Business Context and Reporting Period
Company: Oxford Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2011 (First Quarter of Fiscal 2011)
Business Overview: The company designs, produces, and distributes branded consumer apparel (Tommy Bahama, Lilly Pulitzer, Ben Sherman, Lanier Clothes) and licenses trademarks. Operations are primarily in the U.S. and U.K.
Key Financial Metrics
| Metric | Q1 Fiscal 2011 | Q1 Fiscal 2010 |
|---|---|---|
| Net Sales | $208.3 million | $163.6 million |
| Gross Profit | $117.7 million | $89.7 million |
| Gross Margin | 56.5% | 54.8% |
| Operating Income | $30.7 million | $15.0 million |
| Operating Margin | 14.7% | 9.1% |
| Net Earnings (Continuing Ops) | $17.1 million | $8.5 million |
| Net Earnings (Total) | $18.1 million | $12.5 million |
| Diluted EPS (Total) | $1.10 | $0.76 |
| Cash from Operations | $17.2 million | $9.6 million |
| Cash and Equivalents | $47.0 million | $18.8 million |
| Total Debt | $147.9 million | $149.4 million |
| Working Capital | $141.5 million | $108.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 27.3% ($44.7 million), driven primarily by the inclusion of the newly acquired Lilly Pulitzer brand ($29.9 million in sales) and a 12.6% increase in Tommy Bahama sales.
- Profitability: Operating income more than doubled (105.1% increase) due to higher sales volume, improved gross margins (benefiting from a shift to higher-margin direct-to-consumer sales and LIFO credits), and increased royalty income.
- Discontinued Operations: Earnings from discontinued operations (former Oxford Apparel group) dropped 73.8% to $1.0 million, reflecting the wind-down of the sold business compared to full operations in the prior year.
- Ben Sherman Decline: Ben Sherman sales decreased 12.3% due to a strategic reduction in unit sales at moderate department stores and the absence of off-price sales from exited women's/footwear lines present in the prior year.
Guidance, Outlook, and Risks
- Subsequent Event (Debt Repurchase): In May 2011, the company repurchased $40.0 million of its 11 3/8% Senior Secured Notes for approximately $46.6 million. This transaction resulted in an estimated $8.2 million loss to be recognized in Q2 Fiscal 2011. Remaining principal on these notes is $110.0 million.
- Outlook: Management anticipates continued aggressive inventory purchasing if economic conditions improve. Fiscal 2011 is expected to face pricing pressures on raw materials and transportation costs.
- Liquidity: The company maintains a strong balance sheet with $148.9 million in unused availability under its U.S. Revolving Credit Agreement. Working capital ratio improved to 2.40.
- Risks: Key risks include weak global economic conditions impacting discretionary spending, foreign currency fluctuations (specifically the British Pound for Ben Sherman), and the cyclical nature of the apparel industry.
- Unusual Items: Gross margins were negatively impacted by a $1.0 million charge related to the write-up of acquired Lilly Pulitzer inventory to fair value. A $0.6 million charge was recorded for the change in fair value of contingent consideration related to the Lilly Pulitzer acquisition.
Investor Verification Checklist
- Debt Repurchase Impact: Verify the timing and magnitude of the $8.2 million loss from the May 2011 note repurchase in the upcoming Q2 filing.
- Lilly Pulitzer Integration: Monitor the sustainability of Lilly Pulitzer's operating margins, noting the one-time $1.0 million inventory write-up charge in Q1.
- Ben Sherman Turnaround: Assess whether the strategic shift to higher-tier department stores in the U.K. stabilizes sales and profitability for the Ben Sherman brand.
- Discontinued Operations: Confirm the conversion of the remaining $28.5 million in net assets from discontinued operations into cash as projected for the first half of fiscal 2011.
- Capital Expenditures: Track progress against the anticipated $30 million capital expenditure budget for fiscal 2011, primarily for retail store expansion.