Oxford Industries, Inc. — Form 10-Q Summary
Period: Third quarter of Fiscal 2017, the 13 weeks ended October 28, 2017; nine-month comparison covers the 39 weeks ended October 28, 2017. The filing period differs from the request metadata (“2016 Q3”). Fiscal 2017 ends February 3, 2018.
Business context
Oxford is a global apparel company operating Tommy Bahama, Lilly Pulitzer, Lanier Apparel and Southern Tide, with direct-to-consumer, wholesale, restaurant and licensing activities. Its results are seasonal; management identifies the third quarter as historically its smallest sales and operating-income quarter.
Financial performance and liquidity
| Metric | Q3 FY2017 | Q3 FY2016 | First 9 months FY2017 | First 9 months FY2016 |
|---|---|---|---|---|
| Net sales | $236.0 million | $222.3 million | $793.0 million | $761.5 million |
| Gross profit / margin | $125.2 million / 53.0% | $118.1 million / 53.1% | $450.6 million / 56.8% | $434.3 million / 57.0% |
| Operating income (loss) / margin | $1.1 million / 0.5% | $(0.3) million / (0.1)% | $67.5 million / 8.5% | $70.4 million / 9.2% |
| Net earnings (loss) | $1.1 million | $(1.6) million | $41.0 million | $42.5 million |
| Diluted EPS | $0.06 | $(0.10) | $2.45 | $2.55 |
- Quarterly sales rose 6.1%; nine-month sales rose 4.1%. Comparable store sales, including e-commerce but excluding clearance, increased 4% in Q3 and 2% for the first nine months.
- Nine-month operating cash flow was $65.3 million, versus $53.3 million. Investing used $31.4 million, including $26.4 million of capital expenditures and $5.1 million for acquisitions. Financing used $34.2 million; dividends paid were $13.6 million.
- At October 28, cash was $6.1 million and debt outstanding was $72.1 million. Revolver availability was $204.6 million, subject to facility terms; the company reported covenant compliance. Working capital was $116.8 million and the current ratio was 1.99.
- Debt-to-total-capital was 15%, compared with 28% at October 29, 2016. Nine-month dividends declared were $0.81 per share.
Material changes and drivers
- Q3 revenue growth reflected higher Lanier Apparel and Lilly Pulitzer sales, additional stores, comparable-sales growth and higher Tommy Bahama restaurant sales. Tommy Bahama revenue declined 1.6%, while Lilly Pulitzer rose 13.2% and Lanier Apparel rose 22.9%.
- Quarterly operating results improved from a loss to income, led by Lanier Apparel, Southern Tide and Tommy Bahama. Nine-month operating income declined 4.1%: stronger Tommy Bahama and Southern Tide results were offset by lower Lilly Pulitzer income and a less favorable Corporate and Other result.
- Consolidated gross margin was nearly flat in Q3 and declined 0.2 percentage point for the first nine months. Management cited unfavorable LIFO effects, sales mix and Lilly Pulitzer acquisition-related inventory step-up costs; these were partly offset by improvements in certain brands.
- Lilly Pulitzer acquired 12 Signature Stores in July and August 2017. Related Q3 costs included $1.1 million of inventory step-up expense and $0.6 million of transaction/integration costs. Southern Tide’s prior-year comparison included acquisition-related inventory step-up costs and fewer months of ownership.
Outlook, risks and unusual items
- Management expected a full-year FY2017 effective tax rate of approximately 37%, interest expense of approximately $3 million and capital expenditures of approximately $40 million. It estimated Southern Tide FY2017 sales at approximately $40 million, about 80% wholesale. The filing provides no consolidated full-year sales or earnings guidance.
- Management said operating cash flow and available revolver capacity should fund ongoing requirements and brand investment. It expected inventory levels to support anticipated fourth-quarter sales and planned to use excess cash generally to repay debt.
- Tommy Bahama profitability initiatives include product-cost reductions, selective price increases, lower inventory purchases, revised clearance practices, expense controls and a more conservative approach to store openings and renewals. Management reported initial progress.
- Risks discussed include changing consumer shopping behavior, weak retail traffic and department-store conditions, promotional pressure, discretionary consumer spending, weather, competition, product and labor costs, foreign currency and interest-rate exposure, and execution of growth and acquisition plans. Hurricanes affected store operations and may have reduced wholesale reorders.
- Q3 income taxes were a benefit of $0.6 million, producing an unusually negative effective tax rate; management cautioned that the quarter’s rate is not indicative of the full year. Nine-month results also included a $3.7 million LIFO charge, compared with a $2.3 million LIFO credit in the prior year.
- Liabilities for retained discontinued-operation lease obligations were estimated, but the ultimate loss remains uncertain and depends partly on sublease income or lease termination negotiations. The company reported no litigation or regulatory matter it believed would have a material impact.
Key facts for investors to verify
- Whether comparable-sales momentum and channel mix persist, particularly Lilly Pulitzer’s retail traffic and wholesale trends and Tommy Bahama’s full-price versus clearance sales.
- How LIFO adjustments, acquisition-related expenses and store additions affect reported margins and cash generation in subsequent periods.
- Whether the $204.6 million of revolver availability remains adequate through seasonal working-capital needs and whether covenant headroom changes.
- Progress against management’s stated FY2017 tax, interest, capital expenditure and Southern Tide sales expectations; these are estimates, not guarantees.
- Potential cash exposure from retained lease obligations related to discontinued operations and the effects of upcoming accounting standards, especially lease accounting, on reported assets and liabilities.