income and net earnings were slightly lower; the effective tax rate was 45.6%.
At November 1, 2014, cash was $6.3m, total debt was $147.6m, and shareholders’ equity was $280.9m. Working capital was $150.4m and the current ratio was 2.14. The company reported $85.9m of unused availability under revolving credit agreements; it was compliant with facility covenants and no financial covenant testing was required. Debt-to-total-capital was 34%, versus 40% a year earlier.
For the first nine months, operating cash flow was $40.7m, compared with $21.3m a year earlier; capital expenditures were $36.5m, and investing cash use totaled $36.5m. Financing activities used $6.0m, including $10.4m of dividends paid. Cash declined $1.9m from the fiscal-year start.
Material changes and business drivers
- Tommy Bahama sales increased 5.8% for the first nine months, but operating income fell 9.1%, as lower gross margin and increased store, infrastructure and compensation costs outweighed sales growth.
- Lilly Pulitzer sales grew 23.2% and operating income rose 22.7% for the first nine months, supported by comparable-store growth and direct-to-consumer sales.
- Lanier Clothes sales rose 7.8%, largely due to a warehouse-club private-label pants program; operating income slipped 2.6% as this lower-margin mix reduced gross margin.
- Ben Sherman’s first-nine-month operating loss narrowed to $10.0m from $10.5m, but results included stronger pound sterling and off-price sales of aged inventory.
- Corporate and Other operating loss widened to $11.9m from $9.8m, amid lower Oxford Golf sales and higher SG&A.
- Inventory was $145.8m, up from $124.0m a year earlier; management attributed the increase mainly to inventory supporting anticipated fourth-quarter sales.
Outlook, risks and unusual items
- Management expected full-year FY2014 capital expenditures of approximately $55m and interest expense below $4.0m; it forecast an approximately 43% full-year effective tax rate, with a significantly lower rate in the fourth quarter.
- Management sees long-term direct-to-consumer growth opportunities at Tommy Bahama and Lilly Pulitzer, but expects investment and store expansion costs to pressure margins until sales can leverage those costs. Five Tommy Bahama stores, one retail-restaurant location and one international retail location opened after quarter-end.
- The third quarter is seasonally the company’s smallest quarter. Management expects the earnings gap between it and stronger quarters to widen as retail operations grow.
- Risks cited include promotional apparel markets and uncertain consumer demand; fashion and competitive pressures; timing of wholesale shipments; weather; raw material, labor and transportation costs; foreign-currency movements; reliance on overseas manufacturing; and access to credit. The filing reports no litigation or regulatory matter expected to have a material adverse effect.
- $12.4m of Lilly Pulitzer contingent consideration was classified as current and was expected to be paid in the first quarter of FY2015. The filing anticipated a $0.3m FY2014 charge from changes in its fair value. Third-quarter foreign-currency translation reduced other comprehensive income by $3.1m before the offsetting hedge gain.
- The company was evaluating new revenue-recognition guidance effective for it beginning in fiscal 2017; its financial-statement impact was not yet determined. Disclosure controls were assessed as effective; a new consolidation and reporting package was implemented during the quarter.
Important facts for investors to verify
- Whether fourth-quarter and full-year results meet the stated tax, interest-expense and capital-spending expectations.
- Whether elevated inventory converts to full-price sales or requires further markdowns, particularly given clearance activity and gross-margin declines.
- How new store and infrastructure costs affect margins and cash generation at Tommy Bahama and Lilly Pulitzer.
- Availability under revolving facilities, covenant compliance, debt levels and the expected contingent-consideration payment.
- The sustainability of Lilly Pulitzer’s growth, the private-label program’s contribution to Lanier Clothes, and progress in reducing Ben Sherman and Corporate and Other losses.