Oxford Industries, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended November 2, 2013, and the first nine months of fiscal 2013. Although the request metadata says “2012 Q3,” the filing identifies this as third quarter fiscal 2013; the comparable quarter ended October 27, 2012.
Business context
Oxford designs, sources, markets and distributes branded apparel through wholesale, retail, e-commerce, restaurant and licensing channels. Its operating groups are Tommy Bahama, Lilly Pulitzer, Lanier Clothes and Ben Sherman. Direct-to-consumer channels increased as a share of sales: 53% in the quarter and 57% year to date, versus 49% and 52%, respectively, in the comparable periods.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | First 9 months FY2013 | First 9 months FY2012 |
|---|---|---|---|---|
| Net sales | $197.5 million | $181.4 million | $666.7 million | $619.3 million |
| Gross profit / margin | $104.8 million / 53.1% | $96.8 million / 53.4% | $375.7 million / 56.4% | $344.3 million / 55.6% |
| Operating income / margin | $4.6 million / 2.3% | $5.9 million / 3.3% | $58.3 million / 8.7% | $59.0 million / 9.5% |
| Net earnings | $0.9 million | $3.0 million | $30.3 million | $26.0 million |
| Diluted EPS | $0.05 | $0.18 | $1.84 | $1.57 |
| Operating cash flow | Not separately stated | Not separately stated | $21.3 million | $34.7 million |
Quarterly sales rose 8.9%, but operating income fell 23.1% and net earnings fell 70.5%. Higher SG&A, weaker Tommy Bahama and Corporate and Other operating results, and a 73.5% effective tax rate weighed on earnings. For the first nine months, sales increased 7.7% and net earnings increased 16.4%; operating income declined 1.2%. Year-to-date earnings benefited from the absence of the prior-year $9.1 million senior-note repurchase loss and $4.7 million lower interest expense.
At November 2, 2013, cash was $9.3 million, total debt was $166.7 million, working capital was $150.1 million, and the current ratio was 2.47. Availability under revolving credit agreements was reported as $68.7 million. Debt-to-total-capital was 40%, versus 36% at October 27, 2012. The company reported compliance with its credit covenants. The U.S. revolving facility was amended on November 21, 2013, extending maturity to November 21, 2018 and reducing applicable margins.
For the first nine months, investing activities used $54.6 million, including $36.7 million of capital expenditures and $17.9 million for the Tommy Bahama Canada acquisition. Financing activities provided $35.3 million. Dividends paid were $8.9 million. Cash from operations declined year over year, in part because of less favorable working-capital movements, including increased inventories, receivables and prepaid expenses and lower current liabilities.
Material changes and operating groups
- Tommy Bahama: Q3 sales increased 10.0%, but operating income fell to $1.0 million from $3.4 million, mainly from added store and restaurant costs, seasonal weakness and acquisition-related charges. Year-to-date sales rose 12.2%; operating income increased 1.5% to $46.2 million.
- Lilly Pulitzer: Q3 sales increased 12.6% and operating income rose 11.9% to $3.9 million, despite lower gross margin. Year-to-date sales increased 15.5% and operating income rose 11.8% to $24.5 million.
- Lanier Clothes: Q3 sales increased 10.9% and operating income rose to $3.4 million, partly reflecting order timing. Year-to-date sales declined 6.2% and operating income declined 10.7% amid weaker sales and pricing pressure.
- Ben Sherman: Q3 sales declined 5.8%, though its operating loss narrowed to $1.9 million. Year-to-date sales declined 17.6% and its operating loss widened to $10.5 million, reflecting wholesale account exits, weak UK and European conditions, and merchandise-planning issues that drove promotions and off-price sales.
Oxford acquired its former licensee’s Tommy Bahama Canada operations in May 2013, including nine retail stores and a wholesale business. The purchase-price allocation remained incomplete. The first nine months included $0.7 million of inventory step-up expense and $0.7 million of acquisition-related intangible amortization.
Outlook, risks and unusual items
- Management expected fiscal 2013 sales to be higher in Q4 than in Q4 fiscal 2012. It forecast approximately $13 million of fiscal 2013 operating losses for Tommy Bahama Asia-Pacific, compared with $10.3 million for fiscal 2012.
- Management estimated a fiscal 2013 effective tax rate of approximately 43%, interest expense of approximately $4.3 million, capital expenditures of approximately $45 million, and a contingent-consideration fair-value charge of approximately $0.3 million. It estimated intangible amortization of approximately $1.8 million, subject to finalizing the Canada acquisition allocation.
- Management cited consumer-demand and economic uncertainty, promotional retail conditions, competition, fashion and merchandise execution, wholesale shipment timing, cost pressures, and weak UK and European markets as risks. The apparel business is seasonal; management cautioned that Q3 is typically its weakest quarter and interim results may not indicate full-year results.
- Foreign-jurisdiction losses for which no tax benefit could be recognized contributed to higher effective tax rates. Prior-year tax results also benefited from approximately $2.1 million of favorable discrete tax items.
- The filing reported no litigation or regulatory matter expected to have a material adverse effect, no material changes in internal control, and effective disclosure controls.
Key facts for investors to verify
- Whether direct-to-consumer growth and new-store investment produce sustainable operating returns, particularly at Tommy Bahama.
- Whether Ben Sherman can stabilize wholesale sales, clear inventory without continued margin pressure, and narrow losses.
- Inventory levels, working-capital cash use, revolving-credit availability and debt trends as the company enters its seasonally important periods.
- The final Tommy Bahama Canada purchase-price allocation and resulting goodwill, intangible amortization and acquisition-related costs.
- Actual fiscal 2013 tax rate, capital spending, interest expense and Asia-Pacific losses compared with management’s estimates.